DEFINITION of Socionomics
Socionomics is the study of social mood and its influence over social attitudes and actions. More specifically, it 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 the economy. Unconventionally, socionomic theory proposes that leaders and their policies are virtually powerless to change social mood, and that their actions in the aggregate express social mood rather than regulate it.
Socionomics — which was pioneered by financial market analyst Robert R. Prechter, who popularized the Elliott Wave Principle beginning in the 1970s — turns conventional wisdom on its head.
Conventional analysts believe that events affect social mood. For instance, 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 contracting economy, darker themes in popular entertainment and negative news would make society pessimistic and unhappy. Socionomics, on the other hand, proposes that waves of social mood fluctuate naturally 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 upbeat themes in popular entertainment, and a pessimistic and unhappier society produces more negative social actions, such as a falling stock market, a contracting economy and darker themes in popular entertainment.
Because stock market indexes 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 social activity, such as business and politics, which take more time to play out.
Link Between Socionomics, Financial Markets and the Economy
Prechter’s 2016 book, 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 conventional economic causality in finance as well as the Efficient Market Hypothesis (EMH) in every major respect. In brief, Prechter accepts that in free economic markets, where people know their own values, prices of goods and services are mostly rationally determined, objective, stable, motivated by conscious utility maximization and regulated by the law of supply and demand. But STF proposes that in financial markets, where investors are uncertain of others’ future valuations, the pricing of investments is mostly non-rationally determined, subjective, ceaselessly dynamic, motivated by herding and regulated by waves of social mood.
Socionomics proposes that waves of social mood are endogenous and fluctuate naturally in a fractal pattern described by the Elliott wave model, meaning nothing anyone does can change them. Stock market booms and busts, and attendant economic expansions and contractions, therefore, occur regardless of any actions by business people, presidents, prime ministers, politicians, central bankers, policymakers and other members of society. On the contrary, their actions typically express social mood. In a 2012 paper, a team of socionomists at the Socionomics Institute demonstrated that presidential election outcomes offer no reliable basis for anticipating stock market trends, whereas the stock market, as a sociometer, is useful for anticipating presidential election outcomes.
Consider the socionomic perspective on the subprime crisis of 2008. A large-degree positive mood trend engendered widespread optimism among lenders, borrowers and speculators, which led to record levels of housing debt and soaring real estate prices. When social mood naturally shifted from positive to negative, lenders, borrowers and speculators became more pessimistic, and their corresponding changes in behavior led to a collapse in real estate prices and a contraction in credit. Credit expansion, then, was not the cause but a result, as was its contraction.
Conservatives may blame Jimmy Carter’s policies for the malaise of the late 1970s and credit Ronald Reagan’s policies for the bull market of the 1980s, and liberals may credit Franklin Roosevelt’s policies for the market’s recovery in the 1930s and blame Richard Nixon for the recessions of the early 1970s. According to socionomics, markets and the economy fell and recovered naturally. The leaders merely get the credit or blame.
However unorthodox socionomic thinking may appear to economists, modern behavioral economics and behavioral finance agree that investors do not make perfectly rational financial decisions and are often influenced by emotion, cognitive biases and the herd instinct – and that there is a big hole in the efficient market hypothesis. And even the esteemed economist John Maynard Keynes allowed that financial markets are subject to waves of optimistic and pessimistic sentiment. Socionomics has provided a broad theoretical framework for these observations and purports to be consistent not only internally but externally with respect to data.