The problem lay not so much with the poverty of the underlying theory as with selective reading of it—a selective reading shaped by the social milieu. That social milieu encouraged financial decision makers to cherry-pick the theories that supported excessive risk taking. It discouraged whistle-blowing, not just by risk-management officers in large financial institutions, but also by the economists whose scholarship provided intellectual justification for the financial institutions’ decisions. The consequence was that scholarship that warned of potential disaster was ignored. And the result was global economic calamity on a scale not seen for four generations.

… These simple models should have been regarded as no more than starting points for serious thinking. Instead, those responsible for making key decisions, institutional investors and their regulators alike, took them literally. This reflected the seductive appeal of elegant theory. Reducing risk to a single number encouraged the belief that it could be mastered. It also made it easier to leave early for that weekend in the Hamptons.

Now, of course, we know that the gulf between assumption and reality was too wide to be bridged. These models were worse than unrealistic. They were weapons of economic mass destruction.

When it is costly to acquire and assimilate information about how reality diverges from the assumptions underlying popular economic models, it will be tempting to ignore those divergences. When convention within the discipline is to assume efficient markets, there will be psychic costs if one attempts to buck the trend. Scholars, in other words, are no more immune than regulators to the problem of cognitive capture.

The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster.

—  Economist Barry Eichengreen, The Last Temptation of Risk, April 3, 2009

On a recent visit to Iraq, my first trip back in over three years, a few things surprised me. There was the “countdown calendar” to President Bush’s last day in office, sitting openly on a soldier’s desk. There was the high-up United States official who told me, by way of introduction, that he did not believe the decision to invade Iraq was “reality-based.”

— New York Times reporter Ian Fisher, Bahgdad Bureau blog, March 20, 2008.

As Whitman told me on the day in May 2003 that she announced her resignation as administrator of the Environmental Protection Agency: ”In meetings, I’d ask if there were any facts to support our case. And for that, I was accused of disloyalty!”

— Ron Suskind, Without a Doubt: Faith, Certainty and the Presidency of George W. Bush, New York Times, October 17, 2004

The White House seemed guilty of what might be called persistent, chronic up-is-downism, the tendency to ridicule the possibility that a given policy might actually have its predictable adverse consequences, to deny those consequences once they have already occurred, or—failing that—to insist against all evidence that those consequences were part of the plan all along. By late July, even a paragon of establishment conservatism like Barron’s columnist Alan Abelson was lamenting the president’s “regrettable aversion to the truth and reality when the truth and reality aren’t lovely or convenient.”

In the midst of getting those policies passed, the administration’s main obstacle has been the experts themselves—the economists who didn’t trust the budget projections, the generals who didn’t buy the troop estimates, intelligence analysts who questioned the existence of an active nuclear weapons program in Iraq. That has created a strong incentive to delegitimize the experts…

By disregarding the advice of experts, by shunting aside the cadres of career professionals with on-the-ground experience in these various countries, the administration’s hawks cut themselves off from the practical know-how which would have given them some chance of implementing their plans successfully. In a real sense, they cut themselves off from reality. When they went into Iraq they were essentially flying blind, having disengaged from almost everyone who had real-world experience in how effective occupation, reconstruction and nation-building was done.

— Josh Marshall, The Post-Modern President, Washington Monthly, September, 2003