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There is nothing markets are worse at than pricing in very low-probability but truly extreme risks. This is the original concept of the “black swan” as laid out in the 19th century by the philosopher John Stuart Mill. Until Europeans went to Australia and found swans that were black, they had been entitled to believe that all swans were white, but couldn’t prove it. The US debt ceiling provides a perfect example; political brinkmanship has never led to an all-out default before, and it’s fair to assume it won’t in future. But we can’t be certain. And the cost could be astronomical.
