The Illusion of Control

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Why Financial Crises Happen, and What We Can (and Can’t) Do About It

Jon Danielsson

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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.

Jón Daníelsson is a professor of finance and the director of the Systemic Risk Centre at the London School of Economics. He is the author of Financial Risk Forecasting and Global Financial Systems: Stability and Risk.

"Too little financial regulation or too much of the wrong kind?  Whatever your view, Jon Daníelsson’s lively account and richly informed discussion will surely intrigue you and challenge preconceptions"—Patrick Honohan, Former Governor, Central Bank of Ireland

"Financial regulators should be required to read this book.  It shows in sparkling and non-technical language what aspects of risk can, and frequently cannot, be measured.  Anyone concerned with portfolio management should read it."—Charles Goodhart, London School of Economics
 

“Jon Danielsson makes a compelling case for a fundamental re-think in the approach to risk management taken by both financial services firms and their regulators. Those charged with the management, governance and regulation of risk – either at the level of an entity or an economy – should benefit enormously from Jon’s alternative framework.”—Lutfey Siddiqi, Risk Management Institute, National University of Singapore 

"Is international cooperation on regulatory standards stifling good risk taking, leading to bad risk taking? Refreshingly critical, The Illusion of Control is an important contribution to the ongoing mapping of financial risk."—Yves Mersch, former ECB board member and vice-chair, Single Supervisory Mechanism
ISBN: 9780300234817
Publication Date: June 28, 2022
288 pages, 6 1/8 x 9 1/4
45 b/w illus.