Journal Article

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

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.?

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

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

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Economic Policy Review

Publication Date: 2016

Issue: Aug

Pages: 17-42