[youtubelearn video_code="C_eFjLZqXt8" srt_name="nextfinancialcrisis" player_length=""]

Once upon a time we lived in an economy of financial growth and prosperity. This was called the Great Moderation, the misguided belief by most economists, policymakers and central banks that we have transformed into a new world of never-ending growth and prosperity. This was seen by robust and steady GDP growth, by low and controlled inflation, by low unemployment, and controlled and low financial volatility.

But the Great Recession in 2007 and 2008, the great crash, broke this illusion. A few hundred billion dollars of losses in the financial sector cascaded into five trillion dollars of losses in world GDP and almost $30 trillion losses in the global stock market.

So the understanding of this Great Recession was that this was completely surprising, this came out of the blue, this was like the wrath of the gods. There was no responsibility. So, as a reflection of this, we started the Financial Crisis Observatory. We had the goal to diagnose in real time financial bubbles and identify in advance their critical time.

What is the underpinning, scientifically, of this financial observatory? We developed a theory called “dragon-kings." Dragon-kings represent extreme events which are of a class of their own. They are special. They are outliers. They are generated by specific mechanisms that may make them predictable, perhaps controllable.

Consider the financial price time series, a given stock, your perfect stock, or a global index. You have these up-and-downs. A very good measure of the risk of this financial market is the peaks-to-valleys that represent a worst case scenario when you bought at the top and sold at the bottom. You can look at the statistics, the frequency of the occurrence of peak-to-valleys of different sizes, which is represented in this graph. Now, interestingly, 99 percent of the peak-to-valleys of different amplitudes can be represented by a universal power law represented by this red line here. More interestingly, there are outliers, there are exceptions which are above this red line, occur 100 times more frequently, at least, than the extrapolation would predict them to occur based on the calibration of the 99 percent remaining peak-to-valleys. They are due to trenchant dependencies such that a loss is followed by a loss which is followed by a loss which is followed by a loss. These kinds of dependencies are largely missed by standard risk management tools, which ignore them and see lizards when they should see dragon-kings. The root mechanism of a dragon-king is a slow maturation towards instability, which is the bubble, and the climax of the bubble is often the crash. This is similar to the slow heating of water in this test tube reaching the boiling point, where the instability of the water occurs and you have the phase transition to vapor. And this process, which is absolutely non-linear—cannot be predicted by standard techniques—is the reflection of a collective emergent behavior which is fundamentally endogenous. So the cause of the crash, the cause of the crisis has to be found in an inner instability of the system, and any tiny perturbation will make this instability occur.

Now, some of you may have come to the mind that is this not related to the black swan concept you have heard about frequently? Remember, black swan is this rare bird that you see once and suddenly shattered your belief that all swans should be white, so it has captured the idea of unpredictability, unknowability, that the extreme events are fundamentally unknowable. Nothing can be further from the dragon-king concept I propose, which is exactly the opposite, that most extreme events are actually knowable and predictable. So we can be empowered and take responsibility and make predictions about them. So let’s have my dragon-king burn this black swan concept.

There are many early warning signals that are predicted by this theory. Let me just focus on one of them: the super-exponential growth with positive feedback. What does it mean? Imagine you have an investment that returns the first year five percent, the second year 10 percent, the third year 20 percent, the next year 40 percent. Is that not marvelous? This is a super-exponential growth. A standard exponential growth corresponds to a constant growth rate, let’s say, of 10 percent. The point is that, many times during bubbles, there are positive feedbacks which can be of many times, such that previous growths enhance, push forward, increase the next growth through this kind of super-exponential growth, which is very trenchant, not sustainable. And the key idea is that the mathematical solution of this class of models exhibit finite-time singularities, which means that there is a critical time where the system will break, will change regime. It may be a crash. It may be just a plateau, something else. And the key idea is that the critical time, the information about the critical time is contained in the early development of this super-exponential growth.

We have applied this theory early on, that was our first success, to the diagnostic of the rupture of key elements on the iron rocket. Using acoustic emission, you know, this little noise that you hear a structure emit, sing to you when they are stressed, and reveal the damage going on, there’s a collective phenomenon of positive feedback, the more damage gives the more damage, so you can actually predict, within, of course, a probability band, when the rupture will occur. So this is now so successful that it is used in the initial phase of [unclear] the flight.

Perhaps more surprisingly, the same type of theory applies to biology and medicine, parturition, the act of giving birth, epileptic seizures. From seven months of pregnancy, a mother starts to feel episodic precursory contractions of the uterus that are the sign of these maturations toward the instability, giving birth to the baby, the dragon-king. So if you measure the precursor signal, you can actually identify pre- and post-maturity problems in advance. Epileptic seizures also come in a large variety of size, and when the brain goes to a super-critical state, you have dragon-kings which have a degree of predictability and this can help the patient to deal with this illness. We have applied this theory to many systems, landslides, glacier collapse, even to the dynamics of prediction of success: blockbusters, YouTube videos, movies, and so on. But perhaps the most important application is for finance, and this theory illuminates, I believe, the deep reason for the financial crisis that we have gone through. This is rooted in 30 years of history of bubbles, starting in 1980, with the global bubble crashing in 1987, followed by many other bubbles. The biggest one was the “new economy" Internet bubble in 2000, crashing in 2000, the real estate bubbles in many countries, financial derivative bubbles everywhere, stock market bubbles also everywhere, commodity and all bubbles, debt and credit bubbles—bubbles, bubbles, bubbles.

We had a global bubble. This is a measure of global overvaluation of all markets, expressing what I call an illusion of a perpetual money machine that suddenly broke in 2007.

The problem is that we see the same process, in particular through quantitative easing, of a thinking of a perpetual money machine nowadays to tackle the crisis since 2008 in the U.S., in Europe, in Japan. This has very important implications to understand the failure of quantitative easing as well as austerity measures as long as we don’t attack the core, the structural cause of this perpetual money machine thinking.

Now, these are big claims. Why would you believe me? Well, perhaps because, in the last 15 years we have come out of our ivory tower, and started to publish ex ante—and I stress the term ex ante, it means “in advance"—before the crash confirmed the existence of the bubble or the financial excesses. These are a few of the major bubbles that we have lived through in recent history. Again, many interesting stories for each of them. Let me tell you just one or two stories that deal with massive bubbles.

We all know the Chinese miracle. This is the expression of the stock market of a massive bubble, a factor of three, 300 percent in just a few years. In September 2007, I was invited as a keynote speaker of a macro hedge fund management conference, and I showed to the conference a prediction that by the end of 2007, this bubble would change regime. There might be a crash. Certainly not sustainable. Now, how do you believe the very smart, very motivated, very informed macro hedge fund managers reacted to this prediction? You know, they had made billions just surfing this bubble until now. They told me, “Didier, yeah, the market might be overvalued, but you forget something. There is the Beijing Olympic Games coming in August 2008, and it’s very clear that the Chinese government is controlling the economy and doing what it takes to also avoid any wave and control the stock market." Three weeks after my presentation, the markets lost 20 percent and went through a phase of volatility, upheaval, and a total market loss of 70 percent until the end of the year.

So how can we be so collectively wrong by misreading or ignoring the science of the fact that when an instability has developed, and the system is ripe, any perturbation makes it essentially impossible to control?

The Chinese market collapsed, but it rebounded. In 2009, we also identified that this new bubble, a smaller one, was unsustainable, so we published again a prediction, in advance, stating that by August 2009, the market will correct, will not continue on this track. Our critics, reading the prediction, said, “No, it’s not possible. The Chinese government is there. They have learned their lesson. They will control. They want to benefit from the growth." Perhaps these critics have not learned their lesson previously. So the crisis did occur. The market corrected.

The same critics then said, “Ah, yes, but you published your prediction. You influenced the market. It was not a prediction."

Maybe I am very powerful then. Now, this is interesting. It shows that it’s essentially impossible until now to develop a science of economics because we are sentient beings who anticipate and there is a problem of self-fulfilling prophesies.

So we invented a new way of doing science. We created the Financial Bubble Experiment. The idea is the following. We monitor the markets. We identify excesses, bubbles. We do our work. We write a report in which we put our prediction of the critical time. We don’t release the report. It’s kept secret. But with modern encrypting techniques, we have a hash, we publish a public key, and six months later, we release the report, and there is authentication. And all this is done on an international archive so that we cannot be accused of just releasing the successes. Let me tease you with a very recent analysis. 17th of May, 2013, just two weeks ago, we identified that the U.S. stock market was on an unsustainable path and we released this on our website on the 21st of May that there will be a change of regime. The next day, the market started to change regime, course. This is not a crash. This is just the third or fourth act of a massive bubble in the making. Scaling up the discussion at the size of the planet, we see the same thing. Wherever we look, it’s observable: in the biosphere, in the atmosphere, in the ocean, showing these super-exponential trajectories characterizing an unsustainable path and announcing a phase transition. This diagram on the right shows a very beautiful compilation of studies suggesting indeed that there is a nonlinear—possibility for a nonlinear transition just in the next few decades.

So there are bubbles everywhere. From one side, this is exciting for me, as a professor who chases bubbles and slays dragons, as the media has sometimes called me. But can we really slay the dragons? Very recently, with collaborators, we studied a dynamical system where you see the dragon-king as these big loops and we were able to apply tiny perturbations at the right times that removed, when control is on, these dragons.

“Gouverner, c’est prévoir." Governing is the art of planning and predicting. But is it not the case that this is probably one of the biggest gaps of mankind, which has the responsibility to steer our societies and our planet toward sustainability in the face of growing challenges and crises?

But the dragon-king theory gives hope. We learn that most systems have pockets of predictability. It is possible to develop advance diagnostics of crises so that we can be prepared, we can take measures, we can take responsibility, and so that never again will extremes and crises like the Great Recession or the European crisis take us by surprise. Thank you.

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[youtubelearn video_code="c0KYU2j0TM4" srt_name="powerofintroverts" player_length=""]

When I was nine years old, I went off to summer camp for the first time. And my mother packed me a suitcase full of books, which to me seemed like a perfectly natural thing to do, because in my family, reading was the primary group activity. And this might sound antisocial to you, but for us, it was really just a different way of being social. You have the animal warmth of your family sitting right next to you, but you are also free to go roaming around the adventureland inside your own mind. And I had this idea that camp was going to be just like this, but better.

I had a vision of 10 girls sitting in a cabin cozily reading books in their matching nightgowns. Camp was more like a keg party without any alcohol. And on the very first day, our counselor gathered us all together and she taught us a cheer that she said we would be doing every day for the rest of the summer to instill camp spirit. And it went like this: “R-O-W-D-I-E, that’s the way we spell rowdie. Rowdie, rowdie, let’s get rowdie."

Yeah. So I couldn’t figure out for the life of me why we were supposed to be so rowdy, or why we had to spell this word incorrectly.

But I recited a cheer. I recited a cheer along with everybody else. I did my best. And I just waited for the time that I could go off and read my books.

But the first time that I took my book out of my suitcase, the coolest girl in the bunk came up to me and she asked me, “Why are you being so mellow?"—mellow, of course, being the exact opposite of R-O-W-D-I-E. And then the second time I tried it, the counselor came up to me with a concerned expression on her face and she repeated the point about camp spirit and said we should all work very hard to be outgoing.

And so I put my books away, back in their suitcase, and I put them under my bed, and there they stayed for the rest of the summer. And I felt kind of guilty about this. I felt as if the books needed me somehow, and they were calling out to me and I was forsaking them. But I did forsake them and I didn’t open that suitcase again until I was back home with my family at the end of the summer.

Now, I tell you this story about summer camp. I could have told you 50 others just like it—all the times that I got the message that somehow my quiet and introverted style of being was not necessarily the right way to go, that I should be trying to pass as more of an extrovert. And I always sensed deep down that this was wrong and that introverts were pretty excellent just as they were. But for years I denied this intuition, and so I became a Wall Street lawyer, of all things, instead of the writer that I had always longed to be—partly because I needed to prove to myself that I could be bold and assertive too. And I was always going off to crowded bars when I really would have preferred to just have a nice dinner with friends. And I made these self-negating choices so reflexively that I wasn’t even aware that I was making them.

Now this is what many introverts do, and it’s our loss for sure, but it is also our colleagues’ loss and our communities’ loss. And at the risk of sounding grandiose, it is the world’s loss. Because when it comes to creativity and to leadership, we need introverts doing what they do best. A third to a half of the population are introverts—a third to a half. So that’s one out of every two or three people you know. So even if you’re an extrovert yourself, I’m talking about your coworkers and your spouses and your children and the person sitting next to you right now—all of them subject to this bias that is pretty deep and real in our society. We all internalize it from a very early age without even having a language for what we’re doing.

Now, to see the bias clearly, you need to understand what introversion is. It’s different from being shy. Shyness is about fear of social judgment. Introversion is more about, how do you respond to stimulation, including social stimulation. So extroverts really crave large amounts of stimulation, whereas introverts feel at their most alive and their most switched-on and their most capable when they’re in quieter, more low-key environments. Not all the time—these things aren’t absolute—but a lot of the time. So the key then to maximizing our talents is for us all to put ourselves in the zone of stimulation that is right for us.

But now here’s where the bias comes in. Our most important institutions, our schools and our workplaces, they are designed mostly for extroverts and for extroverts’ need for lots of stimulation. And also we have this belief system right now that I call the new groupthink, which holds that all creativity and all productivity comes from a very oddly gregarious place.

So if you picture the typical classroom nowadays: When I was going to school, we sat in rows. We sat in rows of desks like this, and we did most of our work pretty autonomously. But nowadays, your typical classroom has pods of desks—four or five or six or seven kids all facing each other. And kids are working in countless group assignments. Even in subjects like math and creative writing, which you think would depend on solo flights of thought, kids are now expected to act as committee members. And for the kids who prefer to go off by themselves or just to work alone, those kids are seen as outliers often or, worse, as problem cases. And the vast majority of teachers reports believing that the ideal student is an extrovert as opposed to an introvert, even though introverts actually get better grades and are more knowledgeable, according to research.

Okay, same thing is true in our workplaces. Now, most of us work in open plan offices, without walls, where we are subject to the constant noise and gaze of our coworkers. And when it comes to leadership, introverts are routinely passed over for leadership positions, even though introverts tend to be very careful, much less likely to take outsize risks—which is something we might all favor nowadays. And interesting research by Adam Grant at the Wharton School has found that introverted leaders often deliver better outcomes than extroverts do, because when they are managing proactive employees, they’re much more likely to let those employees run with their ideas, whereas an extrovert can, quite unwittingly, get so excited about things that they’re putting their own stamp on things, and other people’s ideas might not as easily then bubble up to the surface.

Now in fact, some of our transformative leaders in history have been introverts. I’ll give you some examples. Eleanor Roosevelt, Rosa Parks, Gandhi—all these peopled described themselves as quiet and soft-spoken and even shy. And they all took the spotlight, even though every bone in their bodies was telling them not to. And this turns out to have a special power all its own, because people could feel that these leaders were at the helm not because they enjoyed directing others and not out of the pleasure of being looked at; they were there because they had no choice, because they were driven to do what they thought was right.

Now, I think at this point it’s important for me to say that I actually love extroverts. I always like to say some of my best friends are extroverts, including my beloved husband. And we all fall at different points, of course, along the introvert/extrovert spectrum. Even Carl Jung, the psychologist who first popularized these terms, said that there’s no such thing as a pure introvert or a pure extrovert. He said that such a man would be in a lunatic asylum, if he existed at all. And some people fall smack in the middle of the introvert/extrovert spectrum, and we call these people ambiverts. And I often think that they have the best of all worlds. But many of us do recognize ourselves as one type or the other.

And what I’m saying is that culturally, we need a much better balance. We need more of a yin and yang between these two types. This is especially important when it comes to creativity and to productivity, because when psychologists look at the lives of the most creative people, what they find are people who are very good at exchanging ideas and advancing ideas, but who also have a serious streak of introversion in them.

And this is because solitude is a crucial ingredient often to creativity. So Darwin, he took long walks alone in the woods and emphatically turned down dinner-party invitations. Theodor Geisel, better known as Dr. Seuss, he dreamed up many of his amazing creations in a lonely bell tower office that he had in the back of his house in La Jolla, California. And he was actually afraid to meet the young children who read his books for fear that they were expecting him this kind of jolly Santa Claus-like figure and would be disappointed with his more reserved persona. Steve Wozniak invented the first Apple computer sitting alone in his cubicle in Hewlett-Packard where he was working at the time. And he says that he never would have become such an expert in the first place had he not been too introverted to leave the house when he was growing up.

Now, of course, this does not mean that we should all stop collaborating—and case in point, is Steve Wozniak famously coming together with Steve Jobs to start Apple Computer—but it does mean that solitude matters and that for some people it is the air that they breathe. And in fact, we have known for centuries about the transcendent power of solitude. It’s only recently that we’ve strangely begun to forget it. If you look at most of the world’s major religions, you will find seekers—Moses, Jesus, Buddha, Muhammad—seekers who are going off by themselves alone to the wilderness, where they then have profound epiphanies and revelations that they then bring back to the rest of the community. So, no wilderness, no revelations.

This is no surprise, though, if you look at the insights of contemporary psychology. It turns out that we can’t even be in a group of people without instinctively mirroring, mimicking their opinions. Even about seemingly personal and visceral things like who you’re attracted to, you will start aping the beliefs of the people around you without even realizing that that’s what you’re doing.

And groups famously follow the opinions of the most dominant or charismatic person in the room, even though there’s zero correlation between being the best talker and having the best ideas—I mean zero.

You might be following the person with the best ideas, but you might not. And do you really want to leave it up to chance? Much better for everybody to go off by themselves, generate their own ideas freed from the distortions of group dynamics, and then come together as a team to talk them through in a well-managed environment and take it from there.

Now if all this is true, then why are we getting it so wrong? Why are we setting up our schools this way, and our workplaces? And why are we making these introverts feel so guilty about wanting to just go off by themselves some of the time? One answer lies deep in our cultural history. Western societies, and in particular the U.S., have always favored the man of action over the “man" of contemplation. But in America’s early days, we lived in what historians call a culture of character, where we still, at that point, valued people for their inner selves and their moral rectitude. And if you look at the self-help books from this era, they all had titles with things like “Character, the Grandest Thing in the World." And they featured role models like Abraham Lincoln, who was praised for being modest and unassuming. Ralph Waldo Emerson called him “A man who does not offend by superiority."

But then we hit the 20th century, and we entered a new culture that historians call the culture of personality. What happened is we had evolved an agricultural economy to a world of big business. And so suddenly people are moving from small towns to the cities. And instead of working alongside people they’ve known all their lives, now they are having to prove themselves in a crowd of strangers. So, quite understandably, qualities like magnetism and charisma suddenly come to seem really important. And sure enough, the self-help books change to meet these new needs and they start to have names like “How to Win Friends and Influence People." And they feature as their role models really great salesmen. So that’s the world we’re living in today. That’s our cultural inheritance.

Now none of this is to say that social skills are unimportant, and I’m also not calling for the abolishing of teamwork at all. The same religions who send their sages off to lonely mountain tops also teach us love and trust. And the problems that we are facing today in fields like science and in economics are so vast and so complex that we are going to need armies of people coming together to solve them working together. But I am saying that the more freedom that we give introverts to be themselves, the more likely that they are to come up with their own unique solutions to these problems.

So now I’d like to share with you what’s in my suitcase today. Guess what? Books. I have a suitcase full of books. Here’s Margaret Atwood, “Cat’s Eye." Here’s a novel by Milan Kundera. And here’s “The Guide for the Perplexed" by Maimonides. But these are not exactly my books. I brought these books with me because they were written by my grandfather’s favorite authors.

My grandfather was a rabbi and he was a widower who lived alone in a small apartment in Brooklyn that was my favorite place in the world when I was growing up, partly because it was filled with his very gentle, very courtly presence and partly because it was filled with books. I mean literally every table, every chair in this apartment had yielded its original function to now serve as a surface for swaying stacks of books. Just like the rest of my family, my grandfather’s favorite thing to do in the whole world was to read.

But he also loved his congregation, and you could feel this love in the sermons that he gave every week for the 62 years that he was a rabbi. He would takes the fruits of each week’s reading and he would weave these intricate tapestries of ancient and humanist thought. And people would come from all over to hear him speak.

But here’s the thing about my grandfather. Underneath this ceremonial role, he was really modest and really introverted—so much so that when he delivered these sermons, he had trouble making eye contact with the very same congregation that he had been speaking to for 62 years. And even away from the podium, when you called him to say hello, he would often end the conversation prematurely for fear that he was taking up too much of your time. But when he died at the age of 94, the police had to close down the streets of his neighborhood to accommodate the crowd of people who came out to mourn him. And so these days I try to learn from my grandfather’s example in my own way.

So I just published a book about introversion, and it took me about seven years to write. And for me, that seven years was like total bliss, because I was reading, I was writing, I was thinking, I was researching. It was my version of my grandfather’s hours of the day alone in his library. But now all of a sudden my job is very different, and my job is to be out here talking about it, talking about introversion.

And that’s a lot harder for me, because as honored as I am to be here with all of you right now, this is not my natural milieu.

So I prepared for moments like these as best I could. I spent the last year practicing public speaking every chance I could get. And I call this my “year of speaking dangerously."

And that actually helped a lot. But I’ll tell you, what helps even more is my sense, my belief, my hope that when it comes to our attitudes to introversion and to quiet and to solitude, we truly are poised on the brink on dramatic change. I mean, we are. And so I am going to leave you now with three calls for action for those who share this vision.

Number one: Stop the madness for constant group work. Just stop it.

Thank you.

And I want to be clear about what I’m saying, because I deeply believe our offices should be encouraging casual, chatty cafe-style types of interactions—you know, the kind where people come together and serendipitously have an exchange of ideas. That is great. That’s great for introverts and that’s great for extroverts. But we need much more privacy and much more freedom and much more autonomy at work. School, same thing. We need to be teaching kids to work together, for sure, but we also need to be teaching them how to work on their own. This is especially important for extroverted children too. They need to work on their own because that is where deep thought comes from in part.

Okay, number two: Go to the wilderness. Be like Buddha, have your own revelations. I’m not saying that we all have to now go off and build our own cabins in the woods and never talk to each other again, but I am saying that we could all stand to unplug and get inside our own heads a little more often.

Number three: Take a good look at what’s inside your own suitcase and why you put it there. So extroverts, maybe your suitcases are also full of books. Or maybe they’re full of champagne glasses or skydiving equipment. Whatever it is, I hope you take these things out every chance you get and grace us with your energy and your joy. But introverts, you being you, you probably have the impulse to guard very carefully what’s inside your own suitcase. And that’s okay. But occasionally, just occasionally, I hope you will open up your suitcases for other people to see, because the world needs you and it needs the things you carry. So I wish you the best of all possible journeys and the courage to speak softly.

Thank you very much.

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