How we can predict the next financial crisis: 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.