Crises Follow Math Rules

Online retail enjoys the mixed blessing of extremely tight coupling between the means of advertising a product and the means of buying it.

Online retail enjoys the mixed blessing of extremely tight coupling between the means of advertising a product and the means of buying it. A mechanism that calls a product to possible buyers attention, such as Amazons reader rankings, is just a few clicks away from the mechanism by which a buyer can act on that recommendation.

This can lead to sharp, sudden demand shocks, when a retailer must be prepared to make hay while the sun shines. If the goods arent on hand, the moment may pass, with potential sales lost forever.

In the next year or two, it may become possible to diagnose demand behaviors because of work that sprang from a physics professors questioning the rise and fall of sales rankings for his book on stock-market crashes.

When UCLA physics professor Didier Sornette examined Internet download shocks, book-sale shocks, social shocks, financial volatility shocks and financial crashes, he found surprisingly good fits between a well-defined family of mathematical curves and the behavior of these phenomena.

Sornettes intensely mathematical paper, "Endogenous versus Exogenous Origins of Crises" (published late last year in the journal Physical Review Letters), can be summarized as saying that a system thats disturbed by a large external event will "relax" to something like its original state much more quickly than a system that changes in response to many internal events.

This may seem esoteric, but its implications could be valuable for those who dont want to be caught short but dont want to hold a price-slashing clearance sale to dump excess inventory, either.

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