This episode of MarketLife answers a reader question:
I have extracted the following from chapter 3 of Napoleon Hill’s Think and grow rich. It is part 5 of the Self confidence Formula “…I fully realize that no wealth or position can long endure, unless built upon truth and justice, therefore, I will engage in no transaction which does not benefit all whom it affects”
As trading is considered a zero sum game(if we forget the broker), and obviously we enter a trade to gain, it stands to reason that someone has to lose. Can trading be justified in terms of the above mentioned paragraph?
Kind Regards,
Martin
A brief outline of my answer:
How do we define ethics and morals?
- “We know it when we see it.” (But can’t it be relative?)
- Do right thing. Knowing the difference between right and wrong and choosing to do the right thing.
- Ethics define the social conditions necessary for human beings to thrive. – Washington Ethical Society
Economics is a discipline of basically maximizing benefits within the boundaries of constraints.
What is trading?
- Someone hopes to make a profit? Yes, but there can be other considerations.
- Society depends on trade and trade works when everyone maximizes self-interest
- “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” – Adam Smith
Why this question matters
- Cant make money if working against yourself
- Lingering doubts about fairness and goodness will sabotage you
- We need to understand what is right so we can do what is right
Trading is ethical! Why?
- The “other guy” fallacy is garbage. You aren’t buying from someone who has to lose if you make money.
- You are assuming risk every time you trade.
- You have limited resources and are spending them on trading and investing. (This is also a risk.)
- Your activity in the market does create economic value. Price discovery is real and important.
There are many abuses in the industry, but we don’t need to dwell on those. Don’t be a perpetrator and protect yourself if you are a client.
Bottom line:
- Trading is ethical, and you have to embrace that fully to succeed.
- Always act ethically. Avoid anything illegal or questionable.
- Do the right thing.
- Make the world a better place using resources you get from your trading.
Links mentioned in this podcast:
My free trading course. Always free!
Brett Steenbarger wrote a bit on Ayn Rand. I didn’t mention this in the podcast, but it’s worth your time to read.
The symbol of all relationships among [rational] men, the moral symbol of respect for human beings, is the trader… A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures…. [Those] who have, throughout the ages, reviled the traders and held them in contempt, while honoring the beggars and the looters, have known the secret motive of their sneers: a trader is the entity they dread—a man of justice. Ayn Rand, Atlas Shrugged
Also, if you like the music for this podcast, then be sure to check out Brian Ashley Jones, my friend, and a fantastic singer-songwriter. He has a new CD out, Out of the City (or here, on iTunes) that you might enjoy!
Enjoy the show:
Good question & good response.
Thank you 🙂
Hi Adam,
Thanks very much for the very detailed response to my question.
I
was confident (due to the many different offerings that I’ve been
exposed to from you), that you would be a good person to ask this
question, and you most certainly did not disappoint.
I believe
very strongly as you mentioned that if our actions are not aligned with
our beliefs, that we will not receive satisfactory results. This
response from you will most certainly help me to work through my basic
question.
Thanks for the research time and effort. Your work has benefited me tremendously.
Kind Regards
Martin
Thank you, Martin. And thank you for the great question.
Hi Adam
In my opinion it was a very difficult question, but you have explained it such a simple way that any one can understand. Thanks for the market life, and one more thing I really like the name market life.
Thank you! 🙂
Thanks – when I read the title I was not too excited, but it entertained me more than expected, and made running more bearable… 🙂
I read “Trading & Exchanges”, and the book is really excellent and develops all your thoughts on reasons to trade, participants etc. in depth, so in any case the likelihood of having a poor, untrained newby on the other side of the trade is very low (it is actually very high that this guy is on your side of the trade…). But even if it were so, I would not see any ethical issue with it, because you are giving this guy the best possible execution, or in other words, imagine you would not participate in the market. In such case, this guy would not trade with you, but only with the next best offer, i.e. either at a worse price for her/him or at a later time at the same price.
The concern may be more on situations like yourself being short on grains talking to a small farmer who wants and needs to sell her/his crop within two months at an uncertain price (assuming that the farmer does not participate in futures markets)…
Thank you… good point… and your half-joking point about giving the other guy the best execution is also very logical and very correct.
Yeah I have that book on my “easy access” bookshelf and just blanked in the podcast. I’ve probably recommended it 100 times over the past few years to different people… but if you want part of your brain to turn off, try recording yourself for a podcast and saying “I’m not going to edit this, I’m just going to keep it honest and do it straight through!” 😉 It makes for some interesting stumbles!
Thanks for your comment and observations. Much appreciated!
I didn’t think that much on this problem. The market is a place of dream. Every traders bring hope to each other. That’s a good thing, isn’t it.