The market system is imperfect and has well-known flaws, when viewed from a dispassionate analytical perspective. Unfortunately, for the past few decades the imperfections have been ignored as the fall of communism and the spread of globalisation have given credence to the accomplishments of competitive capitalism.

Of course, the actual practice of capitalism has always diverged from the theoretical model. But in the matter of explaining how it works it's not unusual for theoreticians in the social sciences to be blinkered about how they analyse the world. And, then, there are the ideologues whose main aim is to mask reality and propagate fiction.

However, for investors, traders and general market participants concerned about taking optimal decisions that have successful outcomes, the scientific viability of models that guide their actions certainly matters. You can't make it in the real world if you base your decisions on theoretical mumbo-jumbo and ideological fluff.

Central bankers can make hideous mistakes and live to see another day. But traders who make big losses will have a very tough time recouping lost capital. Ben Bernanke has miscalculated often over the past few years, but he still has his job and was just appointed to another term as Fed chairman.

Those who praise him about saving us from a deeper recession than has actually occurred overlook the massively distorted monetary policy that has been put in place. There are many difficulties ahead and the exit strategy from current policies is likely to be very challenging indeed.

Policymakers have a big impact on the economy and financial markets. And the record shows that despite all the talk about their confidence in the smooth functioning of the market they intervene frequently to change outcomes and distort market signals. It is not just a case of occasional forays to correct market failures but of persistent interventionism to achieve desired outcomes. Unfortunately, in trying to achieve these goals they exacerbate market volatility and generate further crises.

Of course, the policymakers don't operate in an isolationist vacuum but are susceptible to, and bend, under political pressure. So the trade-offs among policy goals are going to be influenced by powerful forces in the arena of politics. Consequently, there may be a concerted attempt to achieve higher growth at the cost of rising inflation because of a deliberate choice of policies, and nothing to do with the normal functioning of the market.

And, inevitably, when a crisis develops as a consequence of the compounding of policy errors and private-sector mistakes, the authorities are ever ready to bail out failed entities. This is what happened over the past year, as a slew of firms in the financial-services sector were prevented from collapsing because of the systemic risk they posed.

Those firms got into trouble because of greed, extraordinarily bad decisions and poor risk management. According to the rules of the market they should have been allowed to fail, and yet they were saved.

Policymakers have ignored the problem of moral hazard and are preparing the ground for more crises in the future. Market participants, ever ready to pounce on profitable opportunities, will game the system according to how it dishes out reward and punishment. They may pile into more risk when the upside and downside risks of decisions are distorted by policymaker moves.

Over the past year, the theory of the invisible hand of the market has taken a thorough bashing, as the very visible hand of public policymaking has saved the system from collapse. Massive intervention via fiscal and monetary policy has been necessary to shore up the system.

Keynesian interventionism has been the order of the day, leading to the re-instatement of the guru of aggregate market failure in the pantheon of luminaries. Over the past few decades there has been a concerted attempt to de-bunk Keynes's ideas. The theoretical project of establishing the micro-foundations of macroeconomics has absorbed enormous resources. For those unfamiliar with economic theory, the project attempted to relate observed macroeconomic events to the optimising rational practices of individual agents, basically considering the whole as an aggregation of individual decisions.

Unfortunately, in the real world, what happens at the aggregate level has a dynamic of its own that cannot be related to the supposed rational optimising behaviour of well-informed agents with a correct model of the world. What we have is a complex dynamic system with feedback loops that are often positive in nature, leading to moves away from rather than towards equilibrium.

The growing school of behavioural economics has a realistic view of how economic agents actually behave, often based on experimental psychology. Its findings are very close to the insights that top traders and investors have always had about how the market works. One consequence of the recent crisis is that people are now clearer about which models are wrong and which ones offer greater promise.

Iraj Pouyandeh is a strategist and senior portfolio manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com