Didier Sornette
Jul. 22, 2021
Read time: 2 minutes and 12 seconds.
tags:I remember stumbling upon Didier Sornette’s work during one of those late-night Wikipedia rabbit holes.
You know, the kind where you start looking up something mundane like “how to make sourdough” and end up deep-diving into the intricacies of financial crises. Sornette, often hailed as the godfather of econophysics, has this uncanny ability to blend economics with physics in a way that feels almost poetic.
Sornette’s theories revolve around the idea that financial markets are not as random as we might think. Instead, they exhibit patterns and behaviors that can be analyzed and even predicted using principles from physics.
Financial Crisis Observatory
So he’s actually responsible for the Financial Crisis Observatory which is this environment where they run Bubble Risk Indices on the different parts of the market to determine the likelihood of one or another bubble.
It’s like he’s found a way to decode the Matrix, but instead of green code, it’s stock prices and market trends.
Dragon Kings
One of his most fascinating concepts is the “Dragon-Kings” theory. Unlike the mythical creatures, these Dragon-Kings are rare, extreme events in financial markets that deviate significantly from the norm. Think of them as the black swans of the financial world, but with a twist.
While black swans are unpredictable, Dragon-Kings can be anticipated if you know what to look for. It’s like having a cheat code for the stock market, but without the ethical dilemmas. I remember reading about the 2008 financial crisis and how Sornette’s models could have predicted it. It’s a bit like watching a horror movie where you know the jump scare is coming, but you can’t do anything to stop it. Sornette’s work gives us the tools to see these scares coming, but whether we can act on them is another story.
Underlying Mechanics
Sornette’s approach to econophysics isn’t just about predicting crashes, though. It’s about understanding the underlying dynamics of financial systems. He uses concepts like self-organized criticality, which is a fancy way of saying that systems naturally evolve to a critical state where a small event can trigger a massive reaction. It’s like a sandpile that grows and grows until one more grain causes an avalanche. Financial markets, according to Sornette, work in much the same way.
What’s really cool about Sornette’s work is how it bridges the gap between two seemingly unrelated fields. Physics and economics might seem like strange bedfellows, but Sornette shows us that they’re more intertwined than we might think. It’s a bit like finding out your favorite indie band is actually influenced by classical music. It makes you appreciate both genres even more.
If you’re into this kind of stuff, I’d recommend checking out Sornette’s book, “Why Stock Markets Crash.” It’s a bit dense, but totally worth the read. It’s like peeling back the layers of a really complex onion, and by the end, you’re left with a newfound appreciation for the intricacies of financial systems.