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Didier Sornette: “Crises are predictable”

“Crises are predictable” said the economist Didier Sornette at TEDGlobal 2013. Risk economist Didier Sornette makes bold claims on Wednesday morning at TEDGlobal 2013, during the session “Money Talks.” According to Sornette, we have been operating under a few detrimental illusions that have landed us in our current economic state: One, we have been living in an age of never-ending growth and prosperity. Well, $30 trillion losses in the global market from the Great Recession have already shattered this illusion. And two, that we couldn’t see this crash coming.

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The 2007-2008 crash seemed to come out of nowhere, with no source or group to take responsibility, an unpredictable one-time anomaly — as Sornette calls it: “the wrath of God.” But as he says firmly: Despite what standard risk management tools show, these outliers operate under special mechanisms that make them predictable, perhaps even controllable. Sornette and his team at the Financial Crisis Observatory  (FCO) call these special cases “dragon-kings.” Dragon-kings, in direct contrast with “black swans,” are at the core characterized by a slow maturation of instability, which move toward a bubble, until the bubble reaches a climax and bursts.

There are many early warning signs of dragon-kings, but one of the crucial ones is super-exponential growth. Super-exponential growth is trenchant and unsustainable and can be found in many areas of study to predict dragon-kings. Sornette has applied it to Ariane rockets, parturition problems, epilepsy, landslides, even blockbuster movies and YouTube virality.

Dragon-king theory can be applied to 30 years of financial bubble history, starting with the worldwide bubble that started in 1980 and popped in 1987, and ending in the most recent global over-valuation bubble that broke in 2007 and 2008. In December 2007 Sornette predicted the Chinese market bubble, to the disbelief of analysts. Three weeks after his presentation the markets lost 20 percent, and by the end of the year they had lost 70 percent.

Can the dragons be slain? In a way. Learn the art of planning and predicting, says Sornette. If we find pockets of predictability, advanced diagnostics of crises are possible. So that crises may never again take us by such surprise.

Why you should listen to him:

While financial crashes, recessions, earthquakes and other extreme events appear chaotic, Didier Sornette’s research is focused on finding out whether they are, in fact, predictable. They may happen often as a surprise, he suggests, but they don’t come out of the blue: the most extreme risks (and gains) are what he calls “dragon kings” that almost always result from a visible drift toward a critical instability. In his hypothesis, this instability has measurable technical and/or socio-economical precursors. As he says: “Crises are not external shocks.”

An expert on complex systems, Sornette is the chair of entrepreneurial risk at the Swiss Federal Institute of Technology, and director of the Financial Crisis Observatory, a project to test the hypothesis that markets can be predictable, especially during bubbles. He’s the author of “Why Stock Markets Crash: Critical Events in Complex Financial Systems”. 

Thu-Huong Ha  (June 12, 2013 at 8:40 am EST). ‘“Crises are predictable”: Didier Sornette at TEDGlobal’. Retrieved Dec. 16, 2013 from http://blog.ted.com/2013/06/12/crises-are-predictable-didier-sornette-at-tedglobal-2013/

Francisco Gnecco. (June 2013). ‘Didier Sornette: Cómo podemos predecir la próxima crisis financiera’. Retrieved Dec. 16, 2013 fromhttp://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis.html

TED Ideas worth spreading (???) ‘Didier Sornette: Risk economist’  Retrieved Dec. 16, 2013 from http://www.ted.com/speakers/didier_sornette.html

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