Black-Scholes assumes the change in stock prices follows a normal distribution. It is quite easy to show, by pulling data from any online stock site and creatin

Black-Scholes assumes the change in stock prices follows a normal distribution. It is quite easy to show, by pulling data from any online stock site and creating a histogram, that stock prices do not follow a normal distribution (instead they are power laws). If stock options followed a normal distribution, 'crashes' such as last year should basically never occur. Simple models also assume independent variables, because dealing with cross-correlations for thousands of stocks is hard. This is a mathematical statement of the 'common sense' expectation that you loose a little, win a little. However, in reality the market is highly correlated, for example in the last year virtually everything has gone down. This is pretty common knowledge in the research branch called 'econophysics', google it. It's an interesting field, one of their major 'result' is that classical economic theories are fairly flawed, and only seem to work because they are like self-fulfilling prophecies (traders implement their beliefs, but only up to a point!).