DEFINITION of Socionomics

Socionomics, also known as social economics, believes that social mood drives the economy and markets, as people continually and impulsively revalue stocks based on cues from those around them. It is an unconventional philosophy that believes leaders and their policies are virtually irrelevant to this dynamic, and that their actions in the aggregate express social mood rather than regulate it.

BREAKING DOWN Socionomics

Socionomics, which was pioneered by stock analyst Robert R. Prechter — who popularized the Elliot Wave Principle in the 1970s — turns mainstream economics on its head. Conventional economists think that events affect social mood and move the financial markets, as people continually revalue stocks rationally. Thus, rising markets make investors optimistic. Socionomics, on the other hand, would have us believe that the mood of investors alone determines the economic cycle and causes recessions. Thus, optimistic investors cause markets to rise.

Stock market booms and busts, according to socionomics, occur regardless of any actions by presidents, prime ministers, politicians, central bankers and policymakers. If you want to understand the fluctuations in the stock market and in politics, look to waves of social mood — which politicians and policymakers are themselves subject to. Because politicians are forever behind the curve, election outcomes offer no reliable basis for anticipating stock market trends – though the stock market does anticipate election outcomes.

In the world of socionomics, the subprime crisis was not caused by a flood of cheap money and reckless lending practices, but by a sudden change in mood in America. While conservatives credit Ronald Reagan’s policies for the bull market of the 1980s, and liberals credit Franklin Roosevelt’s policies for the market’s recovery in the 1930s, socionomics thinks markets recovered naturally – even though leaders got the credit.

Link Between Economics and Socionomics

But there is common ground between economics and socionomics. Financial markets are often driven by waves of optimism and pessimism. However outlandish some socionomic thinking is to economists, modern behavioral economics and behavioral finance agree that investors do not make perfectly rational financial decisions – and that there is a big hole in the efficient market hypothesis.

People are often influenced by emotion and cognitive biases, such as the herd instinct, which is why investors pay attention to indicators such as the Fear & Greed Index when it comes to market timing. Dramatic rallies and sudden sell-offs, and the observed tendency of equity market volatility to be higher in declining markets than in rising markets, known as the asymmetric volatility phenomenon, show that there is a tendency for people to follow popular trends without thinking for themselves. And this is an expression of social mood.