This fall brings a string of ten-year anniversaries. September 15: Lehman Brothers fails. September 29: the Dow Jones plummets 770 points, the greatest single-day loss to date. October 3: Congress passes the $700 billion Emergency Economic Stabilization Act, or, to many, “the bailout.”
While these decennials may not inspire celebration, they beg the question: What have we learned since the financial crisis? So asks SFI’s autumn meeting “Risk: Retrospective Lessons and Prospective Strategies,” for members of the Applied Complexity Network (ACtioN).
“The key lesson I take away from the financial crisis is that attempts to measure risk can always fail because of the element of panic,” says Bethany McLean, contributing editor at Vanity Fair and co-author of All the Devils Are Here: The Hidden History of the Financial Crisis. Crises are hard to predict, she continues, “particularly as financial markets get even more complex.”
Historically, this annual meeting on finance has welcomed mavericks in economics, including Nobel laureate Kenneth Arrow. This year, McLean will be a panelist at the event, along with two Nobel laureates — Daniel Kahneman and Edmund Phelps — both of whom are known, like Arrow, for challenging traditional economic theories. Other panelists include SFI Chairman Emeritus Bill Miller and Trustees Andrew Feldstein, Bill Gurley, and Michael Mauboussin, as well as Cliff Asnes, Esther Dyson, Henry Kaufman, SFI President David Krakauer, and Jessica Flack, Director of the C4 Collective Computation Group at SFI.
The meeting is timely in more ways than one. “It’s a unique time in the history of markets,” says Will Tracy, SFI Vice President for Strategic Partnerships. “For one thing, we’re in one of the longest bull markets in U.S. history, despite political shocks that seem likely to have spooked markets in earlier times. Complexity theory helps us conceptualize the phase transitions that can cause markets to shift between states that exhibit different relationships between market risk and shocks from outside the system, such as political events or natural disasters. This type of understanding is particularly useful in counteracting our over-reliance on simpler models, such as those that still dominate most graduate level finance classes.”
While the next crisis may arrive unexpectedly, we can better prepare for it by reviewing and re-thinking the complexities of financial risk.
Read more about the meeting in "The Next Financial Crisis is Staring Us in the Face," in Bloomberg View (October 8, 2018)