The compass points "directly" to your quest target, but rarely is there a direct path. That's how you get lost.
It seems to me that it would be impossible to actually get lost, since the compass always points directly to your quest target, even if you have to go out of your way, you still have the ability to re-align the quest target on the compass no matter where you are, and thus can't actually get lost in the game world. Even if you have to go completely around a mountain or swamp, eventually you would re-align with the quest target on the compass and get to where you want to go.
Some people in life are prone to getting lost, and some have some sort of natural GPS in their own heads. I have to wonder if those getting lost in the game are of the former variety.