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Monday, June 15, 2015

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

Andrew Lo:

The Gordon Gekko Effect: The Role of Culture in the Financial Industry, NBER Working Paper No. 21267 Issued in June 2015: 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.”

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    Posted by on Monday, June 15, 2015 at 11:48 AM Permalink  Comments (17)


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