Why Stock Markets Crash:
Critical Events in Complex Financial Systems
The scientific study of
complex systems has transformed a wide range of disciplines in recent years, enabling
researchers in both the natural and social sciences to model and predict phenomena as
diverse as earthquakes, global warming, demographic patterns, financial crises, and the
failure of materials. In this book, Didier Sornette boldly applies his varied experience
in these areas to propose a simple, powerful, and general theory of how, why, and when
stock markets crash.
Most attempts to explain
market failures seek to pinpoint triggering mechanisms that occur hours, days, or weeks
before the collapse. Sornette proposes a radically different view: the underlying cause
can be sought months and even years before the abrupt, catastrophic event in the build up
of cooperative speculation, which often translates into an accelerating rise of the market
price, otherwise known as a "bubble." Anchoring his sophisticated, step-by-step
analysis in leading-edge physical and statistical modeling techniques, he unearths
remarkable insights and some predictions--among them, that the "end of the growth
era" will occur around 2050.
Sornette probes major
historical precedents, from the decades-long "tulip mania" in the Netherlands
that wilted suddenly in 1637 to the South Sea Bubble that ended with the first huge market
crash in England in 1720, to the Great Crash of October 1929 and Black Monday in 1987, to
cite just a few. He concludes that most explanations other than cooperative
self-organization fail to account for the subtle bubbles by which the markets lay the
groundwork for catastrophe.
Any investor or investment
professional who seeks a genuine understanding of looming financial disasters should read
this book. Physicists, geologists, biologists, economists, and others will welcome Why
Stock Markets Crash as a highly original "scientific tale," as Sornette aptly
puts it, of the exciting and sometimes fearsome--but no longer quite so
unfathomable--world of stock markets.
Didier Sornette is Professor
of Geophysics at the University of California, Los Angeles, and a research director at
Centre National de la Recherche Scientifique, France. A specialist in the scientific
prediction of catastrophes in a wide range of complex systems, he is the author of the
textbook Critical Phenomena in Natural Sciences (Springer-Verlag) and has authored or
coauthored more than 250 papers in international journals.
Endorsements:
"A professor of
geophysics gives a very different perspective, informed by his scientific training, on the
stock market. I am sure that his view will be highly controversial, but the book is
fascinating, and mind-expanding, reading."--Robert Shiller, author of Irrational
Exuberance
"Why Stock Markets
Crash addresses a current and enduring concern for all investors, the seemingly mysterious
twists and turns the markets take. Didier Sornette's insights into why markets behave as
they do are fresh, productive, and provocative. This work is bound to become an important
baseline for anyone trying to understand what will happen next in the stock and currency
markets not only in the U.S. but in Europe and Asia as well. It is well written and
accessible to non technical audiences."Richard N. Foster, Director, McKinsey
& Company
"This is a most
fascinating book about an intriguing but also a controversial topic. It is written by an
expert in a very straightforward style and is illustrated by many clear figures. Why Stock
Markets Crash will surely raise scientific interest in the emerging new field of
econophysics."Cars H. Hommes, Director of the Center for Nonlinear Dynamics in
Economics and Finance, University of Amsterdam
"In turbulent times
for financial markets, more books than usual are published on such subjects as financial
crashes. This book is different. First, it is written by an internationally recognized
expert in non-linear, complex systems. Second, it promotes some new ideas in both finance
and science. In addition, it offers the general reader an insight into finance, both
practical and academic, as well as some of the issues at the cutting edge of science. What
more could one ask for?"Neil F. Johnson, Department of Physics and Oxford Center
for Computational Finance, Oxford Universit
418 pages
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