There’s no standard set of theoretical tools, as there’s for theory based on normally distributed returns, that can apply to power law distributions. Again, it’s not as if theory doesn’t recognise the issue. But it’s work in slow progress that has been shown up to be inadequate by the crisis. When years of good returns based on standard theory of investing can be destroyed by one extreme event, when, moreover, the theory predicts that the extreme event is extremely unlikely (thanks to the small standard deviation assumption), the theory clearly needs a revision.

Will mainstream economics respond to these challenges? Some critics argue the intellectual-cultural inertia of mainstream economics, which is in a powerful position in all influential centres of learning, is too strong and therefore disincentivises the big intellectual investment required.

But note that this investment is risk-free, because there’s no dishonour in trying and failing. And it also promises very high returns; greatness is assured upon success. You would expect economists to respond to that kind of an incentive.

saubhik.chakrabarti@expressindia.com