Financial innovation does not reduce investment risk

While new housing financial instruments caused the global financial crisis in 2008, in investment theory innovation is held to lessen risk to portfolios by allowing a greater spread of debt.

However, theoretical research by MIT economist Alp Simsek argues that new instruments may lead to belief-based bets on the value of instruments among investors with different world-views.

Simsek argues that this represents a separate type of risk which he terms speculative variance.

“In a world in which investors have different views, new securities won’t necessarily reduce risks,” said Simsek. “People bet on their views. And betting is inherently a risk-increasing activity.”

Read more at Massachusetts Institute of Technology

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