The events of the past years have shown that economic and financial systems are prone to so-called “tail risks”, which are the sorts of events which the standard suite of models predict will happen very rarely indeed.

However, these tail-risk events, many of which have proven catastrophic for the global economy, have been uncannily common in recent years. Remember this famous line from David Viniar, Goldman’s CFO, in 2008:

“We were seeing things that were 25-standard-deviation events, several days in a row.”

25-standard-deviation events are exceptionally, exceptionally rare. And if you’re seeing them day after day, then chances are that your model might not correspond to reality — or even be a fair approximation of it.

In a fascinating paper out today, the Bank of England’s executive director Andy Haldane and Bank economist Benjamin Nelson argue that the models that banks and economists — among them the world’s monetary authorities were using — were indeed deeply flawed. Read more