The neglect of risk and its consequences One of the main reasons for the mess we are in now has been a general misperception of risk. In the financial industries, many believed that innovations like structured asset-backed securities would improve the diversification of risks and thereby help to reduce the markets’ vulnerability to adverse shocks.
However, the risks were never actually traded away, but stayed concentrated on the books of the financial corporations involved. There is nothing wrong with risk diversification, but obviously something is wrong with innovative products that are too complex to be understood by the very people who originate and distribute them.