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The Gordon Gekko effect: the role of culture in the financial industry

Author

Listed:
  • Andrew W. Lo

    (Harvard University
    Massachusetts Institute of Technology
    ebrary Inc
    National Bureau of Economic Research)

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,? Socit Gnrale?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.?

Suggested Citation

  • Andrew W. Lo, 2016. "The Gordon Gekko effect: the role of culture in the financial industry," Economic Policy Review, Federal Reserve Bank of New York, pages 17-42.
  • Handle: RePEc:fip:fednep:00029
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    References listed on IDEAS

    as
    1. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2013. "The Determinants of Attitudes toward Strategic Default on Mortgages," Journal of Finance, American Finance Association, vol. 68(4), pages 1473-1515, August.
    2. Hill, Claire A. & Painter, Richard W., 2015. "Better Bankers, Better Banks," University of Chicago Press Economics Books, University of Chicago Press, number 9780226293059, January.
    3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2006. "Does Culture Affect Economic Outcomes?," Journal of Economic Perspectives, American Economic Association, vol. 20(2), pages 23-48, Spring.
    4. Thomas M. Eisenbach & Andrew F. Haughwout & Beverly Hirtle & Anna Kovner & David O. Lucca & Matthew Plosser, 2015. "Supervising large, complex financial companies: what do supervisors do?," Staff Reports 729, Federal Reserve Bank of New York.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Goodhart, Charles, 2018. "Behavioural perspectives on bank misdeeds," LSE Research Online Documents on Economics 87507, London School of Economics and Political Science, LSE Library.
    2. repec:eee:jfinin:v:39:y:2019:i:c:p:59-79 is not listed on IDEAS
    3. Francesco Feri & Caterina Giannetti & Pietro Guarnieri, 2017. "Risk taking for others: an experiment on ethics meetings," Discussion Papers 2017/229, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.

    More about this item

    Keywords

    risk management; culture; behavioral finance; regulation; corporate governance;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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