I recently watched the movie The Big Short over the weekend, so when I saw this prompt is on ethics, this idea quickly popped into my mind. For those who may not be familiar, the movie is based on the same-named book by Michael Lewis (author of Money Ball, Liar’s Poker, Flash Boys) about a few groups of people who recognized the housing bubble of the early and mid 2000’s and decided to short sell the entire housing market. Essentially what they were doing was betting the housing market would crash and then they would in turn make money, rather than lose it. The technical side of how the trade actually works is not as important as the externalities of short selling and the idea. This (short selling, or shorting) can be done on just about any commodity, market, bond, company, etc. so it really made me think about how this technique fits into the ethics of the business world. Short selling is hoping companies, or markets do poorly or, in the “best case”, fail entirely, and I use quotes there because the best case in short selling is not always the best case for the world. So, short selling must be ethically wrong in almost every case, or, at least to me it would seem that way.
Now, I am not entirely familiar with the concept and technical pieces that move around on a short sale trade, but some information from The Business Ethics of Short Selling and Naked Short Selling from the Journal of Business Ethics gives a quick rundown on what short selling does to the economy. It promotes liquidity in the market, keeps trading prices in align with cash equity markets, and reduces overvaluation in the market by introducing negative information. These are some benefits to short selling being allowed in trading platforms around the world, but there are, of course, negatives. From the same journal, short selling incentivizes unethical activity, short sellers profit off of other’s misery, and sometimes cause it, short selling can be considered gambling not trading, and also increase market volatility among other effects.
I think this topic is so stimulating because on first look, the idea of the short sale is a complete ethical, and moral, mess. Take consequentialism for example. In short, consequentialism implicitly says, “the ends justify the means”. But for whom? In the case of the short sale making a lot of money, at the expense of other people’s jobs and livelihoods, it is ethically correct for the individual, but maybe not if we are looking at the business world and personal lives of everyone else involved. This also brings up the point that just because someone short sells something in the world, does not mean they caused it, or encouraged it to happen. The traders could simply seek to profit off a problem that was already created and not recognized by the systems in power, as seen in the movie The Big Short. Still from a moral standpoint it is hard to know all those profits and checks are coming at the expense of regular people, who’s company or industry may have failed and they are left scrambling to recover their lives. From a deontological view, the opposite of consequentialism ethics is true, that is the ends do not justify the means. If someone were to hope, and perhaps influence a company or industry to fail or lose value as they shorted it, the trader would be unethical. But what if they did not hope or influence the failure of a company or industry and still shorted said company or industry? Are they ethical by deontology’s views simply because the rules of the game allow short sales? In many markets around the world (the U.K., Australia, China) short selling had been or still is banned or severely regulated for at least some portion of its history. The rules of one country state short selling is wrong, bad, illegal etc. so can the idea that it is allowed in another country (the U.S.) make it unethical by a deontologist, no matter what the circumstances are? The rules allow it here, but not somewhere else. Can ethical theories be relative to location? I suppose they can if they involve the rules and laws, such as deontology, but that just creates more gray areas, or so I would think. I feel I could go on and on about this topic for a while, but I think you get the idea here; short selling is an ethical mess.
There are of course arguments for the benefits of short selling. It can be a good price discovery mechanism, short selling is an indiciator of poor future stock performance, and short sellers act as a secondary ‘watch dog’ in some cases by exploiting market mistakes in a company’s fundamental values. By these measures it would appear to be ethically good for the economy. Without short sales there is a larger opportunity for both fraud and misleading price information being shown to the traders and consumers. Would a virtue ethics based viewer rather higher price inflation, or the potential of making profit off of other’s misery? Fraud (loosely used here) or unemployment? There seems to be two sides to every argument, and that is why act utilitarianism appears to be the “great equalizer”. It takes the facts only and weighs them against each other in a fair matter. May the greater side win. This could be beneficial for many business transactions as it is, as I like to think, a pros and cons view to every decision. Of course some cons could be “heavier” than some of the pros it is up against, but we can save that argument for another time. Looking at every decision in a purely factual and rational view point can serve everyone well.
I’m inclined to believe the short sale is some sort of financial necessary evil, to keep prices and inflation in check. A world of optimists is not ideal for the financial world, just look at the film The Big Short and examples of blind optimism are shown. Some one needs to be the cynicist, or even realist in times like the 2008 financial crisis. Of course profiting off of people’s job loss and industry failures is morally terrible, but is it ethically wrong as well? That remains up for debate.
Pictured above is a simple 2-step graph describing the actual transaction going on behind a short sale.
Featured Image: The Lehman Brothers were one of the major financial firms severely affected by the 2008 crisis. They were declined a buyout and government bail out and were forced to file for the largest bankruptcy protection case in history. Thousands of Lehman Brothers employees were left without jobs. Some (lucky?) few were left with millions and millions of profits because of short sales.