Anatomy of a Stock Market Crash: A Simulation
More than 60% of trading in the US stock market is driven by algorithms. This increases the probability of sudden crashes. The Danish theoretical physicist Per Bak’s book “How Nature Works: The Science of Self-Organised Criticality”. Self-organised criticality describes systems that slowly drift into a fragile state, where a trigger of any size can set off a cascade of any size. In this sense stock market crashes are no different from forest fires, avalanches, traffic jams, crowd stampedes, algal blooms in water, or guitar amplifier feedback. So, I have made is a simulation of how a stock market behaves before it crashes. The data is synthetically generated. Click on the MP4, sit back and enjoy an entertaining 2-minute simulation complete with sound. The blue, green, orange and red dots represent swarms of investors and their changing perception as the market evolves. What the video shows: 0:06–0:20 – Calm market. A small “nudge” sell order lands and is absorbed. The gain re...