Innovation and the Global Financial Crisis: Systemic Consequences of Incompetence

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4 Citations (Scopus)

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, securitization. This innovation changed the context for all actors in the financial industry repeatedly to such a degree that even the highest regarded experts repeatedly made prediction errors. The negative effects of prediction errors have since 1980 gradually became larger 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.
Original languageEnglish
Peer-reviewed scientific journalInternational Journal of Entrepreneurship and Innovation Management
Volume16
Issue number1/2
Pages (from-to)30-50
Number of pages21
ISSN1368-275X
DOIs
Publication statusPublished - 12.2012
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • Unintended consequences; Undesirable consequences; negative consequences; incompetence; securitization; financial innovation; NPD; Collateralized Debt Obligation; CDO; collateralized mortgage obligation; CMO; NPD (New Product Development); Pro-innovation bias
  • 512 Business and Management
  • Unintended consequences; Undesirable consequences; negative consequences; incompetence; securitization; financial innovation; NPD; Collateralized Debt Obligation; CDO; collateralized mortgage obligation; CMO; NPD (New Product Development); Pro-innovation bias.
  • KOTA2012

Sustainable Development Goals

  • GOAL 09: Industry, Innovation and Infrastructure
  • GOAL 12: Responsible Consumption and Production

Areas of Strength and Areas of High Potential (AoS and AoHP)

  • AoS: Responsible organising
  • AoS: Financial management, accounting, and governance

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