Book Excerpt: Macrowikinomics (Part 2)

Don Tapscott and Anthony D. Williams make the case for applying the wisdom of the crowd to the financial services industry in this edited excerpt from Macrowkinomics

In short, it is time to shine the light on the opaque products and activities of the financial sector that have threatened the entire economy and the Web provides a platform to do this. A digital response involving collaboration on a mass scale may be the best way to properly evaluate and assess the value and risk of new financial instruments as they are produced. New models based on openness, transparency and participation are already changing many parts of the industry from venture capital to mutual funds and even lending, so why not to apply the same thinking to the obscure mathematical models that value the risk and expected returns of the most complex instruments: expose them to the scrutiny of the thousands of experts who have the knowledge to vet the underlying assumptions?

Arguably, this is the perfect time for fresh and even radical thinking. When it comes to evaluating risk, this interconnected digital crowd comprises people who are financially sophisticated and can provide the fresh and innovative insight that will clarify the questionable dealings in the financial services business. A more open and collaborative approach would restore trust in banks, kick start venture capital, unfreeze the paralysis of lending markets and lay a foundation for a financial service industry that continues to underpin the growth and prosperity of the world's economies…

Financial scandals are a predictable part of the Wall Street landscape. They're typically followed by waves of fury—and demands for reparations from the banks, new taxes, criminal prosecutions, and as with the current crisis, breakups of the big banks and even nationalization of the industry. Many pundits have said the cause of the financial collapse was that regulation did not keep pace with innovation in the industry itself.

… [R]regulation is only part of the solution to ensure that the marketplace is fair and that deposits in banks are safe…But in today's global financial environment, the current patchwork of regulation is not enough. "We have a perfectly networked financial industry but a much less networked regulatory community," says Peter Gruetter, former secretary general at the Swiss Federal Department of Finance. "At this point collaboration among various regulators involves a lot of physical meetings. What we need is the use of better communication and networked technologies to help facilitate the collaboration process."

It is one thing to coordinate banking reforms internationally through policy networks and multilateral forums like the G20. But for starters, collaboration can be extended much further to include real-time collaboration among regulatory agencies around the world. This would include a robust information platform that would allow various regulators to pool their resources and better sense and respond to potential threats to the stability of the global financial system. Common standards, like XBRL, will go a long way in helping shape such a platform.

Beyond this, collaboration can bring deeper changes to the whole operating model of the financial services industry. Regulators, bankers and everyone could also get transformative help from the new kinds of innovations made possible by Wikinomics. Collaboration on the web combined with increased transparency would have the power to reshape the industry by engaging external experts and concerned citizens in monitoring the soundness of the system…

… It is time for bankers to ask themselves a question that most have never considered: "Why should the technology, data and risk assessment models that are used to value products today be kept proprietary?" Can investors and others ever again believe the stated profits or losses of any financial institution, its purported capital base and financial soundness, when these numbers are based on secret and opaque models that are derived from mathematics so complex that even the company's executive management does not understand them?

Going forward, the mathematics behind the value and risk calculations for new financial instruments should be open and vetted by a crowd of experts, applying the wisdom of many to the problem…Surely, you might say, outsiders are poorly positioned to look into complicated instruments like CDOs… But there are plenty of financially sophisticated people around the world who do not necessarily work on Wall Street or in The City but have the requisite skills. For starters the tens of thousands of analysts, traders and other financial services professionals who lost their jobs during the financial turmoil comprise a rich talent pool eager to get back in the game. Similarly, thousands of academics, doctoral students and industry experts who study the workings of the financial markets currently have no way to contribute directly to the system. The digital crowd can also offer significant help to regulators who make rules and enforce them. If the financial system becomes more transparent, this can turn into a powerful network that links the digital crowd, the regulators and the enforcers. Through these digital networks, they can pool intelligence in the same way the law enforcement and national security services do.

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