The Role of Culture in Finance

Abstract

Abstract Chapter 19 provides an overview of the role of culture according to psychologists, sociologists, and economists, and then presents a specific framework for analysing 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? This framework is applied to five concrete situations—Long-Term Capital Management; AIG Financial Products; Lehman Brothers and Repo 105; Société Générale’s rogue trader; and the US Securities and Exchange Commission and the Madoff Ponzi scheme—and a proposal to change culture via ‘behavioural risk management’ is presented.