A word to describe an individual who is unable to understand a particular situation as it is unfolding?

The person is befuddled by his situation because he is too close to it. Befuddled, defined by The Free Dictionary:

confused, muddled, perplexed

perplexed by many conflicting situations or statements; filled with bewilderment

Befuddled is often used in the sense of "stupefied by alcoholic drink", but a person can be stone cold sober and yet befuddled by the complexity of a situation in which, for whatever reason, he cannot think clearly. In the OP's example, the person in question cannot think clearly because he cannot distance himself from the problem.

"clueless" may be a good choice.

http://www.merriam-webster.com/dictionary/clueless

Although, "clueless" may be more suited to someone who doesn't even realise that there is a situation - ie someone who is totally unaware of the crisis which is unfolding around them.

For someone who knows there is a crisis, and has been thinking about what to do, but can't decide, you could say they are torn, or caught in a dilemma (or "on the horns of a dilemma"). These words are much more sympathetic, unlike "clueless" which is very insulting.

It sounds as if he is blind to the ways of the world.

It's an old phrase and variations can be found in the Bible and many other places. It can be literal, or a bit figurative, or completely figurative. It implies a lack of awareness that is unfortunate, disadvantageous or pitiable. It can also be applied to children to show their naivety.