Are financial crashes predictable?

– We critically review recent claims that financial crashes can be predicted using the idea of log-periodic oscillations or by other methods inspired by the physics of critical phenomena. In particular, the October 1997 “correction” does not appear to be the accumulation point of a geometric series of local minima. It is rather tempting to see financial crashes as the analogue of critical points in statistical mechanics, where the response to a small external perturbation becomes infinite, because all the subparts of the system respond cooperatively. Similarly, during crashes, a large proportion of the actors in a market decide simultaneously to sell their stocks. If one furthermore postulates that this critical point is decorated by “log-periodic” oscillations (for which there is a recent upsurge of interest in a wider context [1]), then one can interpret the oscillations seen on markets as precursors to predict the crash time tc, which should be the point where these oscillations accumulate. Intriguing hints supporting this scenario have initially been reported in [2, 3], and more recently in [4, 5], where it was explicitly claimed that the October 1997 correction was predicted ex-ante (see also [6]). As a proof of this, the implementation of a winning strategy was reported in two papers published in physics journals [7]. In view of the considerable echo that these claims have generated, in particular in the physics community [8], we feel that it is important to temper the growing enthusiasm by discussing a few facts. In general, the unveiling of a new phenomenon either results from a strong theoretical argument suggesting its existence, or from compelling experimental evidence. In the present case, there is no convincing theoretical model which substantiates the idea that crashes are