Home > data science, finance, modeling > There is no “market solution” for ethics

There is no “market solution” for ethics

November 12, 2013

We saw what happened in finance with self-regulation and ethics. Let’s prepare for the exact same thing in big data.


Remember back in the 1970’s through the 1990’s, the powers that were decided that we didn’t need to regulate banks because “they” wouldn’t put “their” best interests at risk? And then came the financial crisis, and most recently came Alan Greenspan’s recent admission that he’d got it kinda wrong but not really.

Let’s look at what the “self-regulated market” in derivatives has bestowed upon us. We’ve got a bunch of captured regulators and a huge group of bankers who insist on keeping derivatives opaque so that they can charge clients bigger fees, not to mention that they insist on not having fiduciary duties to their clients, and oh yes, they’d like to continue to bet depositors’ money on those derivatives. They wrote the regulation themselves for that one. And this is after they blew up the world and got saved by the taxpayers.

Given that the banks write the regulations, it’s arguably still kind of a self-regulated market in finance. So we can see how ethics has been and is faring in such a culture.

The answer is, not well. Just in case the last 5 years of news articles wasn’t enough to persuade you of this fact, here’s what NY Fed Chief Dudley had to say recently about big banks and the culture of ethics, from this Huffington Post article:

“Collectively, these enhancements to our current regime may not solve another important problem evident within some large financial institutions — the apparent lack of respect for law, regulation and the public trust,” he said.

“There is evidence of deep-seated cultural and ethical failures at many large financial institutions,” he continued. “Whether this is due to size and complexity, bad incentives, or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”

Given that my beat is now more focused on the big data community and less on finance, mostly since I haven’t worked in finance for almost 2 years, this kind of stuff always makes me wonder how ethics is faring in the big data world, which is, again, largely self-regulated.

Big data

According to this ComputerWorld article, things are pretty good. I mean, there are the occasional snafus – unappreciated sensors or unreasonable zip code gathering examples – but the general idea is that, as long as you have a transparent data privacy policy, you’ll be just fine.

Examples of how awesome “transparency” is in these cases vary from letting people know what cookies are being used (BlueKai), to promising not to share certain information between vendors (Retention Science), to allowing customers a limited view into their profiling by Acxiom, the biggest consumer information warehouse. Here’s what I assume a typical reaction might be to this last one.

Wow! I know a few things Acxiom knows about me, but probably not all! How helpful. I really trust those guys now.

Not a solution

What’s great about letting customers know exactly what you’re doing with their data is that you can then turn around and complain that customers don’t understand or care about privacy policies. In any case, it’s on them to evaluate and argue their specific complaints. Which of course they don’t do, because they can’t possibly do all that work and have a life, and if they really care they just boycott the product altogether. The result in any case is a meaningless, one-sided conversation where the tech company only hears good news.

Oh, and you can also declare that customers are just really confused and don’t even know what they want:

In a recent Infosys global survey, 39% of the respondents said that they consider data mining invasive. And 72% said they don’t feel that the online promotions or emails they receive speak to their personal interests and needs.

Conclusion: people must want us to collect even more of their information so they can get really really awesome ads.

Finally, if you make the point that people shouldn’t be expected to be data mining and privacy experts to use the web, the issue of a “market solution for ethics” is raised.

“The market will provide a mechanism quicker than legislation will,” he says. “There is going to be more and more control of your data, and more clarity on what you’re getting in return. Companies that insist on not being transparent are going to look outdated.”

Back to ethics

What we’ve got here is a repeat problem. The goal of tech companies is to make money off of consumers, just as the goal of banks is to make money off of investors (and taxpayers as a last resort).

Given how much these incentives clash, the experts on the inside have figured out a way of continuing to do their thing, make money, and at the same time, keeping a facade of the consumer’s trust. It’s really well set up for that since there are so many technical terms and fancy math models. Perfect for obfuscation.

If tech companies really did care about the consumer, they’d help set up reasonable guidelines and rules on these issues, which could easily be turned into law. Instead they send lobbyists to water down any and all regulation. They’ve even recently created a new superPAC for big data (h/t Matt Stoller).

And although it’s true that policy makers are totally ignorant of the actual issues here, that might be because of the way big data professionals talk down to them and keep them ignorant. It’s obvious that tech companies are desperate for policy makers to stay out of any actual informed conversation about these issues, never mind the public.


There never has been, nor there ever will be, a market solution for ethics so long as the basic incentives between the public and an industry are so misaligned. The public needs to be represented somehow, and without rules and regulations, and without leverage of any kind, that will not happen.

Categories: data science, finance, modeling
  1. November 12, 2013 at 8:34 am

    The public interest is not a trivial matter. Scientific research is governed by many federal regulations based on The Belmont Report. It seems clear finance and big data must also be governed by such a set of rules. http://www.hhs.gov/ohrp/humansubjects/guidance/belmont.html


  2. November 12, 2013 at 8:45 am

    Great post, Cathy! And just think of what things will be like when InBloom, Achieve, etc. get their mitts on our children and families through the Common Core implementation.

    One problem that you could add, is that no only are politicians and regulators ignorant, and the data professionals arrogant, but just look at the $$ involved to make sure things stay that way.


  3. Abe Kohen
    November 12, 2013 at 9:40 am

    The problem with ethics in finance and big data is the same as the problem with ethics in government. It’s called the human condition. Moses gave mankind the Ten Commandments, not because they were self evident, but because it is in our makeup to violate them all. You cannot legislate ethics, but you can make rules and regulations to reign in unethical behavior, whether in business or in government.


    • Guest2
      November 13, 2013 at 8:45 am

      Actually, we can blame all this on Moses. In Exodus he was way over-worked, so someone (his brother in law?) suggested do what they did in Egypt — delegate his workload to a council of 70. Or something like that.

      First example of division of labor. As soon as you do this, the local topology of incentives changes. And once the incentives change, problems soon follow.

      Also, to add to Cathy’s point (“The public needs to be represented somehow, and without rules and regulations, and without leverage of any kind, that will not happen.”) the idea that modern bureaucratic life is premised on stripping the individual of all discretion, including all moral discretion (Norbert Elias and Zygmunt Bauman’s Modernity and the Holocaust, if you want a stomach churning eye opener).


      • Abe Kohen
        November 13, 2013 at 8:56 am

        It was Jethro, priest of Midian (Yitro Kohen Midian), his father-in-law, who taught Moses delegation. I’m not sure how that relates to ethics, though. The public is rarely represented. That’s how Bloomberg and his traffic czar created the increasing Manhattan traffic jams by removing car lanes and eliminating 30% or more of parking spots without any resident input.


        • Guest2
          November 13, 2013 at 2:09 pm

          Zygmunt Bauman, Modernity and the Holocaust (1989)

          Chapter Summaries
          The introduction (Chap 1) is very strong. Page 6 following begins to show how links between modern factory system, bureaucracies, etc., that characterize the modern state, are also central to the Holocaust. (8, 9, 10).

          Refs to Weber start in pages 13-15, where the “ethical blindness” feature of bureaucracy first appears, especially in 18-30, in sections on “Social production of moral indifference,” etc. with 22-23 very strong, and 24-25ff.

          Skip Chapter 2 and Chapter 3, which are very boring, all except the section “Racism as a form of social engineering” 66-72. Much of education can be seen as “social engineering” if viewed in terms of its progressivism, its optimism.

          Chapter 4 is very strong, argues that “we can no longer assume that we have a full grasp of the workings of our social institutions, bureaucratic structures, or technology” (83). 86ff picks up and expands the moral crisis of the modern state, eventually bringing in Norbert Elias (96ff), who articulates some themes Michel Foucault made famous (again) without referring to the Holocaust.

          My favorite section is “Effects of the hierarchical and functional divisions of labor,” 98-102, because it addresses the problem of cognitive stratification of groups and organizations, and especially with institutions. Here he talks about statistics (graphs), and the role they play in the a-moralization of modern society — “Dehumanization of bureaucratic objects” follows, 102-104. Then at 107 a new theme, the failure of societal safeguards, is introduced, with a mention of computers at the very end (115-116).

          Ch 5, Soliciting the Cooperation of the Victims, describes a whole side of the manipulation of ghetto life by the Nazis I never knew about. It is striking that, just as the Nazis eliminated choice, they also eliminated the possibility of moral action. This point is implicit in the earlier chapters: you can only behave morally when there is choice — precisely that which bureaucratic life seeks to eliminate when it buffers society against risk and against the individual.

          Ch 6 uses the famous Milgram obedience experiments, and the reaction to them, that demonstrated the very processes discussed so far, to showcase Bauman’s concerns. Really excellent — even though I published a tiny bit on Milgram, this brought a whole new way of understanding this to light.

          Ch 7, Ch 8 and the Appendix attempt a “sociology of morality,” with mixed results. What is valuable is the re-iteration of the themes just discussed. 192-198 discusses the social production of moral distance, and the Appendix deals with the “Social Manipulation of Morality.” Bauman only slips when his relentless critique lapses, as he attempts to redeem the “Iron Cage” (Weber) he so masterfully analyzes. The purity — and the horror — of his analysis is that no such redemption is possible. But even Bauman cannot face this truth.
          In Saturday’s WSJ (Dec 4-5, 2009), James Grant goes back to corporatization itself as a root cause of moral hazard on Wall Street:

          “In 1970, Wall Street partnerships began to convert to limited liability corporations—Donaldson, Lufkin & Jenrette was the first to make the leap, Goldman Sachs, among the last, in 1999. In a partnership, the owners are on the line for everything they have in case of the firm’s bankruptcy. No such sword of Damocles hangs over the top executives of a corporation. The bankers and brokers incorporated because they felt they needed more capital, more scale, more technology—and, of course, more leverage.”

          The results of this are predictable, and irreversible unless we can find a way of countering the organizational effects of what sociologist Zygmunt Bauman calls “the social manufacture of moral indifference.”

          For those still with me, this is nothing more than the shadow side of Adam Smith’s Wealth of Nations (i.e., the division of labor), which, as Max Weber described, hierarchically sequesters moral responsibility. Corporatization, as Grant shows, merely legalizes the destruction of moral capital, just where it is needed most.

          Do you need more?


        • Guest2
          November 13, 2013 at 3:50 pm

          Here it is from the theological side, Reinhold Niebuhr’s “Moral Man and Immoral Society,” the micro-macro problem.



  4. November 12, 2013 at 9:44 am

    Market regulation and military regulation are two of the most ancient, large-scale ways that human societies have managed to regulate themselves — and both are inherently unstable. They march inexorably toward their deadly singularities — until the last resources of the people at risk pull out of the dive and switch the game, to do or die.

    The Age of Enlightenment brought us the possibility of a new form of social regulation — enlightened, educated, ever-knowledge-seeking democracy — and the Boys of Summer 1776 did a fair job of upstarting a reasonable facsimile thereof.

    But that brave experiment is now at risk for being pulled down into the muck and mire and misery of those older social disorders.


  5. alg0rhythm
    November 12, 2013 at 10:40 am

    Transparency is the first step, an important one, and allows businesses and people to be able to identify breaches and gaps. Regulation is necessary, even for transparency, and standards for how and what transparency is. Off balance Fed reserve loans is an example of how lack of transparency hurts the markets.. people betting on bank collapses got burned. Common education on very simple core standards, allows for less regulation because everyone in the know is a regulator.


  6. November 12, 2013 at 10:54 am

    The Myth of the Transparent Hand is just another variation on the Myth of the Invisible Hand.


  7. November 12, 2013 at 11:41 am

    The problem is there is no political solution for ethics either. This is human problem, and it pervades both “free markets” and “central planning.” Whatever “solutions” applied to private industry must be applied to public service and regulators. In the end, it’s all part of the system to be gamed. Character transparency sooner than later for ALL our “leaders” seems both appropriate and effective. (The best news is that it’s the most fun way to live, too). People of decent character are more likely to make decent decisions across the board, in both commerce and politics. We’re in a “character crisis” in America and until its addressed they’ll all just keep laughing all the way to the bank, so to speak.


  8. November 12, 2013 at 5:15 pm

    Reblogged this on Stop The Cyborgs.


  9. rob
    November 12, 2013 at 9:04 pm

    Some have suggested that risk-taking can be reined in if the Fed would every once in a while unpredictably tighten money and let a few banks and investors fall off the cliff as a warning. Risk-taking isn’t all of unethical finance, but much of it. Also not an ideal solution in tough times, but a reasonable one in flush times.


  10. lb
    November 13, 2013 at 2:41 am

    I’ve heard the “really really awesome ads” spiel delivered, earnestly. I was lucky enough to attend a couple of panels at the 2012 Ninth Circuit Judicial Conference pertaining to technology, privacy and law (thanks be to the folks on the panel for opening the eyes of so many judges to this subject matter). Here’s one of the panels… http://www.youtube.com/watch?v=gmErdaGmd_g#t=41m00s … and that’s the former Deputy General Counsel of Google appreciating her targeted ads.


  11. John Moore
    November 13, 2013 at 10:07 am

    Given that the business model of the Internet by companies is total surveillance (Bruce Schneier), the current trend is not surprising. Since the NSA is the biggest data miner of them all and is collecting everything, even from other data mining firms such as Google (until recently), and Congress has not yet passed a bill or law to rein in the NSA, the chances of data mining businesses being reined in by new policies and regulations are likely even more remote. Since the government has formed public-private partnerships with these firms and is reaping the rewards, it is likely that the public will be the ones regulated and likely oppressed by public and private sector entities in the near future since “all subsequent measures are in the best interests of the public and their safety to protect us from terrorists and extremists”.


  12. Alp Atici
    November 17, 2013 at 9:18 pm

    I work in finance, I read your blog from time to time and I agree about many of your ideas when it comes to regulating the marketplace (such as LIBOR). Clearly, there must be some rules around the marketplace. But if you agree that banks are writing the rules, you should be for “limited government”, not for more government. Because only in the absence of “public policy”, we will be free from lobbyist efforts.

    I completely disagree that “the public needs to be represented somehow”. The public often just needs to learn to suck it up because democracy more often than not utterly fails to find what is just. Please don’t tell me ethics and democracy is always aligned — it was the same democracy that gave rise to the Nazi party.

    No matter how many people like it or not, some freedoms are non negotiable. And individuals as well as companies have a clear right not to operate in the ethics defined by the majority, especially when ethics is such an arbitrary concept.

    The most amazing accomplishments of mankind is a direct consequence of collective intelligence created by decentralization and freedom. Think internet. Think the free markets. The government of the future should harness this power, not argue that ever growing number bureucrats sitting in their offices can solve all the problems of the world.

    Let’s go over what the ethics of the majority got for us so far: ever growing government, debt, incompetence, and rush for redistribution (penalizing work and rewarding unwork).

    I wouldn’t be the one arguing the world of financiers are all-ethical. But I can’t see any argument that promotes less freedom that would fare better.


  1. November 13, 2013 at 7:00 am
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