The Art of Statistics: Learning from Data

by David Spiegelhalter

The financial crisis of 2007–2008 has to a large extent been blamed on the exaggerated trust placed in complex financial models used to determine the risk of, say, bundles of mortgages. These models assumed only a moderate correlation between mortgage failures, and worked well while the property market was booming. But when conditions changed and mortgages started failing, they tended to fail in droves: the models grossly underestimated the risks due to the correlations turning out to be far higher than supposed. Senior managers simply did not realize the frail basis on which these models were built, losing track of the fact that models are simplifications of the real world – they are the maps not the territory. The result was one of the worst global economic crises in history.