The key question about the current financial crisis is how so many investors
could have mispriced risk in the same way and at the same time. This article
looks at the work of Fischer Black for insight into this problem. In particular,
Black considered why the “law of large numbers” does not always
apply to expectations in a market setting. Black’s hypothesis that a
financial crisis can arise from extreme bad luck is more plausible than is
usually realized. In this view, such factors as the real estate market are of
secondary importance for understanding the economic crisis, and the financial
side of the crisis may have roots in the real economy as a whole.