What Is 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.
Socionomic theory proposes that leaders and their policies are virtually powerless to change the social mood and that their actions in the aggregate express social mood rather than regulate it.
- Socionomics is a framework that suggests that social forces like culture, norms, and collective social mood, can drive observable political, economic, and financial trends, among other contexts.
- Socionomics is applied to finance has been closely tied 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 Socionomics' Origins
Socionomics—which was pioneered in application to the financial markets by analyst Robert R. Prechter, and 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 the 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, or other members of society. On the contrary, socionomists claim, their actions typically express social mood.
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.
In a 2012 paper, Prechter and 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 predicting presidential election outcomes. However, the authors admit that their research was limited by the fact that they could not actually measure social mood itself, demonstrate any direct connection between social mood and voting, nor rule out the effects of other unmeasured variables.
Consider the socionomic perspective on the subprime crisis of 2008. According to this perspective, a large, 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 a primary cause, but a result of optimistic mood and its contraction in the ensuing financial crisis was a result of negative mood.
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.
Criticisms of Socionomics
Socionomics suffers from a number of potential flaws, and investors would do well to consider these alongside the support it receives from its promoters.
Socionomics is fundamentally tied to the idea of the Elliott Wave Principle, which is also heavily promoted by Prechter and other socionomics enthusiasts. Empirical support for the validity of Elliott waves is, to say the least, debatable. Akin to Kondratieff waves or Joseph Schumpeter’s cycles-within-cycles, Elliot waves involve alleged patterns of recurring waves in asset prices or other economic or financial data.
These types of theories have been largely dismissed as unscientific, lacking in predictive power, and even exercises in false pattern recognition, also called pareidolia or apophenia, according to the sharpest critics. These are well-known psychological phenomena that are the basis for familiar things like children seeing imaginary dragons in the shapes of clouds and the famous “face” on the surface of Mars, or, less flatteringly, of various pseudosciences such as 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 to these theories, in their proponents' eyes, though it is also their downfall from a scientific point of view; whenever they fail to accurately predict movements in the data, additional layers of waves and cycles can simply be “discovered” to explain the data.
In this regard, they closely resemble Ptolemaic geocentric theories that the Earth sits at the center of the universe, orbited by the Sun, Moon, planets, and stars, which over time came to depend on an enormously complicated series of cycles and epicycles to explain away observed deviations of reality from the model’s predictions.
Beyond its close connection to 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 in the extent literature, socionomists admit that directly measuring social mood is basically not possible. This vague and nebulous character of the concept of social mood can place socionomics on a weak footing in a scientific sense.
Instead, they rely on an open-ended variety of proxies and indicators of varying plausibility, such as the stock prices, subjective interpretations of plot themes in art or media, or the popularity of bright colors and short skirts in women's fashion, among many others. Critics point out that this allows virtually unlimited latitude for socionomists to pick and choose indirect indicators of social mood to rationalize any particular hypothesis, narrative, or prediction.
Most problematically, it allows any failed prediction to be rationalized in retrospect by changing, adding, or shifting the focus of indicators of social mood. Again, this is somewhat analogous to the geocentric model of the solar system; instead of adding Ptolemaic epicycles to explain failed predictions, socionomists can come up with new interpretations of social mood.