The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

130 9 Financial Wagers, Hyper-Speculation and Shareholder Primacy
The similarity between types of wager must not, however, mask the fact that
the character and effects of the said wagers are highly disparate. The knowledgeenlarging
wager is value-adding and a positive sum game, whereas the chancedriven
wager is non-value-adding and a zero-sum game. The differentiation between
the wager and the game of chance allows a distinction to be made between the
acceptable form of investment with a speculative element, and mere chance-based
gambling. The foundation and justification of the differing definition and valuation
of the types of wager mentioned are the different degrees to which the wagerer’s
skills and knowledge influence the outcome of the wager, and the different degrees
to which the different types of wagers contribute to value-creation in the economy.
Although the element of luck plays a role in every wager, and hence also in speculative
investment, the knowledge and prosperity-enhancing corporate wager in market
competition represents an unavoidable and value-creating element of capitalism,
indeed of every form of economic system, whereas this cannot be upheld for the
chance-based wager.
The speculative element is also legitimate in wagers on corporate strategies,
because without speculative entrepreneurial thinking, no new products and
forms of production can be invented and put into practice. 20 Intel’s one billiondollar
wager on a new type of microchip is a good example of the speculative
character of the strategies of modern technology firms. It is therefore useful
to maintain the distinction and differing legitimacy of chance-based games and
wagers, without denying that even in games of chance there is an element of the
wager.
The Functional and the Dysfunctional Extent
of Financial Wagers on Derivatives
Financial wagers differ from games of chance only when they demonstrably provide
some economic functionality, or a contribution to value-creation such as hedging,
market liquidity, or arbitrage. But even if such functionality is present, that in itself
is not sufficient to determine what volume of financial wagers is useful and valuecreating.
Even if financial wagers are demonstrably useful for the financial markets,
more wagers may be placed than are necessary for this purpose, and the excess
of wagers may not only be non-functional and inappropriate to the purpose, but
may even be detrimental. The escalation of financial wagers to a dysfunctional scale
encourages financial wagers of the gambling type and shifts the financial markets for
these wagers in the direction of an arena for games of chance. Excessive financial
wagers create excessive liquidity in the markets, which only serves the gambling
motive and increases price fluctuations.
The rule for options is therefore: if options are to fulfill their function for
hedging and arbitrage, for the fulfillment of these functions a certain extent of
20 On speculation, cf. also HANNS LEISKOW: Spekulation und öffentliche Meinung in der ersten
Hälfte der 19. Jahrhunderts (Speculation and public opinion in the first half of the 19 th century),
Jena (Gustav Fischer) 1930.