THE 'GEKKO' EFFECT: How Wall Street can manage risk ... in its own employees

Wall street gordon gekko michael douglasYouTube / 20th Century FOXVillain Gordon Gekko ended up being a hero to many.

Why do people do bad things at work?

A recent paper out from Andrew Lo, a finance professor at MIT’s Sloan School of Management, suggests it might be a lot more about the corporate culture than the individuals themselves.

That would mean companies themselves might also be able stop the behaviour.

In the paper, which is more of a long essay, Lo thinks through how corporate culture pushes people toward bad behaviour. He asks how corporate organisations, specifically in the finance and regulatory industries, can be managed to avoid major disasters like the Bernie Madoff ponzi scheme or the Lehman Brothers collapse.

He calls this the Gekko effect, after the villain in Oliver Stone’s 1980s movie “Wall Street.” Even though the character, Gordon Gekko, isn’t the hero, a ton of young people still wanted to be like him after the movie came out. They headed to Wall Street because the culture — charisma, money, greed — was enticing. It seems great, but people often forget that things didn’t work out so well for Gekko in the end. Greed is good only up to a point, even on Wall Street.

“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,” Lo writes.

Figuring out how to stop corporate cultures that encourage bad outcomes would be huge. As Lo says, we can measure financial risk. But it’s really hard to measure risk in the way people behave. And that can be just as important in preventing crises, particularly in the financial industry.

This is in some ways about incentives ($US$US$US), but Lo thinks it’s about more than that. The incentive structure, which encourages massive risk-taking, is more or less the same across Wall Street. But plenty of people never step over the line into illegality. Lo tries to work through why some people do step across this line.

And there’s all sorts of places where culture can go wrong:

  • At the top: Do authority figures within the company condone or even encourage excessive risk-taking?
  • At the bottom: Does the company always hire the same kinds of people who think in similar ways?
  • In the environment: Does the company actually focus on managing the risks most likely to affect them?
  • Context: What has the group as a whole absorbed as the best value system? There’s some evidence that groups can adapt those value systems over time.

This last one could be the key to fixing culture, Lo says. It happens by identifying behaviours and slowly teaching the whole company to avoid them. “Human behaviour is clearly a factor in virtually every type of corporate malfeasance, hence it is only prudent to take steps to manage those behaviours most likely to harm the business franchise.”

It’s easy enough: Just find out what behaviours are bad, then stop them. Good luck!

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