We forget—or we willfully ignore—that our models are simplifications of the world. We figure that if we make a mistake, it will be at the margin. In complex systems, however, mistakes are not measured in degrees but in whole orders of magnitude. S&P and Moody’s underestimated the default risk associated with CDOs by a factor of two hundred. Economists thought there was just a 1 in 500 chance of a recession as severe as what actually occurred.
