fbpx Neglected Risks, Financial Innovation, and Financial Fragility | Harvard Kennedy School

Authors:

  • Andrei Shleifer

Excerpt

Neglected Risks, Financial Innovation, and Financial Fragility. Andrei Shleifer, May 27, 2011, Paper. "We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize..." Link