Epidemics of rules, rational negligence and market crashes

Bibliographic Data

ID19040385
AuthorsKartik Anand (0000-0002-3081-3470, The Abdus Salam International Centre for Theoretical Physics (ICTP)), Alan Kirman (0000-0002-4152-6522, Aix-Marseille Sciences Economiques), Matteo Marsili (0000-0001-9437-6989, The Abdus Salam International Centre for Theoretical Physics (ICTP))
Year2020
Pages102-111
Publication date2020-06-04
Peer ReviewedYes
Open AccessNo
TypeCHAPTER
VenueNew Facets of Economic Complexity in Modern Financial Markets (SOURCE_BOOK)
PublisherRoutledge (PUBLISHER • GB)
DOI10.4324/9780429198557-6
OpenAlexW3121719431
ISBN9780429198557
LanguageEN
References cited7

Structural changes in an economy or in financial markets can arise as a result of agents adopting rules that appear to be the norm around them. Such rules are adopted by implicit consensus as they turn out to be profitable for individuals. However, as rules develop and spread they may have consequences at the aggregate level which are not anticipated by individuals. To illustrate this, we develop a simple model, motivated by the 2007–2008 crisis in credit derivatives markets. This shows how coordination on simple and apparently profitable rules may weaken regulatory constraints, rendering the whole system more fragile. The rule, in the specific example, consists in deciding not to exercise due diligence in the evaluation of complex credit derivative products, free riding on information and operational costs. We show that such ‘rational negligence’, in the face of deteriorating macro-economic conditions, can bring a market to a sudden collapse

Actuarial science · Business · Due diligence · Economics · Law and economics · Macro · Microeconomics · Banking stability, regulation, efficiency · Complex Systems and Time Series Analysis · Computer Science · Market Dynamics and Volatility · Finance

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