Rating: 
Summary: Why Stock Markets Crash
Review: Didier Sornette has written an elegant and penetrating study of the complex elements which contribute to financial booms and their associated busts. Its most important conclusion is that potential crashes are proceeded by statistical “fingerprintsâ€Â, largely independent of the particular markets involved, which permit their timing to be estimated within narrow limits by mathematical modeling, as demonstrated by numerous examples. The book attempts two difficult challenges: first to model the potential timings of instabilities conducive to crashes in financial markets, and second to describe both the resulting models and their underlying phenomena intelligibly to the lay reader unfamiliar with much, or even all, of the mathematics involved. I found the author remarkably successful on both counts. The book reads uncommonly well provided one does not get distracted by the inevitable unfamiliarity of some of the mathematical terms, and in support of its main argument presents a wealth of interesting and uncommon information. Importantly, it also reflects a familiarity with the realities of financial markets, typically lacking in academic studies of market phenomena. This appraisal will not be shared by all readers. If you are a fan of Kramer and Kudlow or prefer information about financial markets in sound bites from CNBC, or if you are looking for specific guidance on how to make money in markets, this book is not written for you. Furthermore, the book contains references to a considerable amount of serious mathematics which is likely to annoy some fraction of its readership. This can be circumvented, as suggested, by simply skimming whatever is unfamiliar. What is missed will have been addressed to a different audience, and not much of relevance will be lost. However, if you are frustrated by (or hostile to) unfamiliar mathematical terms and references, however inessential to the gist of the argument, best give it a pass. For the rest, this is a deep study of engaging interest which repays more than one reading.
Rating: 
Summary: WARNING: Get two Ph.D.'s before opening this book
Review: Ever since I bought gold at $800 an ounce (the very top) 20 years or so ago, I have been fascinated by financial markets and their tendencies to produce bubbles that fool the majority. I know that complex systems and positive feedback and other phenomenons are at play and I wanted to find a book that covered the topic with enough depth. I thought Sornette's book was the one and some other reviews might make you think it is. Not for me though. Granted, it is extremely well researched with more than 460 references. It covers all the possible theories for stock markets price fluctuations and crashes. But its merit for me stops here. The author warns the reader at the outset that mathematical explanations in smaller characters could be skipped in a first reading. The problem is that 90% of the book should be in smaller characters. The main text will be as hermetic to most readers than the small characters sections. Unless you have a graduate degree in a mathematics or physics and an extended experience in the disciplines that Sornette covers you'll be lost (BTW I do have one and I was lost). Here is an example of the kind of explanations you will find: "The novel insight is that the arbitrary bubble component X, of an asset price plays a role analogous to the so-called 'Golstoine mode' in nuclear particle and condensed physics. Goldstone modes are the zero energy infinite-wavelength mode fluctuations that attempt to restore broken symetry." Did you get it? I didn't. This book might be of interest to researchers and acdemics in the field but it is way beyond the level of the educated general public. It is regreatble that Mr. Sornette
has chosen such a complex and esoteric way to treat the topic and has not made the slighest attempt to make it understandable to a wider public. So I will keep looking for the book that will explain the fractal nature of stock markets in a documented but simple and interesting way.
Rating:
Summary: New Insights into Market Dynamics
Review: I highly recommend this book, and it may cost you a whole lot of money if you don't read it. EconoPhysics is (quietly) entering the research departments of Wall Street investment firms, so you may do well to take a look for yourself, and this book is a great place to start. It's a fascinating read on market forces and dynamics, and how it all plays out on its way to the extremes (bubbles & crashes). The author reveals findings of a new approach to market analysis and predictions based on studies of real-life, complex systems, which are modelled by a small number of simple rules, wherein a "critical state" can arise, from which chaos (or order!) spontaneously breaks out. It sounds counter-intuitive, but researchers around the world are successfully applying the emerging science of complex systems over a broad range of interests, and unmasking order (predictable patterns) in what was once thought to be random or intractable data. This book takes you down that path and meets up with a little thing called The Market! The reader is given insight into the apparent vagaries of market dynamics from a fresh perspective, walking you through market models and dynamics that account for "herding" behavior around market extremes, wherein pockets of predictability arise. It's all explained without a whole lot of math -- what's not to like? It's the first time I've had fracals explained in simple terms of dimensions, without bifurcation charts, and discussions of "attractors". To give you a flavor of the book's perspective, consider what happens during a typical day in the market when all of the momentum players, trend spotters, value hounds and growth seekers meet up with each other via buy and sell orders. Typically, the market doesn't move very much, though billions of trades execute. As the author explains, this is possible only through what may be described as complete chaos. That is (simplifying here), for every person who thinks the price is going to fall, and acts on it, there is someone who must be doing the exact opposite. So, the market is stabilized only through complete disagreement (disorder). It's those rare times when agreement (order) rules the day that you get HUGE market swings. The good news is that order is something we can wrap our minds around, identify driving forces, build models, and make predictions -- and this book does all that. There are not many equations in this book, and you can skip them without losing lock on the book's theme. The concepts and tools covered in this book are at the cutting edge of science and probably new to you, but new analytical insights are valuable, and the author explains them all in layman's terms. I look at this book as a scientific study into Warren Buffet's statement that money managers are "lemmings".
Rating:
Summary: An Engaging and Thought-Provoking Work
Review: 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.
Rating:
Summary: An Engaging and Thought-Provoking Work
Review: 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.
Rating: 
Summary: theory is unsupported
Review: Sounds interesting. Honestly I haven't read his book but have avidly read other titles that try to predict future trends. Unfortunately, according to Sornette's own site, the data doesn't support his theory. A lot of complex math and a negative conclusion. Sornette received a lot of media attention when he made the prediction that the S&P 500 would crash. The media hasn't been following up now that the data doesn't support his theories.
The man's own words:
"More than two years have passed and our projections for the US market have not been verified (we have also offered the vantage of foreigners and have extended the analysis to other foreign markets with better success).
The origin of our failure to forecast the rebound of the market in 2003 can be traced back, in our opinion, to the following simple point: the mechanism underlying our projection is UNIQUELY based on the imitation and herding behavior of investors."
Rating:
Summary: Best Explanation Yet
Review: The author aside from the problem of crashes presents an insightful exposition of tipping points. I don't know why his approach makes it clearer and deeper than those of Watts and Barabasi --is it due to his using financial markets as a base? or his being an expert at fat-tailed dynamics?
His work builds on the "abyssus abyssum invocat" (panic begets panics) and the dynamics of compounding disequilibria. In addition the notion of "CRITICAL POINT" is made very clear.
Honestly I don't care for the idea of crashes; the same concepts can apply to sudden and unexpected euphorias.
I learned more from this book than any other on disequilibrium.
Rating: 
Summary: Econophysics at the time stock markets crash
Review: The book begins with interesting features on complex system related to the financial discourse. As contending for broad readers, it shows recent findings on the self-organized systems, power-law signatures at many distinct places, positive feedback, random walk, and gives definitions on financial crashes and bubbles in the terms of drawups and drawdowns very deliberately as the theme of the book.
Drawups is defined as runs of positive returns beginning after loss and stopping at a loss (p.73), while drawdowns is the persistent decrease in the price over consecutive days, the cumulative loss from the last maximum to the next minimum of price (p.51). The drawups and drawdowns on the stock market are argued to be the emerging factors we view from many internal processes, such as self-organization, hedging derivatives and rational panics, herding behavior and crowding effect, imitation process in the stock market, the emerging rumors, and the cooperative behaviors resulting from the imitation. All of them are resulted from the cognitive biases, emotional quirks, and social influences in the horizons of the market player (p.91).
There have been a lot of works especially in econophysics and complex system studies to find explanation by using statistical mechanics, behavioral economics, and artificial stock market, however Sornette concurred that the large crashes in stock market is the outlier of those. There are specific and interesting pattern we can reveal by analyzing the crashes instead of overall price fluctuations (p.26).
Mass media often consider large crashes as a direct impact of some exogenous cause, such as political news, etc. According to discussions in the book, we discover that the crash is not merely caused by them. Instead, crashes are the result of growing instability in the market system. In other words, crashes are mainly caused by the impact of a long build-up of herding behavior that forces the market into an increasingly unstable price. Sornette used the physical terminology of critical point. At the critical point, where the instability is at its peak, a small stimulus can cause a crash. Therefore, the cause is not merely of the news related matters but of the nature of instability in the market under stress.
The book proposes an analysis by using 'log-periodicity', the series of oscillations in logarithmic scale graph that become more and more rapid in period before a crash. According to Sornette, the strength of these oscillations depends on the nature of the interactions between traders (p.178). The presence of this oscillations show that the price grows at an accelerating growth rate, which is compatible with a singular behavior occurring within finite time horizon (p.369) that leads to crash. In other words, if the bubbles inflate too much or for too long, they may collapse in crashes. The fragile endogenous market system can easily lead to crash by particular small perturbations brought by some news-related matters.
The book is quite original on proposing a specific model to incorporate the complex adaptive system with power-law signatures to analyzing crashes in the market; while most of econophysics books saw the way to incorporate the same ideas on general data of price fluctuation.
However, the remaining question and mostly discussed by Sornette in the book is whether we have opportunity to predict the crashes in the stock market. Econophysics, as the new emerging discipline to incorporating statistical physics to market system, has generally presented a widely open door to analyze price fluctuations comprehensively, while the book shows how market crashes analogous to the critical points studied in statistical physics related to magnetism, melting, and similar phenomena (p.279) - the log-periodic structures decorates the time evolution of the system.
In advance, if we talk about the prediction of crashes in market, then inevitably we must talk about the prediction of the behavior of complex system. As we know, most of information in complex system is irreducible. Accordingly, most of dynamical feature of complex system is unpredictable. However, as noted by Sornette (p.17), the unpredictability does not prevent the application of scientific method to many phenomena we face everyday. The duty of scientific method is to reveal the information inherited in the futile data. In chapter 9, Sornette elaborated the possible way we have to do prediction of crashes by using the critical phenomena. Even though it is admitted not resulting totally correct prediction, it is clear that the elaborated methodology could be very useful as an intuitive tool on understanding price fluctuation.
In the end of the book, Sornette explains many further possibilities to understand broader fields by using our knowledge about critical phenomena as a model for crashes in market. The end of the book describes the analytical perspective on macroeconomics, demography, and more in an inspiring chapter full of epitomes.
The book is highly recommended since it offers a stunning and comprehensive introductory for those have not yet heard a lot about complex system. However, those who have been doing researches on complex system can take advantage from the book as an inspiring one.
Hokky Situngkir
Bandung Fe Institute
Rating:
Summary: Insightful!
Review: 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.
Rating:
Summary: Science alive
Review: There are many books on many topics. The one that is inspiring and teaches you something that will resonate for a long time is a rare find indeed.
Sornette's work is one such book. Complex systems, critical phenomena, nonlinear interactions are buzzwords of modern physics thrown all over. Yet tying them together in a consistent analysis, presented as simply as possible (but no simpler!), as an application to a real system while remaining engaging is a non-trivial feat. The book is extremely well researched, cites over 400+ references and could be recommended to any beginning physics graduate student to learn something about the scientific method, critical phenomena, non-linear dynamics, statistics, and probability theory. It is so well rounded in that nothing is taken for granted, everything is introduced by plausible argument, evidence, historical analysis or derivation, with references to back up every statement. Still his work is no ordinary dreary text book. Sornette's authorship is spirited and well orgnized, spiked with historical facts, anecdotes and technical asides that enrich but do not distract from the main premise of the book, namely to provide an answer to the question in the title.
The main thrust of the book is as follows: Bubbles (and subsequent crashes) are systemic instabilities present in markets as an innate characteristic. When the market is in a bubble regime, it displays super-exponential growth that can be fitted to a power-law. Power-law price divergence is akin to the behavior of physical systems when approaching critical points (for exmple when undergoing a phase transition). Asset prices in critical regime, in addition, display log-periodic osciallations which are a feature of "discrete scale invariance" (systems that are self-similar only under discrete magnification ratios). The log-periodicity is a saving grace, as it is nearly impossible to distinguish power laws from exponential laws in noisy data. Locking onto oscillations improves discimination substantially. By inverse conclusion, markets that can be fitted to log-periodic super-exponential growth are unstable and subject to a crash. His treatment is probabilisitic in nature, by the very simple argument: If a looming crash were known with certainty, arbitrage traders would take advantage of this and thus remove the instability.
After developing this core tenet, several chapters are devoted to analyzing historical stock market crashes under this lens. He proceeds with a discussion on prediction and its perils, and at last closes with a wider look at economic and population dynamics. Notable among those, for example, is the conclusion that Moore's Law is actually incorrect: The growth of transistor densities is not exponential but super-exponential, predicting a critical point around 2030.
Sornette chose a non-academic format to publish his ideas. And while arduous mathematical derivations have been skipped, the concepts presented still borrow from physics and mathematics to no small extent. Without an upper division background in those disciplines, the reader may be hard pressed to follow the argument.
This book is not a trading system manual either. This book gives no predictions. This book is about a theory, an analysis. And as such it is fascinating.
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