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The Gordon Gekko Effect: The Role of Culture in the Financial Industry

45 Pages Posted: 8 Jun 2015 Last revised: 30 Mar 2016

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Date Written: March 29, 2016

Abstract

Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the recent financial crisis. I present a brief overview of the role of culture according to psychologists, sociologists, and economists, and then describe a specific framework for analyzing culture in the context of financial practices and institutions, a framework in which three questions are addressed: (1) What is culture? (2) Does it matter? and (3) Can it be changed? I illustrate the utility of this framework by applying it to five concrete situations — the collapse of Long-Term Capital Management, the fall of AIG Financial Products, the use by Lehman Brothers of “Repo 105,” Société Générale’s rogue trader, and the Securities and Exchange Commission’s handling of the Madoff Ponzi scheme — and conclude with a proposal to change culture via “behavioral risk management.”

Keywords: Culture, Corporate Governance, Regulation, Behavioral Finance, Risk Management

JEL Classification: A13, D23. L20, M14, Z10

Suggested Citation

Lo, Andrew W., The Gordon Gekko Effect: The Role of Culture in the Financial Industry (March 29, 2016). Available at SSRN: https://ssrn.com/abstract=2615625 or http://dx.doi.org/10.2139/ssrn.2615625

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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