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Why Stock Markets Crash: Critical Events in Complex Financial Systems
 
 
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Why Stock Markets Crash: Critical Events in Complex Financial Systems [Hardcover]

Didier Sornette (Author)
4.3 out of 5 stars  See all reviews (20 customer reviews)

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From Publishers Weekly

It’s everybody’s favorite topic of conversation at the moment: why did the Dow and the Nasdaq tank so horrifically, and where did all the money go? UCLA professor Sornette does his best to tackle those questions. While CNBC anchor Ron Insana’s recent Trend Watching took a reader-friendly look at the history of market bubbles, Sornette’s approach is decidedly different. Befitting his status as an expert in geophysics, the author loads the text with enough charts, graphs and advanced economic theory to choke John Kenneth Galbraith (one chapter subheading, for instance, is "The Origin of Log-Periodicity in Hierarchical Systems"). It’s a meaty book, with helpful autopsies of past crashes ranging from tulip mania in the Netherlands to the Nasdaq crash of April 2000, as well as information on how crashes might be predicted in the future. Unfortunately for the average investor who tends to get burned after these bubbles, Sornette’s conclusion is that a mixture of "systemic instability" and plain old human greed means that market bubbles aren’t about to disappear anytime soon. And neither, of course, will the subsequent crashes.
Copyright 2003 Reed Business Information, Inc.

Review

Sornette is both a statistical physicist and a member of a new breed of scientist: the econophysicist. . . . But Sornette's book is not just about finance and economics; it is also a mesmerizing introduction to game theory, fractals, catastrophe theory, critical phenomena, and much more. No prior knowledge of finance or economics is needed to understand the book. . . . Throughout the book, Sornette makes numerous, vivid comparisons with many other fields in which the various mathematical tools he describes can be applied.
(Frank Cuypers Physics Today )

The book is written in a readable style and does not require technical knowledge. Any reader interested in a serious approach to the origin and possible prediction of financial bubbles will enjoy reading it.
(Josep M. Porra Journal of Statistical Physics )

A highly recommended, enjoyable, well-researched, and thought-provoking book for anyone interested in stock markets and the modeling of financial processes.
(Rick Gorvett Journal of Risk and Insurance )
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Inside This Book (Learn More)
First Sentence
Stock market crashes are momentous financial events that are fascinating to academics and practitioners alike. Read the first page
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Front Cover | Copyright | Table of Contents | Excerpt | Index
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Customer Reviews

20 Reviews
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4 star:
 (1)
3 star:
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Average Customer Review
4.3 out of 5 stars (20 customer reviews)
 
 
 
 
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4.0 out of 5 stars Insightful!, Jun 3 2004
By 
Rolf Dobelli "getAbstract" (Switzerland) - See all my reviews
(TOP 1000 REVIEWER)    (REAL NAME)   
This review is from: Why Stock Markets Crash: Critical Events in Complex Financial Systems (Hardcover)
The word crash strikes fear into any investor's heart. Fear not, writes scientist Didier Sornette, who has crunched the numbers (not to mention the probabilities and log periodicities) and has determined that crashes are, in fact, quite normal and predictable. If prices are soaring and everyone you know says profits are guaranteed, get ready. Sornette backs up his argument with countless charts, formulas and phrases such as "spontaneous symmetry-breaking regime." Still, there's enough plain English here to enlighten the lay reader. We suggest this book to traders and investors looking for a unique analysis of market crashes.
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5.0 out of 5 stars More than it first appears., April 8 2004
By 
W. James D. Easton (Bonita, CA USA) - See all my reviews
(REAL NAME)   
This review is from: Why Stock Markets Crash: Critical Events in Complex Financial Systems (Hardcover)
This is poorly edited, poorly focussed, and inadequately titled. It discusses the behavior of complex systems containing intelligent operators between cusps. Things like the human biosphere -- as well as financial markets. I would hope for a second edition suitable as a required text for upper-division students of demographics, international relations, ecology, anthropology and the like as well as the economics and finance majors its title seems pointed to.
Read Chapter 10 first. It is the most important. Then you can read the rest.
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5.0 out of 5 stars An Engaging and Thought-Provoking Work, Nov 6 2003
By 
Scott Snyder (Northern California) - See all my reviews
(REAL NAME)   
This review is from: Why Stock Markets Crash: Critical Events in Complex Financial Systems (Hardcover)
If you love to read works on economics, math and physics and love to assemble models of the world, I cannot recommend this book highly enough. Indeed, if economic models were this much fun when I was an undergraduate, I might have become an economist.

Funny thing though, this was not written by an economist, but by a geophysicist.
It seems physicists and psychologists in particular are writing more interesting economics books these days than economists themselves.

The core focus of the book is a derivation of a market model that includes value investors, momentum investors and the herding effect of individual economic agents acting in a world of partial information. The final model is stunning.

Sornette points out the main problem with predicting bubbles: even if all the signs say "yes," there is still a pretty good chance that the bubble will be self-correcting. Turns out chasing market bubbles is a little like chasing soap bubbles - they may simply disappear at any moment. Thus, the book and the model are of limited use in any type of market timing. Indeed, the model suggests that the market should now be in the tank, and yet it continues to hover on the higher side of its expected range.

As much as I loved the book, there was a slight aftertaste that this was all nothing but a very mathematical and high-minded type of technical analysis. That at base, when all was said and done, this was not all that different from the various "tools" in the chartist's handbook, e.g. MACD, RSI and OBV, etc., etc., etc. The difference may be solely that Sornette knows his statistics and would easily and readily dismiss any model which did not perform significantly different from chance.

Finally, this book will have you trotting out your old high school calculus book. It brought back memories of just how much fun mathematics can be.

All in all - I give it 5 stars.

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