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

26 Pages Posted: 23 Aug 2016 Last revised: 16 Dec 2017

See all articles by Andrew W. Lo

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: 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 2007-09 financial crisis. This article presents a brief overview of the role of culture as it is seen by psychologists, sociologists, and economists, and then describes a specific framework for analyzing culture in the context of financial practices and institutions. Using this framework, the author addresses three questions: (1) what is culture? (2) does it matter? and (3) can it be changed? He illustrates 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. The article concludes with a proposal to change culture through “behavioral risk management.”

Keywords: culture, corporate governance, regulation, behavioral finance, risk management

JEL Classification: G01, G18, G20, G28, G30, G38

Suggested Citation

Lo, Andrew W., The Gordon Gekko Effect: The Role of Culture in the Financial Industry (2016). Economic Policy Review, Issue Aug, pp. 17-42, 2016. Available at SSRN: https://ssrn.com/abstract=2828072

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

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