Summary of How Can We Predict the Next Financial Crisis?

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How Can We Predict the Next Financial Crisis? summary
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Risk economist Didier Sornette attempts to unravel the black swan theory, which draws the disconcerting conclusion that extreme events are unpredictable and unknowable. Sornette has developed a model that aims to forecast extreme events. Although he cherry-picks examples that corroborate his assumptions and his lecture contains some jargon, getAbstract nevertheless recommends his fresh insights to market analysts, corporate investors, government representatives with fiduciary responsibilities and anyone seeking comfort during times of financial instability.

In this summary, you will learn

  • What constitutes a financial “dragon-king,”
  • How financial bubble “regime changes” are predictable, and
  • How prediction researchers use scientific methodology to dispute “self-fulfilling prophecy” criticisms.
 

About the Speaker

Didier Sornette is a risk economist and director of the Financial Crisis Observatory.

 

Summary

The Great Recession of 2007 and 2008 illustrated a harsh reality: The Great Moderation, characterized by seemingly “never-ending growth and prosperity,” wasn’t sustainable. To avoid such crushing catastrophes in the future, the Financial Crisis Observatory (FCO) aims to identify factors that track economic bubbles and to determine their turning points.

Traditional risk management calculates “peaks-to-valleys that represent a worst-case scenario” for price changes of a stock or an index. Using this technique, a “universal power law” can explain 99% of events but...


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