The Gordon Gekko Effect: The Role Of Culture In The Financial Industry by Andrew W. Lo
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 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-Long Term Capital Management; AIG Financial Products; Lehman Brothers and Repo 105; Societe Generale’s rogue trader; and the SEC and the Madoff Ponzi scheme-and conclude with a proposal to change culture via “behavioral risk management.”
The Gordon Gekko Effect: The Role Of Culture In The Financial Industry – Introduction
In the 1987 Oliver Stone film Wall Street, Michael Douglas delivered an Oscar-winning performance as financial “Master of the Universe” Gordon Gekko. An unabashedly greedy corporate raider, Gekko delivered a famous, frequently quoted monologue in which he eloquently described the culture that has since become a caricature of the financial industry:
The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.
Despite the notoriety of this encomium to enlightened self-interest, few people know that these words are based on an actual commencement speech, at what is now the Haas School of Business of the University of California at Berkeley, delivered by convicted insider trader Ivan Boesky in 1986, only eighteen months before his conviction.
Millions of people saw Wall Street, and Gekko’s monologue became part of popular culture. Hundreds, perhaps thousands of young people were inspired to go into finance as a result of Douglas’s performance. This dismayed Stanley Weiser, the co-writer of the screenplay, who met many of them for himself, Weiser wrote in 2008, at the height of the Financial Crisis, “A typical example would be a business executive or a younger studio development person spouting something that goes like this: ‘The movie changed my life. Once I saw it I knew that I wanted to get into such and such business. I wanted to be like Gordon Gekko.’ After so many encounters with Gekko admirers or wannabes, I wish I could go back and rewrite the greed line to this: ‘Greed is Good. But I’ve never seen a Brinks truck pull up to a cemetery.’”
What makes this phenomenon truly astonishing is that Gekko is not the hero of Wall Street—he is, in fact, the villain. Moreover, Gekko fails in his villainous plot, thanks to his young protégé-turned-hero, Bud Fox. The man whose words Weiser put into the mouth of Gekko, Ivan Boesky, later served several years in a federal penitentiary for his wrongdoings. Nevertheless, many young people decided to base their career choices on the screen depiction of a fictional villain whose most famous lines were taken from the words of a convict. Culture matters.
This is a prime example of what I propose to call “the Gekko effect.” It is known that some cultural values are positively correlated to better economic outcomes, perhaps through the channel of mutual trust.3 Stronger corporate cultures, as self-reported in surveys, appear to have better performance than weaker cultures, through the channel of behavioral consistency, although this effect is diminished in a volatile environment. However, not all strong values are positive ones. The Gekko effect highlights the fact that some corporate cultures may transmit negative values to their members in ways that make financial malfeasance significantly more probable. To understand these channels and formulate remedies, we have to start by asking what culture is, how it emerges, and how it is shaped and transmitted over time and across individuals and institutions.
What Is Culture?
What do we mean when we talk about corporate culture? There are quite literally hundreds of definitions of culture. In 1952, the anthropologists A.L. Kroeber and Clyde Kluckhohn listed 164 definitions that had been used in the field up to that time, and to this day we still do not have a singular definition of culture. This paper does not propose to solve that problem, but merely to find a working definition to describe a phenomenon. Kroeber and Kluckhohn settled on the following: “Culture consists of patterns, explicit and implicit, of and for behavior acquired and transmitted by symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts.” Embedded in this seemingly straightforward and intuitive definition is an important assumption that we shall revisit and challenge below—that culture is transmitted rather than innate—but will adopt temporarily for the sake of exposition and argument.
A corporate culture exists as a subset of a larger culture, with variations found specifically in that organization. Again, there are multiple definitions. The organizational theorists O’Reilly and Chatman define it as “a system of shared values that define what is important, and norms that define appropriate attitudes and behaviors for organizational members,” while Schein defines it in his classic text as “a pattern of shared basic assumptions that was learned by a group… that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct way to perceive, think, and feel in relation to those problems.”
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