Friday, March 18, 2005


Socionomics Part II

About a month ago I wrote this post on socionomics. After that I was contacted by Gordon Graham who is the director of the Socionomics Institute. Mr. Graham politely pointed out some mistakes and mischaracterizations I had made concerning this new field. He offered to correct my effort and the result is below. I thought it would be a great disservice to my readers to not offer the best explanation and reading Mr. Graham's revision I can see that I did not do a very good job. Please note that Mr. Graham was extremely kind and I am flattered that he would consider our blog worth his time. IMHO, this reflects his desire to give the public a better understanding of a new approach to economics, sociology, finance, etc. from which the world will greatly benefit.

Socionomics is a new theory of social causality that offers fresh insights into collective human behavior. Its primary hypothesis is that humans unconscious and pre-rational impulses to herd lead to the emergence of social mood trends, which in turn shape the tone and character of all social action, including economics and finance. In general terms, social mood motivates social action and not the other way around as is commonly assumed.

Below are a few examples of the difference in causal perspective between socionomics and conventional theories:

Standard View
Recession causes businessmen to be cautious.
Talented leaders make the population happy.
A rising stock market makes people increasingly optimistic.
Scandals make people outraged.
Happy music makes people smile.

Socionomic View
Cautious businessmen cause recession.
A happy populationi makes leaders appear talented.
Increasingly optimistic people make the stock market rise.
Outraged people seek out scandals.
People who want to smile choose happy music.

This is completely contrary to the way that classical economics and the efficient market hypothesis look at the world. The following list from the November 2004 Futures magazine contrasts the two perspectives as they apply specifically to economics/finance:

Economic model

Objective, conscious, rational decisions to maximize utility determine financial values
Financial markets are random
Financial markets are unpredictable
Financial markets "tend toward equilibrium" and "revert to the mean"
Investors' decisions are based on knowledge and certainty
Changing events presage changes in the values of associated financial instruments
Economic principles govern finance

Socionomic model

Subjective, unconscious, pre-rational impulses to herd determine financial values
Financial markets are patterned
Financial markets are probabilistically predictable
Financial markets are dynamic and do not revert to anything
Investors in financial markets typically use information to rationalize emotional imperatives
Investors decisions are fraught with ignorance and uncertainty
Changing values of financial instruments presage changes in associated events
Socionomic principles govern finance

As you might have guessed, this has profound implications for the way we view finance. What should have immediately caught your eye is the claim that "financial markets are probabilistically predictable." The chief proponent of socionomics is a man by the name of Robert Prechter who began as a market analyst in the 1970's when he discovered the works of Ralph Nelson Elliott. Elliott's Wave Principle is a model of the markets that breaks market movements down into fractal patterns. (All long before fractals were "discovered") Prechter used Elliott's Wave Principle to predict the markets and achieved the title of "market guru of the decade" in the 1980's. Prechter took the next logical step with socionomics. It was a case of the useful tool being discovered before the science that could explain how it worked. If markets are fractals, does this say something about humanity? Socionomics is the answer.

Why am I writing about this? I want to give you an idea of what might be coming to the US economy in the near future which will not be very pretty. Rather than present my predictions in a vacuum I thought you would better appreciate what I have to say if you understood from where my prognostications are derived. One more thing I want to address. I am sure that some of you look at this as an attempt of some sort of predetermination. It is not at all. Probabilistically predictable means that you can look at a chart of prices and make a better than random, but not certain, guess at what the next move will be. If you study the Wave Principle you will find that there are times when it is simply impossible to make a determination with confidence. And you will find that there are times when it seems like the market is screaming, "I am about to go up/down right now!"

My next post on this subject will make the case for deflation and depression. For more on the socionomic perspective, please see:

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