Applying Confucian Virtues in Finance

By: Charlotte L.Y. Tang


Confucianism was founded in the late Spring and Autumn Period in ancient China (~770BC- ~476BC). The key figure and founder of the philosophy is Confucius.[i].

ConfuciusConfucianism blossomed throughout ancient Chinese history with the help of philosophers and emperors, such as Mengzi[ii] and Emperor Wu of the Han[iii].

In ancient times, Confucianism was not only prominent in mainstream public opinion and as social requirement but also formed the core of some legal systems. Confucian principles were adopted as the legal standard.[iv] Therefore, the ideology was adopted by various social classes, and thus instilled into Chinese culture[v].

Centered on venerating others and respecting oneself, Confucianism was also a popular tool used by emperors to differentiate between various social classes and positions, build a social hierarchy, and establish their regime[vi]. However, this is only a limited dimension of the ideology. Other aspects, such as being wise and righteous, are also important elements. Despite the discrepancy between ancient and modern cultures, these principles are highly applicable in the modern age, especially in the financial world.

The four main Confucian principles yen, li, yi, and zhi, have applications in the modern financial world from client management to trading.

Central Thoughts of Confucianism

There are various versions and interpretations of Confucianism; however, they all concede that yen (仁), yi (義), li (禮), zhi (智), collectively known as the “Four Foundations” (四端), are among the main principles of Confucianism[vii].

A.    Yen (love and sympathy)

It is recorded that “sympathy is the foundation of yen,”[viii] and every human possesses yen. Sympathy forms the emotional core of yen. Yen comes in the form of empathizing and lending a helping hand. Seeing those who are deprived, a person with yen will feel their disappointment and hardship and will give help, out of feeling the other’s need and pain. In a broader sense, sympathy is not limited to harm that has already occurred but also potential harm to mankind and nature. Confucianism holds the belief the latter possesses lives and souls[ix]. By picturing prospective situations in which nature and mankind can be harmed, one will not dare bring harm out of sympathy for possible pain.

On top of helping others, Confucianism also stresses the ultimate embodiment of yen is to love and respect others by restraining desires and outrageous demands in daily life[x]. Yen is the human-oriented aspect of Confucian thoughts. It promotes loving each other and creating a better standard of living for all by collective effort. Throughout Chinese history, love has been commonly observed in the family, where parents were esteemed and siblings loved[xi]. Additionally, neighbors, strangers, and enemies should be loved, respected and cherished. Instead of adding insult to injury or putting enemies to death, one should practice self-control and save a life out of love and sympathy. Love is also applicable to nature, which should be cherished and protected; in other words, yen promotes “maintaining harmony with the nature” so humans and nature can co-exist[xii].

B.    Yi (righteousness)

According to Confucius, a person with yi is conscious of the dignity of being human, which is consciousness of ethics[xiii]. A person with yi feels disgusted and remorseful over shameful behaviors and refrains from committing these wrongs again. Whether an action is shameful or not depends on its alignment with the pursuit of fairness and justice, which takes place in three dimensions: individual, family and national[xiv]. If the action does not align, it is regarded as shameful. After identifying and defining “shameful” behaviors, yi requests stopping the behavior and shouldering responsibility, if one is at fault.

Going a step further, a person who upholds righteousness is regarded as a person with yi. By revealing the truth and stopping an unjust situation, one upholds righteousness. This includes protecting others from being cheated or harmed by unjust social conduct such as discrimination, assault, and harassment. In this sense, yi is not limited to the individual level but incorporates the element of helping the disadvantaged, especially the weak, deprived and disabled. It is not uncommon that revealing the truth comes with a price. Besides huge social pressure, one may also face the need to settle scores. Nonetheless, it is the central thought of yi that one should bravely take on the challenges for the pursuit of justice without flinching or yielding to social pressure or panjandrums[xv]. In ancient China, many risked their lives to defend justice, notably Wen Tienxiang[xvi] and  Yue Fei[xvii], and they have been proudly acknowledged as persons with yi in Chinese history.

C.   Li (veneration and comity)

Veneration is a key element of li, with the assumption that consciences and social requirements can regulate people. In Chinese, li can also refer to customs and traditions. Therefore, in Chinese culture, the definition of courtesy comes from practicing longstanding traditions and unspoken rules. This is especially prominent regarding social etiquette in interpersonal communications. Nonetheless, this aspect of li is only the jam on the bread. Confucius once said, “Restraining one’s desire into courtesy means yen[xviii]. In other words, yen means restraining from desires and outrageous behaviors by turning them into courtesy, or li. Confucianism proposes that by following social requirements and not imposing unnecessary emotional stress or physical harm on others caused by desires, a person respects herself as well as others[xix].

On the other hand, li means comity. According to Confucius: “Comity is the basis of li[xx]. Here, comity is not limited to courtesy, but also humility and achieving consensus. Being humble undoubtedly means not being complacent. This includes accommodating others’ ideas by appreciating, acknowledging and giving in to reach consensus and maintain harmony with the team[xxi]. Furthermore, practical actions are required after consensus. While the others’ ideas may be neither better nor more agreeable, working out of the spirit of li  means implementing their plans, transferring the project to a more suitable person, or withdrawing from the project.

D.  Zhi (Wisdom)

According to Confucius, “the ability to distinguish between right and wrong is the basis of zhi[xxii]. In other words, wisdom is the ultimate goal of zhi.

First, knowing right and the wrong is the starting point of wisdom. Generally, right actions uphold the truth, namely justice, fairness and objectiveness[xxiii]. On the other hand, wrong refers to behaviors violating social conduct or the truth. Therefore, in most cases, zhi understands social code and the acceptability of an action. However, there are exceptions when social practices are unjust and social requirements are no longer the sole reference for right and wrong. The truth must also be considered[xxiv].

A step further from distinguishing right and wrong is learning to give a wise response. In life, responding with wisdom means yen, yi and li are being practiced while differentiating right and wrong. In this sense, zhi is of great significance among the four foundations, as it is the practicing principle of the four elements, especially yen. When practicing yen, one should consider whether an act or intention is acceptable in public opinion and accords with justice before offering blind sympathy. If one is acting out of sympathy but the action is not right, one refrains from the act[xxv]. Besides yen, zhi is shown in yi and li when a person politely reminds others of wrong intentions and behaviors, wisely expresses opinions towards unjust social issues and traditions, and objectively critiques whether the law is just[xxvi].

Applying Confucian Virtues in Finance

These Confucian principles are ancient but enduring. There may be some difference between the culture of our contemporary world and that of Confucius’ times. Nonetheless, Confucianism is not out of the place in the modern age but is highly applicable, even in today’s financial world.

A.    Yen (sympathy and love)

Do not put clients under unnecessary emotional and financial pressure.

According to Lunyu, “Do not do to others what you do not want done to you.”[xxvii]  This phrase proposes that we empathize with people in regards to their situations, concerns and needs. To apply the idea of love and sympathy in the financial world, clients and their positions should be considered with empathy. The desires and self-interest of financial workers should be restrained to avoid putting emotional and financial burdens on clients. Therefore, manipulative tactics, including the use of boiler rooms where intensive sales activities are conducted, are not in accord with yen. Out of sympathy, one refrains from greed to avoid putting unnecessary financial pressure on clients by charging excessive interests on loans and unreasonably high fees for financial products and derivatives.

Do not overwork employees.

While efficiency is stressed in the financial world, it should not mean pressurizing and overworking employees, as one does not desire to be overworked and pressurized. Feasible measures include putting a cap on working and overtime hours, and giving more flexibility to staff. These measures may require hiring more employees to maintain the same profit margins. Costs may go up, but the corporation gains a loyal workface, resulting in a lower turnover rate and potentially lower internal resistance.

B.    Yi (righteous)

Gain by ethical means.

Confucianism specifies that ethics is the difference between humans and animals,[xxviii] in the sense that people should practice ethics and uphold fairness and justice. This implies that one should not use unethical behaviors to make gains but should profit using fair terms, thereby winning over competitors with integrity. If wrongdoings are committed, one should feel remorseful and bear responsibility. In the financial industry, unethical behaviors include  market manipulation, insider trading, and deceiving clients by use of fraud. Firms should avoid using unethical means to make money or save on costs, including tax evasion, disclosure of partial or wrong information, and corruption. While these means provide  shortcuts to fortunes, when they are discovered, the harm done to the firm is not limited to its image but also affects customer confidence and internal loyalty. On the other hand, if an unethical behavior has already been committed, a responsible firm should apologize, abandon the tactic or the financial product, and try to reverse the harm. Proper compensation should also be provided for clients’ losses. These corrective measures do not make the firm immune to legal responsibilities and consequences.

Disclose unethical incidents.

In addition to being ethical and responsible, firms and employees are encouraged to reveal unethical behaviors within the firm or the industry as a whole. By publicizing the truth, one may prevent unethical behavior. The firm should not penalize employees who bravely reveal the truth but honor their integrity and their effort to make the firm and the industry more ethical.

C.   Li (veneration and comity)

Respect the clients and the culture.

Li emphasizes understanding and meeting social expectations.

On a macro view, a business with li operates within the customs and traditions of the prevailing culture, living up to social expectations in moral and ethical aspects without violating the social code or adopting a beggar-thy-neighbor approach. In modern business settings, a firm should make adjustments based on cultural characteristics and unspoken rules out of respect.

On a micro view, li suggests we should respect others, including their opinions, concerns and needs. In the financial world, respecting and satisfying the needs of clients have always been a priority. In addition to satisfying clients’ needs, their objectives also should be respected. When carrying out deals and transactions, financial agents should not be blinded by greed in order to gain more fees. Clients’ freedom to choose products and derivatives should also be respected, and should not be emotionally manipulated. Furthermore, their information should be kept confidential so that their privacy is respected. When financial professionals encounter any conflict of interest, they should respect clients need and maintain objectiveness.

At the firm level, the emphasis of li is be on comity. The firm should avoid seeking a monopoly, as this eliminates room for smaller businesses in the market. It is undeniable that growing market share is beneficial to the growth of a business and increases bargaining power. Creating a monopolistic environment harms the survival and livelihood of competitors, especially smaller enterprises. A firm’s desire should not be insatiable but constrained out of comity to allow for the survival of others.

Cooperate with counterparts in the industry.

Collaboration and consensus lend support for a stronger industry. Upholding comity, firms should try their best to reach consensus in industry-wide issues without obscuring synergy by making deals under the table. Synergy brings harmony to the industry and unveils a firm’s full potential. These qualities build a firmer foundation for the future growth of an industry.

D.   Zhi (wisdom)

Identify and stop unethical behavior.

The prerequisite of zhi is distinguishing between right and wrong. Therefore, “shameful” acts observed in a firm should not be hidden. Instead, one should seek to stop the behavior by reminding others, revealing the truth to society and referencing the laws. In financial operations, loopholes in the law are plentiful, and many unethical behaviors are still legal. It should be made clear in firms that unethical acts, whether legal or not, are wrongdoings that are not encouraged. This includes fraud, which involves making false claims and deceiving clients[xxix]. Next, making use of clients’ personal information for the agents’ own benefit should be prohibited. Actions in this category include front running, naked short selling and exploiting customers by investing in dummy corporations. Making use of swaps to increase the market value of the firm in an initial public offering (IPO) is also regarded as unethical under the Confucian framework.

Provide a wise response that caters to the needs of stakeholders.

Next, zhi aims to provide an appropriate response to the problems of clients, employees and the industry. This wise response should cater to the needs of stakeholders and uphold integrity and fairness. For instance, when launching a new financial product to meet market needs, one should not only consider the needs and benefits of the company and clients but also the potential harm to clients and society. If there is potential harm to customers, the launch should be halted until proper compensation and resolutions are found. On the contrary, cheating consumers by not disclosing full risks and details is not considered a sound business decision with zhi. A notable example would be the CDOs offered by Lehman Brothers and other investment banks prior to the global financial crisis in 2008. Eventually, many of these corporations, including AIG and Goldman Sachs, faced integrity crises[xxx].


There are four major principles under the umbrella of Confucianism: yen, yi, li and zhi, which collectively suggest doing the right thing with grace and respect for oneself and others in order to build an ordered society.

Yen is attributed to sympathizing with the difficulty of others and loving others; yi requests awareness of shameful behaviors, as well as pursuit of the truth; li refers to respecting people and cultures and being humble; and zhi means having the wisdom to distinguish between right and wrong, such as giving a wise response after assessing a client’s needs and the situation.

We may apply these Confucian principles in the financial world at the individual, firm and industry levels. Yen gives insights in internal management and ethical business tactics, while yi applies to the conduct of financial workers in regards to avoiding unethical behaviors and revealing the truth. Li directs customer relationship management and encourages cooperation with

[i] Liang, Qichao. Xian Qin Zheng Zhi Si Xiang Shi. 先秦政治思想史[The political philosophy in Pre-Qin Period].Taipei: Taiwan Chunghwa Bookstore, 1956. Print.

[ii] 孟子

[iii] Si, Maguang, Guoxiang Li, Yusong Chen, and Zhihua Gu, comps. Zhizi Tongjian. Taipei: Taiwan Chunghwa Bookstore, 1956. Print.

[iv] Chʻü, Tʻung-tsu. Law and Society in Traditional China. Paris: Mouton, 1965. Print.

[v] Si, Li, Chen, and Gu, 1956. Print.

[vi] Tang, Junyi. “Yu Qingnian Tan Zhongguo Wenhua.” [Discussing Chinese Culture with Youth.] Zhongguo Wenhua Zhuanti中國文化專題 [A close study on Chinese culture]. Hong Kong: Hong Kong Educational, 2005. 1-27. Print.

Lunyu. Shanghai: Commercial, 1936. Print.

[vii] Mencius. Mengzi. Comp. Qi Zhao and Pan Jin. Taipei: Taiwan Zhonghua tore, 1970. Print.

Lunyu 論語 [The Analects]. Shanghai: Commercial, 1936. Print.

[viii] Original Text in Mengzi:「惻隱之心,仁之端也。」

[ix] Tang, 2005.

[x] Tang, 2005.

[xi] Tang, 2005.

[xii] Tang, 2005.

[xiii] Human is thought to rank higher than animals in Confucius. Tang, 2005.

[xiv] or “societies”.

[xv] Lunyu.

[xvi] Wan, Shengnan. Wen Tianxiang. 文天祥. Taipei: Zhi Shu Fang Chu Ban She, 1996. Print.
Wen Tianxiang (文天祥); The prime minister of the late Song Dynasty, who did not surrender to the Yuan Dynasty, the conqueror and successor of the Song Dynasty which offered wealth and reputation for Wen’s surrender.

[xvii] Fuo, Bilei.Yue Fei Duan (岳飛傳) [A Biography of Yue Fei]. Taipei: International Translation Services, 1989. Print.

Yue Fei(岳飛); A general in mid Song Dynasty, who conquered The Kingdom of Jin out of the passion to revive the Song Dynasty.

[xviii]  Original Text in Lunyu: 「克己復禮為仁。」

[xix] Lunyu.

[xx] Original Text in Mengzi: 「辭讓之心,禮之端也。」

[xxi] Tang, 2005.

[xxii] Original text in Mengzi [Mencius]:「是非之心,智之端也。」

[xxiii] Lunyu.

[xxiv] Tang, 2005.

[xxv] Lunyu.

[xxvi] Tang, 2005.

[xxvii] Original text in Lunyu: 「己所不欲,勿施於人。」

[xxviii] Tang, 2005.

[xxix] “Ponzi Schemes – Frequently Asked Questions.” “Ponzi” Schemes. N.p., n.d. Web. 03 Aug. 2013.  Ponzi fraud refers to a fraud that investments have never been made but paying the clients exceptionally high return rates by using the capital injected into the fraud by other investors.

[xxx] Mendes, Errol. “Goldman Sachs and the Integrity Crisis.” Goldman Sachs and the Integrity Crisis – Errol Mendes. N.p., 11 Apr. 2010. Web. 03 Aug. 2013.

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