Early warning signals can help anticipate crashes from "summary" of Why Stock Markets Crash by Didier Sornette
Early warning signals can help anticipate crashes. These signals are like the canary in the coal mine, alerting us to potential dangers ahead. By paying attention to these signals, we can take action to mitigate the impact of a crash. One key early warning signal is the presence of bubbles in the market. Bubbles occur when asset prices rise far above their intrinsic value, driven by speculation and irrational exuberance. These bubbles are unsustainable and inevitably lead to a crash. By recognizing the signs of a bubble and taking steps to deflate it, we can avoid the worst effects of a crash. Another important early warning signal is the presence of feedback loops in the market. Feedback loops occur ...
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