One of the strongest complaints about the coalition is that many of its policies - for example, on taxes, EMA, or troubled families - are not based upon evidence.I wonder whether this failure is connected to the financial crisis.

To see what I mean, start from Andrew Lo's point that financial markets are neither efficient not inefficient but rather adaptive. Profitable opportunities regularly emerge, only to disappear as traders recognize them and bid them away.

To take just one example, in the 1980s it became increasingly well-known that smaller stocks had for years beaten the market. This sparked increased buying of them, but such buying pushed their prices up to a level from which subsequent returns were poor.

This means that evidence-based rationality can be counter-productive in financial markets. If you wait until there is huge evidence that a particular strategy works, it's likely that other people will also be aware that it works, and their buying will have moved prices against you. This was the fate of those who bought small caps in the late 80s.

In this sense, the trading mentality is the antithesis of the academic mentality*. The academic is cautious, proportions his beliefs to the evidence and wants more research.But the trader who waits for strong evidence will have missed the profits. The academic wants to be right, the trader wants to be first.

What's true of trading is, to at least some degree, true of entrepreneurship and business generally. The entrepreneur acts on hunches, often against the prevailing wisdom. There's a reason why many business-minded people feel frustrated in big bureaucratic firms that demand more market research, and why businessmen and academics often have a mutual incomprehension.

Which brings me to my point. If the trader's mentality enters politics - either because politicians have a business background or because they are influenced by association with business rather than academia - then we will have policy-making without an evidence base. What's appropriate in one sphere is not appropriate in another.

But what's this got to do with the crisis?

Plenty. To trade in adaptive markets, you must act upon a shaky evidence base, and this requires overconfidence. I suspect that if there is one character trait which links traders, it is not greed or amorality but overconfidence.

And, of course, it was overconfidence in various forms - in RBS's belief it could pay billions for ABN Amro, in Northern Rock's reliance on wholesale finance, in other banks' holdings of mortgage derivatives - which triggered the crisis.

If I'm right, or nearly so, there's an implication here. It's that the crisis was due not simply to individuals' failing, but rather was the result of the over-application of the sort of mentality that it is actually often necessary to have in financial markets.In other words, the crisis arose from the very nature of markets selecting for particular character traits**. The qualities that help a species thrive can also - when the environment changes - also hasten its demise.