In my opinion, the global financial meltdown had less to do with macroeconomic errors – although such errors occurred – than with distorted and incompatible micro incentives. Here are 11 reforms that will damp the tendency of financial markets to stampede.

First, adjust capital adequacy ratios to restrain the lending cycle. For example, the 4 per cent target for the tier one capital ratio for banks might be raised to 8 per cent in booms but lowered to 3 per cent in recessions. Cycle-dependent capital ratios would reduce the tendency of banks to lend too generously in booms and too timidly in recessions.

Second, design performance benchmarks that discourage herd behaviour. Benchmarks usually reward fund managers for their performance against a reference index. Such benchmarks can trigger bubbles or stampedes. If a stock is included in the reference index and is rising, fund managers have a strong incentive to buy – even if valuations are too high already. Requiring absolute benchmarks (for example, seek 10 per cent, plus or minus 2 per cent, with a penalty for deviation in either direction) might quell the herd instinct. Relative reference indices should not be used as performance benchmarks, especially for compensation.