What is socionomy?

Socionomy is the study of social mood and its influence on social attitudes and actions. Specifically, he seeks to understand how social mood regulates the overall tenor and character of social behavior in areas such as politics, pop culture, financial markets, and economics.

Socionomic theory proposes that leaders and their policies are virtually powerless to change social mood and that their actions as a whole express social mood rather than regulate it.

Key points to remember

  • Socionomy is a framework that suggests that social forces such as culture, norms, and collective social mood can drive observable political, economic, and financial trends, among other contexts.
  • Socionomy applied to finance has been closely linked to the Elliott Wave Principle, and both were popularized by investment manager Robert Prechter.
  • Socionomic ideas are popular among some traders and members of the investing public, but face a number of profound questions and criticisms that investors should consider.

Understanding the origins of socionomy

Socionomics – which was pioneered in application to financial markets by analyst Robert R. Prechter, and which popularized the Elliott wave principle from the 1970s – upsets received ideas.

Conventional analysts believe that events affect social mood. For example, conventional wisdom would say that a rising stock market, an expanding economy, upbeat themes in popular entertainment, and positive news would make society optimistic and happy, and a falling stock market, a shrinking economy, darker themes in popular entertainment and negative news would make society pessimistic and unhappy.

Socionomy, on the other hand, proposes that waves of social mood naturally fluctuate and come first, reversing the presumed direction of causality. Thus, an optimistic and happier society produces more positive actions, such as a rising stock market, an expanding economy, and more optimistic themes in popular entertainment, and a pessimistic and more unhappy society produces more negative social actions. , such as a declining stock market, a shrinking economy, and darker themes in popular entertainment.

Because stock market indices can reflect changes in social mood almost immediately, socionomic studies typically use them as benchmark social mood indicators, or sociometers, to understand and anticipate changes in other areas of activity. social, such as business and politics, which take longer. time to play.

Link between socionomy, financial markets and economics

Prechter’s book 2016, The socionomic theory of finance (STF), applies socionomic theory to financial markets. STF proposes that economics and finance are two fundamentally different fields. It opposes classical economic causality in finance as well as the Efficient market hypothesis (EMH) in all material respects.

In short, Prechter admits that in free economic markets, where people know their own values, the prices of goods and services are for the most part rationally determined, objective, stable, driven by the conscious maximization of utility, and regulated by the law of supply and demand. But STF proposes that in financial markets, where investors are uncertain of the future valuations of others, the pricing of investments is mostly determined in a non-rational, subjective, endlessly dynamic way, driven by breeding and regulated by waves of social mood.

Socionomy proposes that social mood waves are endogenous and fluctuate naturally in a fractal pattern described by the Elliott wave pattern, meaning that nothing someone does can change them. Stock market booms and busts, and the resulting economic expansions and contractions, therefore occur independently of any action by businessmen, presidents, prime ministers, politicians, central bankers, policy makers or governments. other members of society. On the contrary, argue socionomists, their actions usually express the social mood.

Conservatives can blame the policies of Jimmy Carter for the malaise of the late 1970s and credit the policies of Ronald Reagan for the bull market of the 1980s, and liberals can credit the policies of Franklin Roosevelt for the market recovery in the 1930s and blaming Richard Nixon for the recessions of the early 1970s. According to socionomy, markets and the economy fell and recovered naturally. Leaders simply get credit or blame.

In a 2012 paper, Prechter and a team of socionomists from the Socionomics Institute demonstrated that presidential election results offer no reliable basis for anticipating stock market trends, whereas the stock market, as a sociometer, is useful to predict the results of presidential elections. However, the authors admit that their research was limited by the fact that they could not actually measure social mood itself, demonstrate a direct link between social mood and voting, or rule out the effects of other variables. not measured.

Consider the socionomic perspective on the subprime crisis of 2008. According to this outlook, a broad trend of positive sentiment has spawned widespread optimism among lenders, borrowers and speculators, leading to record levels of housing debt and soaring housing prices. immovable. As the social mood naturally shifted from positive to negative, lenders, borrowers, and speculators became more pessimistic, and their corresponding changes in behavior led to collapsing house prices and shrinking credit. Credit expansion was therefore not a primary cause, but the result of an optimistic mood and its contraction in the ensuing financial crisis was the result of a negative mood.

As unorthodox as socionomic thinking may seem to economists, behavioral economics and Behavioral finance agree that investors do not make perfectly rational financial decisions and are often influenced by emotion, cognitive biases and pack instinct— and that there is a big hole in the efficient market hypothesis. And even the eminent economist John Maynard Keynes admitted that the financial markets are subject to waves of optimistic and pessimistic sentiments. Socionomy has provided a broad theoretical framework for these observations and claims to be consistent not only internally but externally with respect to data.

Critics of socionomy

Socionomy suffers from a number of potential flaws, and investors would do well to consider them alongside the support it receives from its proponents.

Elliott Waves

Socionomy is fundamentally tied to the idea of ​​the Elliott Wave principle, which is also heavily promoted by Prechter and other socionomy enthusiasts. Empirical support for the validity of Elliott waves is, to say the least, questionable. Similar to Kondratieff waves Where by Joseph Schumpeter cycles within cycles, Elliot Waves involve assumed patterns of recurring waves in asset prices or other economic or financial data.

These types of theories have been widely dismissed as unscientific, lacking predictive power, and even exercises in false pattern recognition, also called pareidolia or apophenia, according to the harshest critics. These are well-known psychological phenomena that underlie familiar things like children seeing imaginary cloud-like dragons and the famous “face” on the surface of Mars, or, less flatteringly, various pseudosciences like the numerology, astrology, or palm reading.

According to critics, a major problem is that these theories are not falsifiable, a key aspect of scientific theories. This may be a saving grace for these theories, in the eyes of their proponents, although it is also their downfall from a scientific point of view; whenever they fail to accurately predict the motions in the data, additional layers of waves and cycles may simply be “uncovered” to explain the data.

In this respect they closely resemble Ptolemy’s geocentric theories that the Earth is at the center of the universe, orbiting the Sun, Moon, planets and stars, which over time have come to depend of an extremely complicated series of cycles and epicycles to explain away the observed deviations from reality compared to the predictions of the model.

social mood

Beyond its close connection with Elliott waves, socionomics depends entirely on the concept of social mood. However, conceptualizing, operationalizing, and measuring social mood has always proven difficult at best. Even within the breadth of the literature, socionomists admit that it is fundamentally impossible to measure social mood directly. This vague and nebulous nature of the concept of social mood may place socionomics on a weak footing in the scientific sense.

Instead, they rely on an open variety of proxies and indicators of varying plausibility, such as stock prices, subjective interpretations of plot themes in art or media, or popularity. bright colors and short skirts in women’s fashion, among many others. . Critics point out that this leaves virtually unlimited scope for socionomists to choose proxy indicators of social mood to rationalize any particular hypothesis, narrative, or prediction.

Most problematic is that it retrospectively rationalizes any failed predictions by modifying, adding, or shifting the orientation of social mood indicators. Again, this is somewhat analogous to the geocentric model of the solar system; instead of adding Ptolemaic epicycles to explain failed predictions, socionomists can offer new interpretations of social mood.

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