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 (MIT)