
Neglected Risks, Financial Innovation, and Financial Fragility (2011) [pdf] - INGELRII
https://www.hbs.edu/behavioral-finance-and-financial-stability/Documents/86973485.pdf
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INGELRII
>Abstract

>We present a standard model of financial innovation, in which intermediaries
engineer securities with cash flows that investors seek, but modify two
assumptions. First, investors (and possibly intermediaries) neglect certain
unlikely risks. Second, investors demand securities with safe cash flows.
Financial intermediaries cater to these preferences and beliefs by engineering
securities perceived to be safe but exposed to neglected risks. Because the
risks are neglected, security issuance is excessive. As investors eventually
recognize these risks, they fly back to safety of traditional securities and
markets become fragile, even without leverage, precisely because the volume of
new claims is excessive.

