Intellectual hazard is root cause of financial crisis

Intellectual hazard is root cause of financial crisis 15 December 2010

People in large organizations and systems may fail to read the situation. Dealing with complexity, they rely on tunnel visions, tend to interprete facts in a way that coincides with their interests or see the world through simple, shared frames of mind. Better regulation should focus on strengthening their capabilities to deal with complexity.  

Complex organizations and systems can fail because individuals have limited intellectual capacities, are view things in a certain light because that is in line with their interests and because they look at the world from well defined, shared perspectives. Often, institutions and individual persons rely on (computer) models which are an oversimplification of reality. Because the amount of data to be interpreted is too large and complex there is too much reliance on authoritative sources, such as the Basel Committee. Another aspect of intellectual hazard is the incentive to maintain the status quo and to disregard negative effects and risks in times of growth (e.g. housing bubble).

Better and coherent financial (in particular macro prudential) regulation and supervision is crucial, but not sufficient. Improved complexity regulation, improved education on intellectual harzard, government reforms and corporate governance reforms are equally important in order to prevent another collapse of the world wide financial system.

These views were expressed by Professor Geoffrey Miller in his public lecture as Visting Chair on Private Actors and Globalisation on 14 December 2010 titled ‘Blame Basel? How well intentioned regulation failed during the financial crisis, and what can be done about it now’. 

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