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Innovation and shirking in financial markets

Innovation is usually viewed by economists as a productivity-enhancing force, powering economic growth in modern capitalist societies. This is just as true in the investment industry, where new products are assumed to help consumers meet their individual financial needs. This optimistic view ignores the damage that can be done by innovations, especially in the financial sector, where agency issues create the potential for negligence and rent extraction.

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A model of imperfection

Mainstream finance theory offers an idealised view of how financial markets work and, as a result, fails to provide practitioners with a useful basis for decision-making. By studying the effects of delegation from asset owners to asset managers, we develop a more realistic and useful understanding of financial markets and point towards actions that would improve outcomes for savers and wider society.

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A precondition for sustainability

The asset management industry is horribly conflicted. On the one hand it is supporting the grassroots drive to encourage big business to adopt sustainable policies. On the other, the majority of investors and asset managers are adopting strategies that destabilise asset prices and promote short-termism. Unfortunately, the latter effect not only undermines the former, but does untold damage to the macroeconomy.

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Paul Woolley Centre for the Study of Capital Market Dysfunctionality

The PW Centre produces and disseminates high-quality research focused on the workings of capital markets and the social efficiency of allocations achieved in these markets.

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of our latest blogs

Asset mispricing: the ignored externality

The externalities of greatest interest in contemporary discussion typically fall under the E, S and G headings. However, this leaves a critically important externality – that of asset mispricing – largely ignored. Asset owners should broaden their awareness of the externalities that arise from their investment approach.

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The transparency fallacy

One of the recommendations emerging from the recent CMA review into the investment consulting marketplace is for greater transparency around fiduciary manager performance. The resulting proposal has garnered almost universal support, but may create some damaging unintended consequences.

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