'It's all about bucks kid, the rest is conversation': A critique of risk in modern investment management

Now the dust has settled and the worst of the housing crisis has passed and the resulting financial crisis in 2008, it is time to look back. What have we learned, particularly in the area of modern investment management? The Obama administration may have taken measures that partially undo the 1998 reversal of the Glass-Steagall Act but will this be enough? In this article I will use Charles Perrow’s Normal Accident Theory to reflect on investment management - and more in particular Modern Portfolio Theory -, the financial crisis and what we can learn from that for the future. The article concludes that the financial world could have learned from Normal Accident Theory by perceiving the financial community as one integrated system and not simply the sum of independent parts. The financial crisis was a case of negligence, foolishness and unwillingness to look beyond the immediate present to the looming dangers in the real world outside of finance. As a consequence, it would be fair to demand from investors a real world check that goes much further than what is currently happening under the heading of (socially) responsible investing. Good governance and responsible investing need to be extended to material societal risk management. Part of this risk management needs to be the assessment of the nature of the impact of investments on society.