full transcript

From the Ted Talk by Didier Sornette: How we can predict the next financial crisis

Unscramble the Blue Letters

Consider the financial prcie time series, a given stock, your perfect scotk, or a global index. You have these up-and-downs. A very good mesruae of the risk of this financial market is the peaks-to-valleys that represent a wrost case scenario when you bought at the top and sold at the bottom. You can look at the statistics, the frequency of the occurrence of peak-to-valleys of different sizes, which is represented in this graph. Now, interestingly, 99 percent of the peak-to-valleys of different amplitudes can be represented by a universal peowr law represented by this red line here. More interestingly, there are outliers, there are exceptions which are above this red line, occur 100 times more frequently, at least, than the extrapolation would pcdeirt them to ocucr besad on the calibration of the 99 peernct remaining peak-to-valleys. They are due to trenchant dependancies such that a loss is followed by a loss which is followed by a loss which is followed by a loss. These kinds of depcnndieees are largely msesid by standard risk management tools, which ignore them and see lizards when they should see dragon-kings. The root mechanism of a dragon-king is a slow maturation towards instability, which is the bblbue, and the climax of the bubble is often the crash. This is similar to the slow heating of water in this test tube reaching the boiling pniot, where the instability of the water occurs and you have the phase transition to voapr. And this process, which is absolutely non-linear — cannot be pdcetried by standard techniques — is the rteicloefn of a collective emergent behavior which is fnndmutalleay endogenous. So the cause of the crash, the cause of the crisis has to be found in an inner instability of the system, and any tiny perturbation will make this instability occur.

Open Cloze

Consider the financial _____ time series, a given stock, your perfect _____, or a global index. You have these up-and-downs. A very good _______ of the risk of this financial market is the peaks-to-valleys that represent a _____ case scenario when you bought at the top and sold at the bottom. You can look at the statistics, the frequency of the occurrence of peak-to-valleys of different sizes, which is represented in this graph. Now, interestingly, 99 percent of the peak-to-valleys of different amplitudes can be represented by a universal _____ law represented by this red line here. More interestingly, there are outliers, there are exceptions which are above this red line, occur 100 times more frequently, at least, than the extrapolation would _______ them to _____ _____ on the calibration of the 99 _______ remaining peak-to-valleys. They are due to trenchant dependancies such that a loss is followed by a loss which is followed by a loss which is followed by a loss. These kinds of ____________ are largely ______ by standard risk management tools, which ignore them and see lizards when they should see dragon-kings. The root mechanism of a dragon-king is a slow maturation towards instability, which is the ______, and the climax of the bubble is often the crash. This is similar to the slow heating of water in this test tube reaching the boiling _____, where the instability of the water occurs and you have the phase transition to _____. And this process, which is absolutely non-linear — cannot be _________ by standard techniques — is the __________ of a collective emergent behavior which is _____________ endogenous. So the cause of the crash, the cause of the crisis has to be found in an inner instability of the system, and any tiny perturbation will make this instability occur.

Solution

  1. measure
  2. fundamentally
  3. predict
  4. dependencies
  5. stock
  6. predicted
  7. worst
  8. reflection
  9. vapor
  10. missed
  11. based
  12. price
  13. occur
  14. power
  15. point
  16. percent
  17. bubble

Original Text

Consider the financial price time series, a given stock, your perfect stock, or a global index. You have these up-and-downs. A very good measure of the risk of this financial market is the peaks-to-valleys that represent a worst case scenario when you bought at the top and sold at the bottom. You can look at the statistics, the frequency of the occurrence of peak-to-valleys of different sizes, which is represented in this graph. Now, interestingly, 99 percent of the peak-to-valleys of different amplitudes can be represented by a universal power law represented by this red line here. More interestingly, there are outliers, there are exceptions which are above this red line, occur 100 times more frequently, at least, than the extrapolation would predict them to occur based on the calibration of the 99 percent remaining peak-to-valleys. They are due to trenchant dependancies such that a loss is followed by a loss which is followed by a loss which is followed by a loss. These kinds of dependencies are largely missed by standard risk management tools, which ignore them and see lizards when they should see dragon-kings. The root mechanism of a dragon-king is a slow maturation towards instability, which is the bubble, and the climax of the bubble is often the crash. This is similar to the slow heating of water in this test tube reaching the boiling point, where the instability of the water occurs and you have the phase transition to vapor. And this process, which is absolutely non-linear — cannot be predicted by standard techniques — is the reflection of a collective emergent behavior which is fundamentally endogenous. So the cause of the crash, the cause of the crisis has to be found in an inner instability of the system, and any tiny perturbation will make this instability occur.

Frequently Occurring Word Combinations

ngrams of length 2

collocation frequency
stock market 4
critical time 4
great recession 3
extreme events 3
black swan 3
perpetual money 3
money machine 3
financial crisis 2
phase transition 2
swan concept 2
key idea 2
change regime 2
epileptic seizures 2
global bubble 2
macro hedge 2
hedge fund 2
chinese government 2
essentially impossible 2
unsustainable path 2

ngrams of length 3

collocation frequency
perpetual money machine 3
black swan concept 2
macro hedge fund 2

Important Words

  1. absolutely
  2. amplitudes
  3. based
  4. behavior
  5. boiling
  6. bottom
  7. bought
  8. bubble
  9. calibration
  10. case
  11. climax
  12. collective
  13. crash
  14. crisis
  15. dependancies
  16. dependencies
  17. due
  18. emergent
  19. endogenous
  20. exceptions
  21. extrapolation
  22. financial
  23. frequency
  24. frequently
  25. fundamentally
  26. global
  27. good
  28. graph
  29. heating
  30. ignore
  31. index
  32. instability
  33. interestingly
  34. kinds
  35. largely
  36. law
  37. line
  38. lizards
  39. loss
  40. management
  41. market
  42. maturation
  43. measure
  44. mechanism
  45. missed
  46. occur
  47. occurrence
  48. occurs
  49. outliers
  50. percent
  51. perfect
  52. perturbation
  53. phase
  54. point
  55. power
  56. predict
  57. predicted
  58. price
  59. process
  60. reaching
  61. red
  62. reflection
  63. remaining
  64. represent
  65. represented
  66. risk
  67. root
  68. scenario
  69. series
  70. similar
  71. sizes
  72. slow
  73. sold
  74. standard
  75. statistics
  76. stock
  77. system
  78. techniques
  79. test
  80. time
  81. times
  82. tiny
  83. tools
  84. top
  85. transition
  86. trenchant
  87. tube
  88. universal
  89. vapor
  90. water
  91. worst