Black-Scholes assumes one volatility for all strikes; the market disagrees. Equity indices show a skew, with downside puts at markedly higher implied vol than upside calls.
What it prices in: fatter tails than lognormal, and an asymmetric distribution. The explanations reinforce each other - genuine crash risk, the leverage effect (falling prices raise leverage and therefore volatility), and structurally one-sided demand for protection.
Historical marker: the skew was far flatter before October 1987. That crash permanently repriced downside protection.