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

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 describe a specific framework for analyzing culture in the context of financial practices and institutions, a framework in which three questions are addressed: (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 — 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 — and conclude with a proposal to change culture via “behavioral risk management.”