Working Paper: NBER ID: w21267
Authors: 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 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.”
Keywords: No keywords provided
JEL Codes: G01; G28; G3; M14; Z1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corporate culture (M14) | individual and group behavior (C92) |
| negative cultural values (A13) | financial malfeasance (G28) |
| leadership transitions (J62) | risk perceptions and behaviors (D91) |
| cultural values (A13) | decision-making processes (D70) |
| decision-making processes (D70) | systemic failures (P11) |
| environmental factors (O44) | corporate behavior (M14) |
| changes in external environment (O36) | shifts in internal culture and practices (O35) |