Sornette why stock markets crash

Since stock market crashes are, without question, catastrophes, the reader might expect an informative treatment of the relationship between catastrophes that occur in the natural world and those that occur in financial markets. Readers interested in why stock markets crash and the relationship between these events and natural catastrophes will be disappointed, however. Clearly, natural and financial phenomena are similar in that catastrophes occur in both.

It is something else to argue that the processes leading to these events and the relevant tools of analysis are the same or even similar. George Stigler once noted that the economist faces a level of difficulty not shared by the physical scientist. Some would hurry him along; others would cry shrilly for a federal program to drill wells for water instead; and several would blandly assure him that they were molecules of argon.

Few economists did more than Stigler to promote the application of science in economics but he warns that the economist can expect to encounter some special problems.

Sornette bumps up against one of these special problems in his discussion of the fundamentals of stock prices. Sornette fails to recognize that stock prices or, more precisely, the choices people make in determining these prices are always based on expectations regarding the future — and this implies nothing about whether or not they contain a speculative bubble.

Expected future cash flows dividends, capital gains, etc. The behavior of people, unlike molecules of oxygen, is driven by expectations. This hypothesis implies that stock prices move at a random walk so that changes in the price are unpredictable.

Didier Sornette. Many of our ebooks are available for purchase from these online vendors:. Many of our ebooks are available through library electronic resources including these platforms:. 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.

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. 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.

Sornette probes major historical precedents, from the decades-long "tulip mania" in the Netherlands that wilted suddenly in to the South Sea Bubble that ended with the first huge market crash in England in , to the Great Crash of October and Black Monday in , 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. Frequently Bought Together. Why Stock Markets Crash. The Mis Behaviour of Markets.