Why do governments, banks, insurers and others who manage our world often assume the correlation between different risks to be far smaller than it is? That the risk of one disaster is independent of another--when so many calamities (eg. Lloyds of London's near collapse to the present financial crisis) have shown they are not?
This was the question I posed to Professor Paul Krugman after his talk at the World Knowledge Forum in South Korea from which I've just returned. He answered that several factors were at play that I'd summarise as: greed, stupidity and governments being accused of overzealousness in assuming correlation. I'd add complexity: it's much harder to model correlated risks, so people don't or can't.