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Dragon-Kings, Black Swans And The Prediction Of Crises
Didier Sornette on "Dragon-Kings, Black Swans and the Prediction of Crises" - for all you Taleb fans:
This leads to two consequences, one pessimistic and the other one more optimistic. The first one is the unavoidable evidence that extreme events occur much more often than would be predicted or expected from the observations of small, medium and even large events. Thus, catastrophes and crises are with us all the time. On the other hand, we have argued that the dragon-kings reveal the presence of special mechanisms. These processes provide clues that allow us to diagnose the maturation of a system towards a crisis, as we have documented in a series of examples in various systems.
We have emphasized the use of the concept of a “phase transition – bifurcation – catastrophe – tipping – point,” which is crucial to learn how to diagnose in advance the symptoms of the next great crisis, as most crises occur under only smooth changes of some control variables, without the need for an external shock of large magnitude.
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An interesting concept but doesn't the manipulation of the financial markets by the government change it from a natural system and thereby alter the "normal" distribution?
I would imagine the system adapts to the presence of new or "outside" force. That forces existence is adapted to by the existing system and you are left with a new normal or natural system. However, its late and I am not even trying to dive to heavily into this now.
Oh-man is going to have to send Hillary over to China to do the same thing. HAaaaaaaaaaaaaa
We just
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Precisely. If you want to know the laws that govern the finanical markets, i.e. the Dow Jones and other indices, look no further than the formulas used in the algorithms.
Thus the data since at least a year is absolutely worthless if you want to understand social interaction of humans through that data. You will be studying the interaction of algorithms instead. It also has no link to reality outside of Wall St.
Le Chatelier's Principle
If a dynamic equilibrium is disturbed by changing the conditions, the position of equilibrium moves to counteract the change.
The bigger they are, the harder they fall...
Harbour, "According to this theory, local effects such as interest rates, new tax laws, new regulations, and so on, involked as the cause of the burst of a given bubble leading to a crash, are only one of the triggering factors but not the cause." There'll be a test tomorrow...... that's a joke, not a forcast. :)
I am still reading but I am reminded of this, which I was reading yesterday. In this article, the metaphor is entropy.
The waterfall effect
http://fofoa.blogspot.com/2009/08/waterfall-effect.html
As I am tracking with the article so far, I am understanding that the outlier has a bigger effect on the whole than do the "average" data points. Gravity sucks, so do black holes/event horizons, and so do outliers.
Collapse.
It's what I am afraid of.
Thanks for the post and that graph of the 3rd century Roman collapse reminds me of Joseph A. Tainter's outstanding "Collapse of Complex Societies" (he covers that as well as a number of other ancient and semi-ancient societies). Sadly, rather appropriate for today.
You need a portfolio ready for operating in a variety of environments, unless you are connected enough for Bernanke and Geithner to bail you out. It's like they say in the movie Real Genius, would you be prepared if gravity reversed itself? Or would the change fall out of your pockets and into the big banks' hands?
When collapse is on the horizon you pump lithium into the water system.... then its happily ever after.
http://www.scribd.com/doc/17880556/How-ALL-Systems-Can-Collapse-Overnight-709
I love the "mise-en-scene" of Martin Armstrong...somewhere between John Nash, a ransom note and Brad Pitt's character in 12 Monkeys.
I wonder what would the impact of this paper be if it were not for the words "dragon-king" and "black swan"? The remainder of the concepts are old as mud. I have nothing against the paper itself. Ultimately I guess the principles of marketing are valid in scientific research too. Sad but true...
FYI, I am an academic with an interest in non-linear dynamics.
Anon #38375
Do you think there is any value to the conversation that gets started with this? If you believe science is a "body" of knowledge to be built on, then yes, there may not be anything entirely new here. If you believe it to be paralogical in nature, then there is value in engaging new terms to aim it at our up to the minute contemporary situation.
Damn straight. Nothing is new under the sun. As Jim Grant says, innovation in science is cumulative, where as innovation in finance is cyclical. It is basically coming up with variations on Martin Mayer's six financial scams that haven't yet been prohibited.
Everything is endogenous.
That would be deleterious (understatement) to the notion that the financial system is solvent.
We just
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
Most interesting view on the harmonic progression/ analysis. While the planet earth is a gigantic harmonica- our planets harmonics seem to have lost the fundamental frequency that keeps all in harmony. Without all the parts agreeably related the worse off we become. The worlds banking system at least to me has to be one of the greatest sour notes to have ever been thrown into our progression of chords. Functionality without purpose leaves us with only discord . I can remember one of my favorite westerns with Charles Bronson as Harmonica in which his playing preceeded only one thing-to this day I can still hear those chords. The people of this planet will never forget the financial banking chords.
Fight club is one of many coupled oscilators.
I've given up hope for the Taleb's and the black swan followers. Empirical modeling of a banking collapse and financial crisis is a waste of time. It's an epistemological problem they run into constantly: the laws of human behavior do not follow the conventions and proofs necessary in the scientific or mathematics communities. You could model it, come up with answer that tells you a collapse is imminent, then change your behavior to adapt and avoid the collapse. Then the model is busted.
The relevant macro empirical observation about right now that is fiat currency has never succeeded where it has been tried and fractional reserve banking leaves banks inherently bankrupt at all times. Being able to predict the timing of the collapse would be useful, but largely irrelevant.
Agreed. Predicting the future without being able to influence it would probably be a waste of time. They also continually mix-up being able to explain what happened (in the past) with being able to predict what will happen (in the future).
Besides, aren't learning and randomness mutually exclusive anyway?
It is very interesting the author suggests that the Shanghai Composite is set to burst on August 17-27 2009. See figure 29, page 15 of the paper. The Shanghai opened the day down more than 2%. Nikkei and Hang Seng are also deep red.
Dow and S&P futures aren't looking to hot for this time of the night... Dow futures are off almost 60... earnings season is winding down and it may be time for the tide to flow back out.
keep in mind the differneces betwene cahs close and setlement. if the market were to open now the S&P 500 would only drop 3 points instead of six
Agreed... but I do know that the futures look positively ugly this morning... Dow down 200 at 7:25EST... the last time I saw futures like that the market was on its way down in a big way for a long time... not being a professional trader there is a lot I don't know however.
Welcome Dragon King.
Thank you, MsCreant
Nice to be here
Thank you, MsCreant.
Nice to be here as a poster (child) after reading for the last 4 months.
Swine flu crisis will be worse than most expect. That's why I'm long NVAX.
Lost respect for Sornette when he called the US housing market a non-bubble in 2005-2006 according to his Landau equations. And since the bubble burst he obviously stopped making his "predictions." He is just another random person trying to guess a bubble's bursting, except he is equipped with equations most (non-physics) people in wall street wouldn't have a clue about.
All the traders who think physicists are any better at predicting irrationality of human behavior need to look no further than the greatest physicist of them all in recent memory, Newton, lose his shirt in the stock market and make his famous quote...
I am the dragon king!
The fire breathing dragon king of Mordor!
AhehaAHEHahahHAAhehahehAHEHahAHehah!!!
Heh
Outliers.
Somethings Wicked This Way Comes.
It's all about a predicatable permutation model, that quite frankly I don't believe exists.
bye bye US jobs for Chrysler:
http://online.wsj.com/article/SB125046466790535335.html?mod=rss_whats_ne...
"Under the direction of Fiat SpA, Chrysler Group LLC is devising plans to produce the Italian auto maker’s Fiat 500 subcompact at a Chrysler plant in Mexico, according to people familiar with the matter, while considering what other Fiat models to introduce to the U.S. market.
Chrysler doesn’t believe it could make much profit, if any, if it were to assemble the 500 in a U.S. plant, these people said."
So you Americans will finally come to enjoy the Fiat Cinquecento, ey?
Boy that is going to be a car that everyone is going to want... a Fiat/Chrysler subcompact car that is Made in Mexico... wow I am going to run down to the dealership first thing tomorrow and make sure I get a pre-order in for that one...
You say: 'I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened ... ? - Seneca
........... thought provoking concept...may be something to it....seems similar to 'elliot wave theory'... but a thoughtful examination of history,specifically the history of Empires,their rise,dominance,and fall.... should offer the best 'clues' as to the 'timing' of 'Dragon Kings'... Ask this question,about timing... when the british empire was collapsing and the next empire was ascending, what did the 'Game Controllers' do to the world markets?
Now that the current (USA) empire is collapsing and the next empire (china) is ascending.... what happened... so a good question might be something like....how softly into the night will the good ole usa go...with cooperation,or kicking and screaming.How cooperative will China be in the transition process? what manner of conflicts might the struggling empires engage in before the day is come? what signs and symptoms of conflict have we seen so far? somewhere in the answers to these questions,you will find the issues of 'swine flu',WW3,or not... bursting bubbles ,or not...economic recovery for all countries,or all will fall.the 'samson options' whatever they may be,...forced co dependent countries,limping along together.China will or wont agree to pull the USA out of the depression,or the usa will not stay collapsed on its own,alone.but would bring the world down with it...thats what happened last year and next year unless china 'helps' the usa.by not moving too far too fast into its new empire status. russia too , as well as brazil, or any other country that moves forward in progress too far too fast. the usa will see to it that they would be punished. think mumbai bombing. thinkswine flu. think salvador allende. think crashing the dollar. economic or biologic warfare is the game controllers 'world war 3 weapon of choice'...why? because it leaves the territory still inhabitable after the people are destroyed. 2012 here we come...will it be a new world of cooperation and co existence in brotherhood among nations.... or will it be death and destruction and the game controllers hiding safe in their underground bunkers. . such an imagination i have.
mmmm
black swan
with new potatos
Futures are red again on Monday morning.
BGZ, FAZ, EDZ, SKF, SRS, should all make money on Monday...
...But only if you knew in advance of Friday morning that the market has reversed and it is heading lower, at least in the short term.
Invetrics DJIA timing signal switched to Short pre-market last Friday, allowing people considering shorts to capitalize in the market move lower since then.
See http://invetrics.com
http://economicedge.blogspot.com/2009/08/week-in-charts-buckle-heck-up.html
The ideas are indeed quite old, but of course Taleb was smart enough to give them a new name. http://www.murphys-laws.com/murphy/murphy-laws.html
Off topic - DJIA futures down 153 points. Where the PPT? Start pumping !!
oh, they'll pump it, don't worry, the DOW will open -60 max.
Darn it Cheeky... don't you just hate it when you make predictions like that... the market will prove you wrong everytime... in fact I think it takes great delight in it :-)
Good morning Hungry Bears....futures gave my spx short hope....;-)
Its going to be a day full of honey in Bear World... now maybe I can start moving in the right direction on my short position.
Me toooo....x watch sugar and honey?
WTF???? Technical problems at NYSE!!!
WHAT???????? tell me you're joking
Just like your picture...joking, but would it surprise you????
no. it would not
Sorry CB, I was hoping you would LOL...
CB: Knowing what we know about the NYSE and that its all Rigged. It would behoove them to lean on a circuit breaker this morning?
This article and thread has persuaded me to renew my membership in DENSA and wait for the next Taleb book to come out in paperback.