ABSTRACT
The inappropriateness of the traditional paradigm, suggesting that exogenous shocks are the sole factors responsible for economic instabilities, has been forced on economists by the pressure of evidence. Besides the behavioral heterogeneity, many other aspects of the complexity of economic systems have emerged throughout the prolonged financial crisis. This has impacted seriously the efficiency of modern asset management and economic policy. Driven by the aforementioned issues, newly presented tools and techniques provided evidence that standard financial economic approaches can fail to provide realistic interpretations of bubbles and crashes that can be of practical use. The empirical results for several financial markets provide supportive evidence that positive feedback mechanisms are prone to fuel financial bubbles. Regarding the actual benefits of financial innovation, N. Gennaioli, A. Shleifer, and R. Vishny show that, if there is room for financial innovation, new securities tend to be over-issued due to ‘local thinking’.
