NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Andrew W. Lo

NBER Working Paper No. 21267
Issued in June 2015, Revised in July 2015
NBER Program(s):Asset Pricing, Corporate Finance, Industrial Organization, Labor Studies, Political Economy, Productivity, Innovation, and Entrepreneurship

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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Document Object Identifier (DOI): 10.3386/w21267

Published: Lo, Andrew W., 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. citation courtesy of

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