[kosciusko51]

— Many of these complex models were based on relatively simple assumptions that were just wrong.

Mandelbrot and the other practitioners of chaos theory would say that even simple models will lead to chaotic behavior.

The problem really isn't oversimplification, the problem is that the mechanisms are inherently non-linear and chaotic. A good introduction to the history of chaos theory is Gleick's "Chaos".

However, the mathematics that were used by the quants to predict the market are similar to those used to predict global warming. That should give you warm fuzzies.

[TigerLikesRooster]

You mean, the kind of model in which things often go ‘iid’ at the convenient places?

[zeugma]

A good introduction to the history of chaos theory is Gleick's "Chaos".

That's a great book. 

I think about chaos whenever morons start talking about "climate models" and "global warming".

Sensitive dependence upon initial conditions is apparently a fundamental law of the universe that God designed to keep us suitably reverent.