Moreover, the problems with complex risk management are exacerbated in that perhaps the most important component available to an individual is human capital, with all the forms of risk connected with its management and yield. In addition, households encounter complicated decisions in other aspects of life, of which some have to do with insurance products. As I just said, the financial system has already changed spectacularly and become increasingly sophisticated. But it will not stop there. It may therefore be asked whether banks and other financial institutions will become increasingly consumer oriented in the future, instead of the current focus on products. One advocate of such a development is Robert Merton, a Harvard professor who predicts that financial institutions will split into one group that produces business services and another that is 16 close to consumers and mainly distributes financial services. Banks today often perform both these functions. Merton considers that in such a new consumer-oriented financial system, help is needed to construct well though-out, tailor-made plans for the life cycle that allow for all the potential risks. One type of risk that needs to be considered is stock market fluctuations. Central matters here are, of course, investment horizons, how buying and selling is arranged and the degree of diversification across companies and geographical regions. Another parameter is, as indicated, the life cycle; the possibility of saving for the long run is restricted by how much capital is likely to be needed in the nearer future.
The fact that many people have entered the stock market in a short time is not entirely a good thing. Besides the losses they may incur and thereby run into financial difficulties, there is a risk of the stock market functioning less well because prices bolt from more fundamental levels. An example of this is the IT bubble in recent years. The ease with which firms attract capital in an over-valued market leads to misinvestment which, if it becomes too prevalent, can be harmful for society in general when the economy and the stock market both turn downwards. The behaviour of inexperienced investors is thus a general economic issue. The American study argues that firms, banks and analysts had incentives to talk inexperienced people into investing in new enterprises on grounds that were not entirely sound. Many new technology companies were not generating a profit and had to rely instead on paying for wages and equipment by issuing shares. For this to be feasible, stock markets need to be high. In this sense there were incentives for managements to trim reports and statements about their firm’s future profits. At the same time, analysts and investment banks, with potential earnings from launching share issues, lacked incentives to take a critical look at these reports and statements. Inexperienced investors did not get the assistance and support they needed. As a sign of this, the paper mentioned that in summer 2000 professional analysts were summoned to Washington for a congressional hearing on their market recommendations.