01 Dec 2018
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Averting Crisis

Could data help predict the next global financial crisis?

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A decade ago, the global economy nearly collapsed entirely, bringing down with it some of the biggest banks and the livelihoods of countless individuals in lost jobs, savings, and homes. When the next downturn comes, will we be any better prepared?

The Behavioral Finance and Financial Stability Project (BFFS), conceived at HBS and launched in July 2016, aims to use data to predict—and maybe prevent—future financial crises. A database of financial stability and investor sentiment measures is published in real time on the BFFS website, which makes the data accessible to outside researchers, practitioners, and the public.

Researchers have found that financial instability often follows periods when institutions, policymakers, and investors have underestimated risks—errors in perception that are visible in the run-up to past financial crises. But if those beliefs could be tracked in real time, researchers would be able to predict financial vulnerability. Enter the BFFS project, which focuses on five areas: regulation and monetary policy, measuring bubbles, extrapolation and neglected risks, the size and structure of the financial sector, and governance and culture.

Visitors to the website can see the probability that a given sector within a certain country is currently experiencing a bubble. For users seeking a longer-term perspective, the site also includes a historical database of banking, stock market, and currency crises in more than 60 countries since 1800.

Beyond sharing data, the project also convenes researchers, policymakers, and financial executives to exchange ideas with BFFS faculty. The goal is to empower the project’s research to have broad real-world impact, sharing knowledge that could help prevent another economic collapse.

 

Photo by Russ Campbell

“If beliefs and expectations can be measured in real time, it would be easier to anticipate financial vulnerability and take measures to prevent future crises.”
Robin Greenwood, George Gund Professor of Finance and Banking; Chair, BFFS Project

 

Photo by Webb Chappell

“Most decisions in finance and macroeconomics are made in the face of uncertainty, and beliefs play a central role. I have worked on projects that study beliefs and important economic decisions, in the context of corporate investment in general, and banking and the financial crisis in particular.”
Yueran Ma (PhDBE 2018), Business Economics

 

Photo courtesy of James Allworth

“The financial markets put pressure on you to generate the type of returns they’re looking for: quarterly results. …It makes no sense to let such finance-oriented, short-term pressures seep into the economy’s innovation engines.”
James Allworth (MBA 2010), Head of Innovation, Cloudflare

 
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