The Price of Anarchy in Finance: Quantifying the Degree of Confusion of Subprime Credit Crisis

Abstract

In this paper, we quantify the degree of confusion in subprime credit crisis. It's well known that huge confusion and anarchy of financial system come to light in the subprime credit crisis. By using concept in traffic network as a source of reference, this paper originally poses financial price of anarchy (PoA), the ratio of two optimums under different financial condition (such as information transparency, mechanism), which can quantify such discrepancy and accordingly be regarded as an index of inefficiency of the financial system. We apply the financial PoA to the subprime loan process and calculate its border of degree of confusion in subprime credit crisis. With the result of PoA, we give some preliminary suggestion about improvement of the financial regulation design to reduce confusion and avoid future crises.