Bitcoin and Market Crasheshttp://www.bloombergview.com/articles/2015-04-06/bitcoin-and-market-crashesPredicting big market crashes is a difficult business, many would say impossible. If enough investors believe a cataclysm is coming, their selling will simply make it happen sooner -- a dynamic that would quickly render any convincing forecasting method obsolete.
Nonetheless, a pair of physicists -- drawing inspiration from the market for bitcoin, no less -- might be on to something.
Jonathan Donier and Jean-Philippe Bouchaud, both of whom work at Paris-based hedge fund Capital Fund Management, started from an obvious idea: It would be easy to foresee big crashes if you could monitor the actual thoughts and expectations of all investors. With that kind of superhuman knowledge, you could get an early warning of emerging imbalances between pessimists and optimists, between likely sellers and buyers. Such imbalances set the groundwork for a crash -- specifically, when the number of potential buyers gets very small.
Of course, no one has access to such mental information. Yet Donier and Bouchaud found a clever way to estimate it, and to do so using only publicly available data.
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