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.
