Conclusion

This study provides robust empirical evidence that U.S. capital markets have diverged from the classical ideals of allocative efficiency, particularly in the post-2008 era of quantitative easing and the dominance of passive capital flows. Asset returns no longer follow symmetric, risk-compensated distributions; instead, they increasingly resemble a mixture of structurally persistent, rank-locked flows governed by capital incumbency and index-based reinforcement.

At the core of this transformation is the “Too Big to Fail” (TBTF) strategy. Simple in design yet profound in implication, the strategy selects the top decile firms by market capitalization and applies a convex weighting function inspired by utility-theoretic and structural concentration principles. Its empirical outperformance—especially after 2010—is not rooted in fundamentals or superior information, but rather in passive lock-in, narrative insulation, and macro-policy distortions.

Yet, this success raises a sobering paradox:
The TBTF strategy is “sadly optimal.”

• If it continues to outperform, it profits from a system that rewards scale over efficiency, entrenchment over innovation.
  
• If it falters, it may signal a long-overdue reversion to competitive capital allocation—a welcome but unlikely shift under current institutional dynamics.

In either case, the implications are clear. The strategy thrives not because markets are efficient, but because they are systematically tilted toward power and persistence. The mechanisms that once ensured discipline through arbitrage and competition now appear weakened—replaced by self-reinforcing structures of capital inertia.

This paper contributes to a growing literature on non-ergodic market dynamics, rank-based valuation frameworks, and the erosion of allocative efficiency under interventionist regimes. It calls for a fundamental reorientation in asset pricing theory: away from marginal risk pricing and toward a framework that incorporates persistence, asymmetry, and rent extraction as first-order forces in financial economics.

Ultimately, if financial markets are to reclaim their role as allocative institutions rather than passive amplifiers of incumbent power, the rethinking of capital indexing, passive vehicle design, and structural fairness is not merely desirable—it is necessary.

Too big to fail?
More like: too big to compete, too big to move, and too big to serve.