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

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  • Andrew W. Lo

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, issue Aug, pages 17-42.
    • Handle: RePEc:fip:fednep:00029
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    References listed on IDEAS

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    1. Hill, Claire A. & Painter, Richard W., 2015. "Better Bankers, Better Banks," University of Chicago Press Economics Books, University of Chicago Press, number 9780226293059, September.
    2. A. Joanne Kellermann & Jakob de Haan & Femke de Vries (ed.), 2013. "Financial Supervision in the 21st Century," Springer Books, Springer, edition 127, number 978-3-642-36733-5, September.
    3. 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.
    4. 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.
    5. 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.
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    Cited by:

    1. Priyank Gandhi & Benjamin Golez & Jens Carsten Jackwerth & Alberto Plazzi, 2019. "Financial Market Misconduct and Public Enforcement: The Case of Libor Manipulation," Management Science, INFORMS, vol. 65(11), pages 5268-5289, November.
    2. Goodhart, Charles, 2018. "Behavioural perspectives on bank misdeeds," LSE Research Online Documents on Economics 87507, London School of Economics and Political Science, LSE Library.
    3. Bunderson, Stuart & Thakor, Anjan V., 2022. "Higher purpose, banking and stability," Journal of Banking & Finance, Elsevier, vol. 140(C).
    4. Huang, Sheng & Maharjan, Johan & Thakor, Anjan V., 2020. "Disagreement-induced CEO turnover," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    5. Barth, Andreas & Mansouri, Sasan, 2021. "Corporate culture and banking," Journal of Economic Behavior & Organization, Elsevier, vol. 186(C), pages 46-75.
    6. Bäumer, Marcus, 2020. "What matters to investment professionals in decision making? The role of soft factors in stock selection," EIKV-Schriftenreihe zum Wissens- und Wertemanagement, European Institute for Knowledge & Value Management (EIKV), Luxembourg, volume 44, number 44.
    7. Jennifer Kunz & Mathias Heitz, 2021. "Banks’ risk culture and management control systems: A systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 32(4), pages 439-493, December.
    8. Hagen Rafeld & Sebastian G. Fritz-Morgenthal & Peter N. Posch, 2020. "Whale Watching on the Trading Floor: Unravelling Collusive Rogue Trading in Banks," Journal of Business Ethics, Springer, vol. 165(4), pages 633-657, September.
    9. Anthony Asher & Tracy Wilcox, 2022. "Virtue and Risk Culture in Finance," Journal of Business Ethics, Springer, vol. 179(1), pages 223-236, August.
    10. Song, Fenghua & Thakor, Anjan V., 2019. "Bank culture," Journal of Financial Intermediation, Elsevier, vol. 39(C), pages 59-79.
    11. 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.
    12. Ramiro de Ávila Peres, 2020. "Equality and Responsibility in Financial Crisis: an ethical approach to the regulation of bail-outs, moral hazards and accountability," Working Papers Series 520, Central Bank of Brazil, Research Department.

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    More about this item

    Keywords

    risk management; culture; behavioral finance; regulation; corporate governance;
    All these keywords.

    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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