How to Deter Financial Misconduct if Crime Pays?

Karol Marek Klimczak,Maria Prats,Alejo José G Sison,Maximilian B Torres

doi:10.1007/s10551-021-04817-0

Abstract

Financial misconduct has come into the spotlight in recent years, causing market regulators to increase the reach and severity of interventions. We show that at times the economic benefits of illicit financial activity outweigh the costs of litigation. We illustrate our argument with data from the US Securities and Exchanges Commission and a case of investment misconduct. From the neoclassical economic paradigm, which follows utilitarian thinking, it is rational to engage in misconduct. Still, the majority of professionals refrain from misconduct, foregoing economic rewards. We suggest financial activity could be reimagined taking into account intrinsic and prosocial motivations. A virtue ethics framework could also be applied, linking financial behavior to the quest for moral excellence and shared flourishing. By going beyond utilitarian thinking and considering alternative models, we offer a fuller account of financial behavior and a better perspective from which to design deterrence methods.

Highlights

Illicit practices accompany financial markets throughout history
Some economists suggest that the neoclassical approach only considers the impact of external interventions on behavior and ignores the intrinsic motivation of economic actors (Frey, 1997)
This paper provides evidence to establish that on an net present value” (NPV) basis, crime pays

Summary

Introduction

Illicit practices accompany financial markets throughout history. Deterrence methods rely mainly on the theory of subjective expected utility (SEU) that describes criminals as rational utility maximizers (Becker, 1968). In modern psychology, such behavior may be characterized as extrinsically motivated (Amabile et al.,, 1994), focusing on material goods for the actors themselves, not others (Batson, 2011). Financial accounting practice describes this behavior as having a positive “net present value” (NPV). Economic actors choose extrinsically motivated actions that maximize their own utility; governments try to impose a cost on perpetrators of misconduct that would outweigh benefits

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Discussion

Conclusion