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.

  1. Socially Responsible Investment ...

    Socially responsible investing looks for investments that are ...
  2. Social Impact Bond - SIB

    A social impact bond is a contract with the public sector or ...
  3. Social Economics

    Social economics is a branch of economics that focuses on the ...
  4. Social Security Benefits

    Social security benefits are funds that are received by retired ...
  5. Social Enterprise

    An organization that is directly involved in the sale of goods ...
  6. Social Security

    Social Security is a part of a social insurance and welfare program ...
Related Articles
  1. Retirement

    Is Social Security the Next President’s Problem?

    Social Security isn't going bankrupt, but someone will need to fix it at some point.
  2. Investing

    Socially Responsible Mutual Funds

    It is possible to avoid unethical investments and still profit from mutual funds. Find out how!
  3. Managing Wealth

    Go Green With Socially Responsible Investing

    Find out how morals and ethics can bring you a surprising return.
  4. Retirement

    Will My Social Security Benefits Be Taxed?

    If, and how much, your social security benefits are taxed depends on your income and where you live.
  5. Investing

    Modern Portfolio Theory Vs. Behavioral Finance

    Or: How financial markets would work in an ideal world vs. how they work in the real world.
  6. Personal Finance

    Social Finance Careers: How to Get Started

    Find out how to get a financial career in the specialized field of social finance with a more social objective that goes beyond just bringing in profits.
  7. Investing

    Understanding Social Impact Bonds

    Social impact bonds are powerful investment vehicles for the solving of social issues in a sustainable fashion.
  8. Retirement

    8 Types of Americans Who Won't Get Social Security

    Most Americans eventually get Social Security retirement benefits. Those who don't need a solid Plan B.
  9. Retirement

    Tips on How to Navigate the Social Security System

    Here are three places to turn for help when navigating the convoluted Social Security system.
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  3. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  5. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  6. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
Trading Center