Models and Overconfidence

Whether a scientist, or a financial engineer, when we invest in an idea, a model, a way of thinking, by definition, we believe it to be an accurate representation of the world, and so interpret new information in terms of this model. New information that is consistent with this model makes us more confident in its use, while new conflicting information is often regarded as spurious, exceptional or irrelevant. The model provides us with an anchor, and biases us away from alternatives.  We protect our models from the world of evidence, in the same way we protect ourselves, no surprise here, as in some sense these models constitute ourselves. The models change only with crisis, some overwhelming surge of evidence that cannot be ignored. Ironically, financial models, (unlike models of physics) when broadly and consistently acted upon, will often build up arbitrage and economic pressures in the market to break the models. So no one can see the breakdown coming, everyone is shocked when it does happen, and yet everyone can rationalize after the fact why the crisis occured.
Perhaps the truth is that reality is more complex than we can ever know, and like a good buddhist, all we can do is acknowledge and respect the complexity that we face, realizing like the quantum physicist, that the act of understanding the world, also changes it into something else.