Regulation is not the answer; Wikinomics is. So argues authors Bob and Don Tapscott who challenge the financial services industry to open itself for peer review and improvement by the public. Tapping the collaborative wisdom of the crowd has resulted in such remarkable achievements as Wikipedia, the public human genome project, and Linux open-source software. The masses may have more power than the experts to restore long-term confidence.
The four main principals of Wikinomics are full transparency, peering, greater sharing of intellectual property, and more globally-oriented action. In a white paper titled “Risk Management 2.0: Overcoming the Current Financial Crisis and Restoring Stability and Prosperity with a New Perspective on Risk” the authors envision a new model for the financial services industries in the U.S. and other industrialized nations. Under this new model, participants would share knowledge and intellectual property, ensuring that the best essential resources are available to the entire market. This includes sharing data, models and underlying algorithms, correlation analyses, and stresses.
The full white paper can be downloaded here: Risk Management 2.0.pdf It includes the following description of how the main principals of Wikinomics can be used to create a new, more open approach to risk management.
TRANSPARENCY: The start of the current financial meltdown was found in the banks’ inability to properly model the price, volatility and risk of various asset based securities (ABS). Banks, until recently, packaged and sold these assets to third parties in an opaque and complex way. The inscrutability of these instruments made many of the ABS securities impossible to price, meaning they have paralyzed many markets and arguably, the entire financial sector.
PEERING: With Web 2.0 technologies, transparency can go far beyond simple data sharing. Risk Management 2.0 participants can build on the example of Linux and other open-source systems to share models, methodologies and other IP. With access to the data, multiple organizations can collaborate on creating models for calculating value, volatility and VaR within the public domain.
SHARING INTELLECTUAL PROPERTY: Hoarding intellectual property profited a select few until miscalculations on Wall Street caused the system to implode -negatively affecting everyone. If taxpayers need to bail out the financial system, then shouldn’t they require this IP to be exposed to and vetted by others? Former Intel chairman Andy Grove has called upon open-source rules for finding advanced technology to solve the energy crisis. Maybe they should also be used to curtail the spreading financial crisis.
ACTING GLOBALLY: The credit problem is clearly a global one and localized actions in one country will do little to prevent the next implosion elsewhere. Risk mismanagement is having a deleterious effect daily on the world’s wallet and as such, it is becoming everyone’s concern. It’s time to align responsibility with accountability. A rising tide of cooperation is the only option left, leaving secretive, opaque financial institutions naked to the wisdom of the crowd.
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