The Illusion of Control: Why Financial Crises Happen, and What We Can (and Can’t) Do About It

This SUERF BAFFI Bocconi – Meet the Author webinar marks the publication of Jón Daníelsson’s new book “The Illusion of Control: Why Financial Crises Happen, and What We Can (and Can’t) Do About It”. In conversation with Hyun Song Shin, Economic Adviser and Head of Research (BIS) and Elena Carletti, Full Professor of Finance, Finance Department (Bocconi University and SUERF Fellow), Jón Daníelsson, Director of the Systemic Risk Centre, Department of Finance (LSE) will expose weaknesses of current approaches to predicting financial crises and explore avenues to improve financial regulation and supervision in the future.

A challenge to the conventional wisdom surrounding financial risk, providing insight into why easy solutions to control the financial system are doomed to fail. Finance brings prosperity and danger. We use measurements of risk to try and control the dangers of investments while maximizing our growth. Current strategies rely on mathematical techniques and historical data to predict future risk, but ignore the human component, failing to take into account the nature of risk inherent in the system. Jón Daníelsson argues that critical risk is generated from within, through the interactions of individuals and perpetuated by their beliefs, objectives, abilities, and prejudices. He asserts that the widespread belief that risk originates outside the financial system frustrates our ability to measure and manage it, and the likely consequences of new regulations will help alleviate small-scale risks but, perversely, encourage excessive risk taking. Daníelsson uses lessons from past and recent crises to show that diversity is the best way to safeguard our financial system. 

ISBN 9780300234817, Yale University Press, Published: 23