Didier Sornette

Didier Sornette (born 25 June 1957) is Professor on the Chair of Entrepreneurial Risks at Swiss Federal Institute of Technology Zurich (ETH Zurich). He is also a professor of the Swiss Finance Institute, a professor associated with both the department of Physics and the department of Earth Sciences at ETH Zurich.

Why Stock Markets Crash - Critical Events in Complex Systems (2003)

 * At another level, market crashes constitute beautiful examples of events that we would all like to forecast. The arrow of time is inexorably projecting us toward the undetermined future. Predicting the future captures the imagination of all and is perhaps the greatest challenge.
 * Preface, p. xvi.


 * According to the academic world view that markets are efficient, only the revelation of a dramatic piece of information can cause a crash, yet in reality even the most thorough post-mortem analyses are typically inconclusive as to what this piece of information might have been. For traders and investors, the fear of a crash is a perpetual source of stress, and the onset of the event itself always ruins the lives of some of them.
 * Chapter 1, Financial Crashes: What, How, Why, And When?, p. 3.


 * The concept of a random walk is simple but rich for its many applications, not only in finance but also in physics and the description of natural phenomena. It is arguably one of the most founding concepts in modern physics as well as in finance, as it underlies the theories of elementary particles, which are the building blocks of our universe, as well as those describing the complex organization of matter around us.
 * Chapter 2, Fundamentals Of Financial Markets, p. 38.


 * Since it is the actions of investors whose buy and sell decisions move prices up and down, any deviation from a random walk has ultimately to be traced back to the behavior of investors.
 * Chapter 4, Positive Feedbacks, p. 81
 * Positive feedbacks, when unchecked, can produce runaways until the deviation from equilibrium is so large that other effects can be abruptly triggered and lead to ruptures and crashes.
 * Chapter 4, Positive Feedbacks, p. 82.


 * The point is that humans are rarely at their best when they use rational reasoning.
 * Chapter 4, Positive Feedbacks, p. 106.


 * The old Wall Street saying " buy on rumors, sell on the news," is alive and well, as can be seen from numerous sources in the media and the Internet. Rumors can drive herding behavior strongly.
 * Chapter 4, Positive Feedbacks, p. 108.


 * These rumors do not circulate in all directions, but essentially from the top to the bottom of society. The rather sophisticated presentations, the apparently serious references that seem to justify their origins, and their distinguished proponents provide food for amplifications serving diverse interests and psychological biases in all layers of society.
 * Chapter 4, Positive Feedbacks, p. 110.


 * It is difficult to assess how much this gambling spirit is active in the minds of individual investors. If it is, even to a small degree, it is relevant to our discussion since it makes investors prone to imitation and herding because they invest on little information. It may also explain the anomalously large volatility of prices and their potential instabilities.
 * Chapter 4, Positive Feedbacks, p. 114.


 * Profiting from being in the minority leads to interesting paradoxes. Rather diabolically, if all traders use the same set of rules, they will end up doing the same thing at the same time and cannot therefore be in the minority.
 * Chapter 4, Positive Feedbacks, p. 115


 * Knowledge is encoded in models. Models are synthetic sets of rules, and pictures, and algorithms providing us with useful representations of the world of our perceptions and of their patterns.
 * Chapter 5, Modeling Financial Bubbles And Market Crashes, p. 134.


 * Indeed, the financial world is such that any insight is almost immediately used to trade for a profit.
 * Chapter 5, Modeling Financial Bubbles And Market Crashes, p. 136.


 * Perhaps the most profound synthesis of physical sciences came from the realization that everything could be understood from "conservation laws" and symmetry principals.
 * Chapter 5, Modeling Financial Bubbles And Market Crashes, p. 136
 * The assumption of perfectly rational, maximizing behavior won out until recently in the art of modeling, not because it often reflects reality, but because it was useful.
 * Chapter 5, Modeling Financial Bubbles And Market Crashes, p. 138.


 * A bubble that goes up is just one that could have crashed but did not.
 * Chapter 5, Modeling Financial Bubbles And Market Crashes, p. 153.


 * One trader's move in the market can be interpreted by another trader as relevant additional information due to the uncertainty he faces.
 * Chapter 6, Hierarchies, Complex Fractal Dimensions, And Log Periodicity, p. 182.


 * The price of a stock is strongly influenced by the behavior of the traders in a nontrivial way.
 * Chapter 6, Hierarchies, Complex Fractal Dimensions, And Log Periodicity, p. 183.


 * The acceleration of the number of traders buying into the market in the inflating bubble captures the oft-quoted observation that bubbles are times when the "greater fool theory" applies.
 * Chapter 6, Hierarchies, Complex Fractal Dimensions, And Log Periodicity, p. 185.


 * The same basic ingredients are found repeatably: fueled by initially well founded economic fundamentals, investors develop a self-fulfilling enthusiasm by an imitative process or crowd behavior that leads to an unsustainable accelerating overvaluation.
 * Chapter 7, Autopsy Of Major Crashes, p. 272.


 * By one estimate, 90% of international transactions were accounted for by trade before 1970, and only 10% by capital flows. Today, despite a vast increase in global trade, that ratio has been reversed, with 90% of transactions accounted for by financial flows not directly related to trade in goods and services.
 * Chapter 8, Bubbles And Crashes In Emergent Markets, p. 304.


 * Indeed, the frequency of crashes in the Monte Carlo simulations was much smaller than the frequency of crashes in the real data: if one of the most frequently used benchmarks of the industry is incapable of reproducing the observed frequency of crashes, this indeed means that there is something to explain that may require new concepts and methods.
 * Chapter 9, Prediction Of Crashes And Antibubbles, p. 327.


 * In order to have a continuing influence, the stock market has to continue rising at an accelerating pace faster than exponential. Only a faster-than-exponential stock market growth makes private investors feel richer.
 * Chapter 10, 2050: The End Of The Growth Era?, p. 375
 * Finally, empirical data suggests that assets are sold much more slowly during retirement years than when they are accumulated during working years.
 * Chapter 10, 2050: The End Of The Growth Era?, p. 378.


 * Faster-than-exponential growth also occurs in computing power, as measured by the evolution of the number of MIPS per $1,000 of computer from 1900 to 1997. Thus the so-called Moore's law is incorrect, since it implies only an exponential growth. This faster than exponential acceleration has been argued to lead to a transition to a new era, around 2030, corresponding to the epoch when we will have the technological means to create superhuman intelligence.
 * Chapter 10, 2050: The End Of The Growth Era?, p. 379.


 * The problem is not that this optimistic view is wrong. By economic accounting, the optimistic view is mostly right.
 * Chapter 10, 2050: The End Of The Growth Era?, p. 390.


 * The incentives that people need to work and to find meaning in their lives should be found beyond material wealth and power.
 * Chapter 10, 2050: The End Of The Growth Era?, p. 390.


 * The phenomena and underlying mechanisms discussed in this book may thus become even more relevant to a larger and larger portion of human activity. Understand their origin, and be prepared for subtle but significant precursors!
 * Chapter 10, 2050: The End Of The Growth Era?, p. 396.