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Unfortunately, the answers given are thoroughly embedded in the physics-inspired view of the financial economy as a stable and an equilibrium seeking system. In such a view, if some changes do occur in the financial markets, those changes present no discontinuities and the model has ample time to react by slowly adjusting risk forecasts as the volatility rises. As almost everybody in the world by now knows, currently accepted risk models have time and again shown their inability to deal with financial market reality. Frequent talk of ‘hundred year floods’ and ‘rise in correlations’ not only suggests frequent failures of a theory, but also the inability of the theory to learn from past mistakes by incorporating new data. The crash of 2008, completely unforeseen by all traditional risk systems, should serve as the final wake-up call to re-examine the foundations of the old paradigm and consider how sound they really are.
Since Thomas Kuhn (1962), a historian of science who gave ‘paradigm’ its contemporary meaning, the term ‘paradigm’ has been widely used in science and social sciences to…
Since Thomas Kuhn (1962), a historian of science who gave ‘paradigm’ its contemporary meaning, the term ‘paradigm’ has been widely used in science and social sciences to refer to a theoretical framework or thought pattern in any given discipline, or broadly, a set of experiences, beliefs and values that affect individual perceptions of a reality and their subsequent reactions. A dominant paradigm is the widely held system of thought in a society at a particular period of time. For Kuhn, a dominant paradigm can be changed and replaced by a new one, which often occurs in a revolutionary manner in science. In social sciences, ‘paradigm shift’ implies the changing ways of understanding and organising a social reality.