Posts tagged: dilemma of control

Financial Innovation and the Dilemma of Control


Innovation has been with us for a long time, and its overall contribution to finance and welfare has been positive. Nevertheless, its core benefits to society have recently been questioned following the financial crisis in 2007/2008; where financial innovation has received various criticisms from the media, the public, policy makers and top economists in society. As a result, controversies exist on the merits and dangers of financial innovation; and on the responsibility or irresponsibility with which it is conducted. To this end, there are agreements among stakeholders on the need to create a more responsible approach to handling financial innovation; and actors have become interested in finding ways to preserve the benefits of financial innovation, while at the same time limiting the effects of financial innovations that prove harmful.

Is this a realistic and attainable goal? Do we have a choice if we are to ensure that the financial crisis is not repeated again? Can stakeholders distinguish beneficial innovations from harmful ones early enough to reduce, if not eliminate, the negative impacts of financial innovations? Here the issue is one of uncertainty, ignorance and the dilemma of control; and clearly, this is not an easy task as researchers point out that for most economic and financial decisions, we do not know what all the consequences of the outcome will be; and as such will be exposed to some degree of uncertainty regarding the wider impacts of financial innovations.

The complexity of this issue is even more aggravated when it is understood that financial innovation, comparable to many forms of technological innovation, may be commercialized even before relevant authorities can consider their danger, or even know about their existence. This may also be compounded by the rapidity and complexity of financial innovation itself . Thus, a dilemma of control, may emerge; as by the time undesirable consequences become visible, the innovation is locked in; and making a change has become expensive, difficult and time consuming. These arguments lead to questioning how adequate or robust current mechanisms, including regulation, for governing financial innovations are in predicting the wider impacts of financial innovations before they occur.

Research suggests that financial regulation lags financial innovation itself as regulation in the financial industry have normally focused, to a large extent, on filling in the regulatory gaps identified after each financial crisis. Significant time lags of this type are common for many forms of innovation; and this suggest that experiences in anticipatory governance, and emerging concepts of responsible innovation in these other fields may have read across to the governance of financial innovation. These suggest that financial innovators cannot predict all the possible consequences of their innovations before commercialization; thus the key to addressing the issue of the dilemma of control may be in making the right decisions under conditions of uncertainty, and establishing a framework for responsible financial innovation to support this.

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