The financial sector plays a crucial role for the economy by managing risk, providing price signals and fostering economic opportunities. Why then is the sector perceived as highly selfish and even dishonest among the professions (Achraf and Bandiera, 2017)? Compared to doctors, for example, many financial activities, such as wealth management, are associated with much higher private (perceived) returns than social (Zingales, 2015).
Since the 2007/08 financial crisis, the financial sector has come under public criticism with lawsuits relating to the causes of the crisis, the manipulation of Libor, tax evasion and money laundering. Political blame has often been attributed to a “lack of professionalism and ethics” (UK Parliamentary Commission on Banking Standards, Economist, 2014). But do finance professionals think and behave in a way that could have contributed to the scandals?
Numerous studies have sought to assess the values and culture among financial professionals. Experiments with bankers show that they behave more dishonestly (Cohn, 2014), but other researchers hesitate to conclude that the corporate culture of bankers is particularly problematic (Vranka, 2015; Hupé, 2018).
Holmen et al (2021) find in one experiment that bankers behave more risky and less pro-social due to different group characteristics, such as a higher proportion of men and more educated professionals. Van Hoorn (2015) shows in cross-sectional survey studies that the prosocial values of finance professionals are only negligible when personal characteristics remain constant.
This study complements the literature on banking culture by observing professional bankers over time. With large-scale data from Germany (GSOEP) on 465 banking professionals who were interviewed 2,391 times between 2000 and 2018, researchers can analyze their self-reported preferences for risk and monetary motivation before, during and after financial employment.
In addition, we can compare preferences to almost 300,000 observations of the general population during this period. In this way, it is possible to differentiate a selection effect – i.e. whether individuals with certain preferences are more likely to start working in finance – and a socialization effect – i.e. tell if preferences stem from indoctrination while working in finance.
By keeping personal characteristics such as age, education, qualification and duration in current employment status constant, we find that individuals with higher risk and monetary preference have a significantly higher probability of start working in finance.
Figure 1. Averages of preferences by group
Note: The graph shows the means and confidence intervals (95%) of economic preferences for the general population, professionals and financial professionals. GSOEP Data Cones
Figure 2. Economic preferences and financial employment, by year
Note: The graph shows the average marginal effect (AME) of economic preferences and financial employment by year. MEAs were calculated from a logit regression of a variable on financial employment on individual preference, interacting with nominal year variables. Data are taken from GSOEP (see Section 2). 95% confidence intervals are indicated. The vertical line represents the financial crisis of 2007, the horizontal line the zero effect. Own representation
Specifically, individuals entering finance display a 40% higher standard deviation risk preference and 12% higher monetary motivation than the general population.
Regarding whether economic preferences are shaped due to a pre-existing corporate culture, bankers who are already working in finance have a similar risk premium, but 20% higher monetary motivation, an indication of a socialization of monetary importance during the period in The sector. Looking at economic preferences over time, we see a spike in average risk preferences in the years leading up to the 2007/08 financial crisis.
The results matter because they point to a business standard in the financial industry that attracts professionals who think riskier and more income-oriented. Risky behavior can lead to loss of well-being (Barber, 2001) and low pro-sociality can lead to weaker contract execution (LaPorta, 1996).
We conclude that changing the culture in the financial industry requires a concerted effort involving not only recruitment and retention, but also the disruption of existing socialization processes.
Max Deter is a fourth year doctoral student at the University of Wuppertal, Germany. His research interests are behavioral economics, labor economics and political economy.
This item was first published in LSE Business Review
Keep up to date with all the ideas.
Browse the news, 1 day of email.
Subscribe to Qrius