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Learning from the master of complexity

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									N E W S A N D A N A LY S I S

Learning from the master of complexity
French physicist Didier Sornette tells Edwin Cartlidge how complexity theory can be used to
predict catastrophes such as stock-market crashes and earthquakes
Having a flair for prediction can make you a                                                             log periodicity and then extrapolating for-
lot of friends, as Didier Sornette has found                                                            ward to the point of rupture, he and his col-
out. Since publishing a book earlier this year                                                          leagues were able to calculate the maximum
entitled Why Stock Markets Crash, in which he                                                           stress that the tanks were able to withstand.
proposes that crashes can be anticipated                                                                   He has since applied this principle to the
months or even years before they happen,                                                                stock market. Here the traders play the role
Sornette has received between 10 and 20                                                                 of elements of the material that are subject
e-mails a day from people eager to know the                                                             to failure, and the stock price is analogous
fate of the world’s markets. These e-mails                                                              to the elastic energy stored in the material.
have come not just from small-time inves-                                                               According to Sornette, individual traders
tors, but also from some of the world’s top                                                             tell neighbouring traders that they believe
fund managers and market analysts.                                                                      a fall is approaching, which creates a more
   Sornette bases his analyses on the science                                                           gloomy outlook among the traders in gen-
of complexity, which describes both natural                                                             eral, which in turn increases the number
and man-made systems – such as the Earth’s                                                              of pessimistic interactions, and so on. This
crust, the body’s immune system and fi-                                                                  process continues until a critical mass of
nancial markets – in terms of the collective                                                            traders has been persuaded that the market
behaviour of their constituent parts. Finan-       Financial doomsayer – Didier Sornette believes the   is going to crash, and then the market does
cial markets, for example, consist of many         US stock market is about to take a nosedive.         indeed crash.
traders continually telling one another what                                                               Sornette believes this behaviour says
they think about the future of the market. Al-     Nice, went on to study the statistical physics       something fundamental about human na-
though the evolution of such systems cannot        of interfaces, the propagation of waves in           ture. “It is not a problem to be wrong if you
be predicted in detail, Sornette believes it is    random media, chaos and turbulence. He               are wrong with a crowd,” he says. “It is okay
possible to foresee major transitions, such as     started his work on complex systems in               for fund managers to lose money if everyone
a large earthquake or a stock-market crash.        earnest in the late 1980s, studying how ma-          has lost money, and this is reflected in how
   “My papers on finance have been down-            terials such as concrete or metal alloys rup-        their incentives are calculated. That is why it
loaded by professionals from around the            ture under stress. He observed that small            is very rare for people to go it alone.”
world,” says Sornette, who is a research di-       defects known as microcracks form at weak               According to Sornette, since August 2000
rector at the French national centre for scien-    points in the material and that over time            the Standard and Poor 500 Index in the US
tific research (CNRS) in Nice and a professor       these microcracks multiply and combine,              has been experiencing an “antibubble”, a
of geophysics at the University of California,     eventually causing the material to rupture.          period of overall decline in the share price
Los Angeles (UCLA). “These include em-                What excited Sornette was that these              with a series of more minor ups and downs
ployees at the US Federal Reserve, the Bank of     cracks, which are not correlated to begin            – the log periodicity – superimposed on the
Japan and the Deutsche Bank in Germany.”           with, break the material through positive            downward trend. By extrapolating these
   One prediction that has aroused partic-         feedback – microcracks weaken the struc-             fluctuations as he did with the materials
ular interest was contained within a paper         ture, which leads to more microcracks and            under stress, Sornette and Zhou have cal-
he published last December with Wei-Xing           to fusion between existing cracks. Such col-         culated that the market will decline signifi-
Zhou, also at UCLA (Quantitative Finance 2         lective behaviour underlies all complex sys-         cantly from about now until the Summer of
468). According to Sornette and Zhou, the          tems, and is manifest in what are known as           2004 (the slight recent upward trend was
relative buoyancy of the US market over the
past eight months will come to an end with-
in a month or two, and the market will then
start to decline.
                                                   “I think by taking risks you
   Although his research has not been uni-
versally acclaimed by fellow academics, in
science or economics departments, Sornette
                                                   make progress in science.”
                                            “emergent phenomena” that act as a sign of
believes it is right that he sticks his neck out                                                        merely a positive fluctuation, they say). He
and makes risky predictions. “I think by ta-impending collapse. In the case of materials                first made the prediction last September,
king risks you make progress in science,”   under stress, Sornette discovered that the                  and has updated it every month since, dis-
he says. He points out that some of his cor-accelerating growth of the cracks is punctu-                playing the updated version on his website.
respondents have made money from what       ated by a series of acoustic emissions that                   Whether or not the prediction is borne
he has told them; indeed, he himself made a occur more and more frequently as the ma-                   out remains to be seen, of course, but Sor-
400% profit after he predicted that a mini   terial gets closer to the point of rupture (a               nette does have a couple of successes under
crash would occur on the US stock market    phenomenon that Sornette has called a log                   his belt: he and Anders Johansen of UCLA
in October 1997.                            periodic power law).                                        correctly predicted that an antibubble would
                                              Sornette put this discovery to use about 10               occur on the Nikkei index in 1999 and that
Belief in the collective                    years ago while working for the French aero-                the NASDAQ exchange would crash in
Sornette graduated from the Ecole Nor- space company Aerospatiale. By placing a                         April 2000. But they wrongly predicted that
male Supérieure in Paris in 1981 and, after rocket’s pressure tanks under stress, record-               the US market would crash in December
doing a masters thesis at the University of ing the acoustic emissions, working out their               1997 and October 1999.

8                                                                   physicsweb.org                                         PHYSICS WORLD    J U LY 2 0 0 3
                                                                                                                          N E W S A N D A N A LY S I S
   Although Sornette’s work has attracted         by small earthquakes link fault lines, thereby             is coupled with the underlying crust and
a good deal of attention from financial pro-       increasing stress in the crust and generating              mantle as well as with other plates.”
fessionals, it has received a more muted re-      further minor quakes. Eventually a large                      But how does Sornette manage to carry
sponse among academic circles. “In finance         fraction of the faults become interconnec-                 out such a wide range of research? “I have a
and economics departments my work is ba-          ted and a slight disturbance then spells dis-              very understanding wife [who is also a geo-
sically ignored,” he says. “They know our         aster. Again, he believes this critical state              physicist],” he replies. “While I am in the
work is very strong and very serious, but we      can be predicted by looking for a log-peri-                US I work 13–15 hours a day, seven days a
are not part of the mainstream.”                  odic power law – fluctuations in the aggre-                 week, although I work a bit less in France.”
   Sornette has certainly earned himself a        gate shift of the Earth’s crust over time.                    To sustain this pace, he says he takes plenty
reputation as something of a maverick with-          “Other geophysicists find some of my                     of exercise, from windsurfing and skiing to
in the geophysics community. The orthodox         work on earthquakes hard to swallow,” he                   cutting down trees and digging holes in his
view among geophysicists is that large            says. “This is understandable because earth-               garden. And for recreation, he simply swit-
earthquakes are simply individual smaller         quake prediction is a difficult problem. It                 ches fields. “When I work on finance my
earthquakes that have grown. But Sornette         is much more complicated than working                      hobby is to work on earthquakes,” he ex-
believes that major quakes may instead be         out what will happen to a piece of concrete                plains. “And when I work on earthquakes my
caused by many smaller tremors acting col-        under stress, for example. You do not know                 hobby is to work on rupture phenomena.”
lectively. He says that stress patterns created   where the material begins and ends – a plate               G www.ess.ucla.edu/faculty/sornette


INDUSTRY


Laser expert lights up entertainment
Lasers have fascinated Floyd Rollefstad                                                                      LFI developed laser shows for international




                                                                                                       LFI
from the time he first encountered one in                                                                     expositions in Canada and Australia, in-
high school. Not only was he interested in                                                                   stalled a laser projection system at a theme
the science underpinning lasers, but also in                                                                 park in South Korea, and co-designed, pro-
their artistic potential. He expressed that                                                                  duced and installed a light show in the
interest by setting up small laser shows for                                                                 Las Vegas Hilton hotel.
his friends while he was studying for bach-                                                                     During the same period, the firm also
elor’s and master’s degrees in physics from                                                                  set up an educational division to produce
the University of North Dakota.                                                                              “edutainment” shows for schools. Subjects
   Then, hoping to explore the possibilities                                                                 of these shows have included public health,
of using light for medical applications, he                                                                  space science, ecology and history.
stayed at the university to take some bio-                                                                      Despite those initiatives, LFI’s growth be-
logical courses. But in 1977 another career                                                                  gan to flatten out in the early 1990s. “It has
opportunity presented itself. “A so-called                                                                   not grown any more since then, mainly be-
Laserium had stared in Los Angeles,” he                                                                      cause I was the only person calling the shots,
says. “I saw that I could do similar work         Light fantastic – Laser Fantasy International puts         and I was uncomfortable with making more
and that it could be a viable business.”          on shows for a wide range of organizations.                than I could handle,” Rollefstad says. “I am
   To pursue that possibility, Rollefstad foun-                                                              probably fairly strong on the right and left
ded Laser Fantasy International (LFI) as a        owned a printed-circuit company for 11                     sides of my brain; that was critical in being
one-man company. In the following year            years. “It was an ideal situation. Floyd did               the leading force for innovation in the in-
he produced his first planetarium show in          not enjoy the business side and I do. So he                dustry and having good, solid technical
Chicago. And today, a quarter of a century        could stick around and use his creativity.”                products. I was also able to do the manage-
after that event, the firm has become a               Baldridge plans to focus that creativity                ment and business aspect of the job, but it
global leader in laser entertainment.             on developing innovative technologies and                  was not my favourite.”
   Based in Bellevue, Washington, since           new markets. “We are looking not only to                      In his new role overseeing technology and
1982, LFI has co-developed the yttrium            be the laser entertainment experts but also                development, Rollefstad will monitor ad-
aluminium garnet (YAG) laser for entertain-       to expand into multimedia to broaden the                   vances in what has become a very com-
ment, has pioneered multiplex colour mo-          scope of our business,” Baldridge says. He                 petitive field. “We have a small group and
dulation and trace elimination for laser          wants to apply lasers in new ways, including               probably will not come up with earth-sha-
graphics, and has developed a self-contained      developing their use in theatres. He also                  king developments from the technical point
YAG laser system for road shows. The firm          wants to put more emphasis on the firm’s                    of view,” he says. “Marrying laser display
sets up laser-based corporate promotions,         international work.                                        technology with entertainment is probably
educational projects and entertainment               Rollefstad could hardly imagine those                   where I will be putting in most of my work.”
spectaculars for organizations as diverse         ambitions when he founded LFI. “Getting                       Even though he did not fully embrace the
as Microsoft, Nintendo and the Seattle            started was pretty difficult because of a lack              business aspects of running a technical com-
Mariners baseball team, in locations as far       of money and not knowing very much                         pany, Rollefstad’s background in physics
afield as Calgary, Kyoto and Las Vegas.            about business,” he remembers. “It took                    gave him some valuable non-scientific skills.
   Last October, wishing to spend more of         about a year before I could make any money                 “The training helped me to look at things
his time on the creative side of the business,    at the first small planetarium.” Only after he              from a systems approach,” he says. “And
Rollefstad sold LFI to entrepreneur Robert        had moved himself and his firm to Seattle in                knowing how lasers work is important in
Baldridge, while remaining as the firm’s vice      1982 to set up a show in that city’s Pacific                determining whether things are possible
president of technology development. “I saw       Science Center did he expand beyond work-                  when customers ask for them.”
LFI as an exciting business with profit po-        ing in one planetarium at a time. But as he                Peter Gwynne
tential,” says Baldridge, who had previously      became more accustomed to the business,                    Boston, MA

PHYSICS WORLD    J U LY 2 0 0 3                                     physicsweb.org                                                                         9

								
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