Didier Sornette: The Professor Who Chases Financial Bubbles

Original source: SimoleonSense.com .

Very cool article via WSJ

H/T Paul Kedrosky

Click Here To Read: Didier Sornette: The Professor Who Chases Financial Bubbles

Introduction (Via WSJ)

Didier Sornette has immersed his life in risk. He rides motorcycles, windsurfs and water skis long stretches of a 120-mile route between Nice and Corsica. Now comes a daunting professional challenge: “The Financial Bubble Experiment.”

Mr. Sornette, 52 years old, is the director of the Financial Crisis Observatory at the Swiss Federal Institute of Technology in Zurich, or as he calls it, “the MIT of Europe.” Late last year, he launched the bubble experiment by identifying four developing bubbles and forecasting when they’ll peak. His predictions are locked away in encrypted files that can’t be altered, to be revealed only when the forecasted bubble peaks have passed, on May 1.

This sounds like reflexivity!!! (via WSJ)

And he continued to flex his forecasting muscles, looking for certain “fingerprints” in market prices that help him identify bubbles. While there’s lots of complex math behind it, one key pattern is essentially this: periods of unsustainable growth, in which the growth rate is itself accelerating, punctuated by waves of panicky selling. Key elements are the “positive feedback” generated by optimistic investors pushing the price ever higher into bubble territory even as more pessimistic investors produce waves of selling. In the midst of this tug of war, there’s an accelerated development of the bubble.

Only about two-thirds of bubbles end in a crash, Mr. Sornette says. But in his view, as the bubble develops, it becomes increasingly unstable so that any number of small disturbances could cause it to pop. (He uses the analogy of a ruler held vertically on a finger. Any small movement will cause it to fall.) So while market-watchers often seek the causes of a crash in the events immediately preceding it, he believes the fundamental origin is in the longer-term build-up of instability.

Click Here To Read: Didier Sornette: The Professor Who Chases Financial Bubbles