Why Stock Markets Crash: Critical Events in Complex Financial Systems.

DIDIER SORNETTE

Here a scientist treads on economists' territory. Sornette applies cutting-edge thinking in the field of complexity and the theory of critical phenomena to the inner workings of the stock market. The objective is a potentially lucrative one: to predict the market's peaks and valleys. As Sornette points out, "Market crashes exemplify in a dramatic way the spontaneous emergence of extreme events in self-organizing systems," meaning that the science he employs should work. Generally, economists believe that stock market crashes are explained by effects that occur in short time scales--hours, days, or weeks at most. Sornette argues to the contrary, that the months and years of accelerating ascent of market prices--commonly known as a bubble--explain a crash. In a bubble, the market has entered an unstable phase and any small disturbance or process triggers its instability, explains Sornette. In much the same way that geologists and social scientists predict earthquakes and demographic changes, physical and statistical modeling techniques can forecast stock prices, the author argues. In postulating how, why, and when stock markets crash, Sornette predicts that the end of the world's economic growth era will occur around 2050. Princeton U Pr, 2003, 421 p., b&w illus., hardcover, $29.95.