On today’s episode of Trend Following Radio Michael Covel interviews Didier Sornette. He is Professor on the Chair of Entrepreneurial Risks at Swiss Federal Institute of Technology Zurich. He is also a professor of the Swiss Finance Institute, associated with both the department of Physics and the department of Earth Sciences at ETH Zurich. He has worked on the King effect, a theory used to predict economic bubbles. Didier also set up the Financial Crisis Observatory in October of 2008. He brings an interesting perspective to financial crisis’s, and bubbles.
Didier first realized his fascination with financial bubbles back in 1989. He received a grant to try and solve the equation of prediction. Didier goes on to discuss the different theories that stemmed from his research. A few years later, when the housing crisis hit the U.S., he founded The Financial Crisis Observatory. He founded it as a psychological response to the discourse he had with the markets. People didn’t have a clear view of what was happening. Nobody seemed to know how it happened, but to Didier it was so obvious and natural that the crisis occurred. He wanted to help inform people better with his observatory by showing concrete steps that lead to the housing collapse and other crashes that came before it.
Michael and Didier then go into discussing black swans. Didier does not believe in black swans because they relate to “surprise events.” He says that crisis’s are actually not surprise events at all. They can be expected and are human related. Instead, Didier believes in a notion he calls “Dragon Kings.” His theory is called Dragon Kings because a King is a special person in a country, and dragon means of unique origin. Dragon Kings is how he describes his version of, “surprise events.” Michael and Didier move onto talking about how the world is out of equilibrium. The world is consistently battered with surprises therefore the equilibrium is always off. A lot of economists refuse to acknowledge this and policy makers are not well educated on the subject. Lastly they talk about Didier’s financial bubble experiment. Didier then goes into his background in physics saying it gave him tools to look at things outside the box. Nature doesn’t function in disciplines just like our minds do not work in silos or disciples.
In this episode of Trend Following Radio:
- The adaptive market hypothesis
- Dragon Kings vs. Black Swans
- New economy syndrome
- Predictive markets
- Finite singularity
- Equilibrium of the world
“When herding behaviour among investors ramps up, a stock’s or index’s growth rate can increase faster than exponentially, leading to more herding. This positive feedback brings the system to a tipping point. About two-thirds of the time, a crash results.” – Didier Sornette
Mentions & Resources:
- Didier Sornette
- ETH Zurich
- The adaptive market hypothesis
- The Financial Crisis Observatory
- Social Bubble Hypothesis
- Human Genome Project
- Andrew Lo
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