Innovation and the global financial crisis - systemic consequences of incompetence Online publication date: Thu, 31-Jul-2014
by Karl-Erik Sveiby
International Journal of Entrepreneurship and Innovation Management (IJEIM), Vol. 16, No. 1/2, 2012
Abstract: The article applies the concept of incompetence by Polanyi (1962) and the concept of unintended consequences by Merton (1936) to explore the development of a radical financial innovation, securitisation. This innovation changed the context for all actors in the financial industry to such a degree that even the highest regarded experts repeatedly made prediction errors. The negative effects of prediction errors have gradually increased since 1980 until today when even a single individual decision by a portfolio manager may risk global financial mayhem. The conclusion is that financial innovation has become a lot riskier than is commonly appreciated in economic theory and practice. Our limited ability to foresee the consequences of our actions are fundamental to innovation and product development. Unintended and undesired outcomes should be acknowledged as an untapped resource for improving the net effects of innovation. The article suggests approaches to deal with the risk.
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