Financial Innovation and Risk Management

Cecchetti & Schoenholtz

Financial Innovation and Risk Management: “We allow our standards of living to be determined essentially by a game of chance.” -- Robert Shiller, Macro Markets, 1993.

In 2013, Robert Shiller shared the Nobel Prize for Economics with Eugene Fama and Lars Peter Hansen for their research on asset pricing. While Shiller is known as a critic of the efficient markets hypothesis and as a proponent of behavioral finance, less appreciated is his work on advancing financial technology to help societies manage fundamental economic risks.

At a time when the recent crisis has given financial innovation a bad name, Shiller’s contrarian message is that well-designed financial instruments and markets are an enormous boon to social welfare. We agree.

Historical examples supporting Shiller’s view abound. ...