After the credit crisis and Great Recession, it seemed ridiculous to have thought that investing in subprime mortgages was a good idea. As with most market "bubbles," the risk of giving 7.5 million mortgages to people who couldn't possibly pay them off was somehow invisible to many investors at the time.

One reason such bubbles form is the tendency by many investors to confuse "risk" with "uncertainty." As the economist Frank Knight established, there is a subtle but crucial distinction between...