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

47 Pages Posted: 15 Jun 2015 Last revised: 11 Aug 2024

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

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Date Written: June 2015

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 present a specific framework for analyzing culture in the context of financial practices and institutions in which three questions are answered: (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—Long Term Capital Management; AIG Financial Products; Lehman Brothers and Repo 105; Société Générale’s rogue trader; and the SEC and the Madoff Ponzi scheme—and conclude with a proposal to change culture via “behavioral risk management.”

Suggested Citation

Lo, Andrew W., The Gordon Gekko Effect: The Role of Culture in the Financial Industry (June 2015). NBER Working Paper No. w21267, Available at SSRN: https://ssrn.com/abstract=2618655

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