The Physics of Wall Street: a brief History of Predicting the Unpredictable

particular way, related to the logarithm of the time. Since this pattern 
would occur only if the system were primed for a rupture, it counted 
as a signal that a critical event was about to occur. And because the 
pattern was one that accelerated over time, if you looked at a few of the 
smaller events in a row, you could determine whether they were show-
ing the log-periodic behavior (because the time between the events 
would be shrinking), and you could extrapolate forward in time to 
figure out when the peaks would collapse into one another, thus pre-
dicting the critical event.
Sornette first sought to test the theory with the pressure tanks. Sure 
enough, right before a rupture, he and his collaborators observed 
the log-periodic pattern in vibrations of the tanks known as acoustic 
emissions. Basically, the tanks would start rumbling as fractures began 
to appear. And if the rumblings were log-periodic, a critical event was 
about to occur. Aérospatiale quickly patented the method for predict-
ing when its rockets’ tanks would explode; it is still used today for 
forecasting and testing pressure tank failure.
But pressure tanks were only the beginning. If the Sornettes were 
right about the close connection between material rupture and earth-
quakes, didier’s discovery had enormous implications. there were 

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all sorts of reasons for the occurrence of small earthquakes, which 
were the equivalent of tiny fractures in Kevlar under stress. But if 
catastrophic earthquakes were like ruptures, as the Sornettes had pro-
posed, then one should be able to predict a critical earthquake by look-
ing for the log-periodic pattern in the geophysical data. (there is a 
long history of people believing that small earthquakes foretell larger 
ones — Sornette’s approach makes this much more precise, by saying 
when small earthquakes are predictive.) Sornette’s methods weren’t 
useful for predicting anything but the critical earthquakes, the ones 
that resulted from underlying coordination. But these were usually the 
biggest earthquakes of all, the ones that leveled cities and tore conti-
nents apart. It was a tool for predicting catastrophe. the holy grail, 
indeed.
As September 1997 crept to an end and october began, Sornette and 
Ledoit began to buy far-out-of-the-money put options. neither had a 
fortune to invest, but the options were cheap. nervously, they watched 
as the major world indices marched along, blithely unaware that di-
saster was just around the bend. Sornette was confident enough to 
put his own money where his best science told him to. But there have 
been only a handful of market crashes in modern history. this pattern 
could have been a false alarm. Much was on the line for Sornette, both 
financially and intellectually.
the middle of october came and went. Sornette’s predictions were 
not perfectly precise — the market oscillations put the crash some-
where toward the end of october, but it was difficult to pinpoint a spe-
cific day. each day, the probability that the crash would happen (given 
that it hadn’t already) increased. But this would continue for only a 
short while — it was theoretically possible, if unlikely, for the critical 
point to pass without so much as a shudder from the markets. Another 
week passed. Going into the weekend of october 24, there was still no 
crash. It was becoming nerve-racking. the end of october was here, 
and Sornette had nothing to show for it.
And then it happened. on Monday, october 27, 1997, the dow Jones 
Industrial Average suffered its sixth-largest single-day point loss ever, 
down 554 points. the nASdAQ and S&P 500 indexes suffered similar 
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t h e p h y s i c s o f wa l l s t r e e t

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