# Why Stock Markets Crash Author: [[Didier Sornette]] ## Summary Because I read this book on and off over the course of a year without taking notes, some of the details are more fuzzy. [[Didier Sornette]] took his work on self-organized critical from earthquakes and materials failure and applied it to the stock market. The central idea of the book is to examine the crash pattern formed through log periodic oscillations around a power law (LPPL = log periodic power law). Because power laws are commonly observed in fractals he relates the LPPL to fractals and discrete self similarity. One of the more interesting sections looked at the reasons for why this might occur. The description that most stood out to me was around a hierarchical [[Ising model]] that can form the log periodic oscillation. Based on my personal experience I believe an Ising model, or agent-based model of market interactions is more realistic so I really liked this description. Some of his students seem to be examining the market from this light. He goes on to demonstrate the LPPL model on a few instances through time. His group has even published some of their calls in real time. They have a few different formulations of the model, the differences of which I can't remember. He goes on to speculate on the possibility that their are log periodic power laws in the structure of society such as technology evolution or demographics. ## Review The idea presented in the book was super important and I have spent a significant amount of time reading through papers on this and similar topics. Chris Kaufmann of Parallax Financial Research has also done incredible research in this area (and first got me interested in this topic). His interviews and writing are sparse but worth checking out if these ideas are interesting. Some readers might find the idea untenable because of what it implies for things like technical analysis. In a way it is maybe a more advanced form of technical analysis which has a scientific basis and is tested. The writing on the other hand is bland. It is unfortunately obvious that it is written by an academic. In part that's why it took me so long to finish. ##### Related [[Econophysics]], [[Transaction Analysis]], [[Fractals]],[[Complexity]], [[Patterns of Speculation]]