Wrong Assumptions and Risk Cultures
Wrong Assumptions and Risk Cultures
Deeper Causes of the Global Financial Crisis
This chapter analyzes the incorrect assumptions and risk cultures that are the deep and hidden root causes of the financial crisis. It argues that the crisis was caused not simply by technical economic and regulatory failures but rather by the unconscious psychological and cultural assumptions prevalent in financial companies and financial markets. These assumptions are reductionist and incomplete in portraying human motivation reduced to self-interest, complex human emotions reduced to fear and greed, all available information about asset values reduced to market prices, and all information about the riskiness of assets reduced to asset price volatility. Such obsessive reductionism eventually led to the failure of risk management. This chapter recommends moving financial companies from a culture of risk, selfishness, and narcissism to a culture of trust.
Keywords: risk cultures, financial markets, asset values, reductionism, risk management
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