THE pessimism that drives down stock prices spreads just like tiny cracks in a solid, say a pair of physicists. The idea has led them to a disheartening prediction for investors: the US market's latest tentative recovery will last only a few months into next year, before it tumbles even further.
Didier Sornette and Wei-Xing Zhou at the University of California, Los Angeles, developed their stock market model while studying how materials fail under stress. They believe the feedback processes that determine how cracks worsen and eventually fail also govern the way information flows through the stock market and changes opinion.
Isolated microcracks that form in a material under stress can multiply to form a network of fractures that merge into deeper cracks. When the cracks reach a critical density they combine, causing catastrophic failure.
Sornette pictures a stock trader who goes against the consensus as the equivalent of a ...
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