The 1987 crash was thus not provoked by events in the real economy but by a supposedly smart risk-management strategy— and the current downturn also derives at least partly from a global craze for a seemingly foolproof financial innovation.
Investors in financial markets rationally pursuing individual profit, can produce outcomes that are globally negative. Doesn’t that contradict classical economic theory? “Both theory and empirical facts do tend to show that,” says Cont. “On the financial markets, the ‘Invisible Hand’ does not always lead to welfare-improving general outcomes.”
Hence, free-market capitalism is not dead, but it is unclear whether there is any better alternative. In fact, I strongly believe that capitalism has to grow up and become less naïve, relying less on a blind faith in the invisible hand and more on an understanding of human nature, including insights from the field of behavioral economics.