Social Events – part THREE

Where I Believe Socionomics is Heading

An Interview with Robert R. Prechter, Jr.:

In this issue, editor Mark Almand conducts an
in-depth interview with Robert R. Prechter, Jr.,
founder of the Socionomics Institute and publisher
of
The Socionomist.

The Socionomist: You have a new publication
about socionomics (this one, launched a year ago).
John Casti, a well-known academic author, just released
a well-received book about your social mood theory
(
Mood
Matters
). You recently presented
your ideas at the University of Cambridge, and I
understand the reception was very good among both
students and faculty. You released a DVD of your
presentation at the London School of Economics. Socionomics
is getting coverage in the media. Two staff members
have taught university classes. And the Institute
has its first research fellow, Matt Lampert, pursuing
an advanced degree at Cambridge. Socionomics seems
to be gathering steam.

R.P.: I always feel that it’s taking too long for
people to discover socionomics. But when I review
the latest developments, I realize that progress
is coming along nicely. So thanks for the reminder.

For the benefit of new readers, how about
an “elevator speech” definition of socionomics?

Socionomics is the study of actions that result
from changes in social mood.

What’s the hardest thing for most newcomers
to grasp?

That social mood motivates social actions instead
of the other way around.

Can you give me an example of how this causality
works?

There are millions. Here is one. Most people think
that recessions make businesspeople cautious. Socionomics
says the opposite: Cautious businesspeople make recessions.
So, the mood is the cause, and the event is the result.

Why is this insight important? I mean, what
can it do for people?

Start with the above example. If you grasp that
social mood is what moves the economy, and you can
measure mood, then you can identify when and where
recessions are most likely to occur. You can get
out of the way.

And socionomics says that you can measure
mood via the stock market?

Yes. For a variety of reasons, the stock market
is an excellent meter of society’s mood. People can
act on their moods immediately by buying or selling
stock. But decisions they might make at the same
time to expand or contract a business, or to draft
a peace treaty or declare war, take time to effect.
So there is a lag. This is why the stock market predicts
the character of news, not the other way around.

You’ve told the story about how you got the
initial insight about socionomics. What was that
like?

I was drifting toward the idea in 1969, when I was
20 years old and wrote a college paper about song
lyrics and social trends. Then I latched onto the
Wave Principle in the early 1970s and started plotting
financial prices in 1972. I taught myself technical
analysis and the Wave Principle in 1973-1974 and
became a pure technician early. This was useful,
because from the beginning I never adopted the idea
that stock prices responded to facts and news. All
I could see were patterns, breadth and volume and
how they corresponded to types of market action.
These were all necessary precursors to the breakthrough.
Then the idea that the stock market and popular culture
were linked hit me in late 1975. I was looking at
a wall chart of the stock market and thinking about
tonal changes in Beatles records. That led me to
thinking about popular music in general. Musical
styles seemed to ebb and flow with stocks. That’s
when I had the first moment of feeling that I had
figured out something that no one else had observed
before.

Were you instantly thrilled?

You know that introspective, suddenly alert feeling
you get when a new idea comes into your head? That’s
what I felt. But I didn’t have the whole picture
yet. From there, things unfolded in waves.

What happened next?

I
was mostly working at the time, for the Merrill Lynch
Market Analysis Department. So I was busy with a
career. I studied the Wave Principle, cycles and
technical analysis in more depth and watched the
stock market confound the fundamental analysts time
and again. It became even more obvious to me that
news lagged prices, not the other way around. So
I became completely committed to the idea that the
market moves independently of outside events. To
this day I cannot understand technicians who talk
about elections, the Fed, interest rates, economic
news and social events. They have no predictive value
as far as the stock market is concerned, at least
not in the way most people read the news.

What’s the best way to read the news?

A socionomist reads the news completely differently
from everyone else. For example, when we read that
some think tank has predicted rising energy prices
for the next decade, we figure that energy prices
are probably near a top. When we read that economists
are in agreement that a recession is in force, we
see it as evidence that stock prices are near a bottom.
And so on. As you can see, this is the opposite of
the way most people read the news. When news stories
cluster or sound extreme, they can have predictive
value, in the opposite direction.

Why is that?

Because news lags mood trends. By the time events
have reflected a positive or negative mood trend
fully, that trend is about to reverse.

When did you start writing about socionomics?

In 1979, I went independent and started a publishing
company. In December that year I wrote my first socionomic
declaration. It’s at the start of Pioneering
Studies
. In 1984 I wrote another one. Then in
1985, I wrote a report titled “Popular Culture and
the Stock Market,” which was boiled down for a Barron’s
article. That sort of kicked things off. Until then,
I was the only one having these thoughts. Then a
small segment of the public got interested.

Did you call it socionomics then?

I wrote that name on a file folder and put it away
for the day when I wrote my first book about it.
I kept it to myself until 1999, when I finally wrote The
Wave Principle of Human Social Behavior and the New
Science of Socionomics
.

Were you a pure socionomist from the start?

No. Socionomics is deeply counter-intuitive. I had
to go through a long process of weeding out misconceptions
from my mind that had taken root there long ago.
An early example was the idea that interest rates
buffet the stock market. There are people who make
a living on this idea. Economists are sure it’s true.
My colleagues were convinced of it. It makes
sense
. It’s also quite wrong. If someone told
you the course of interest rates in advance, you
couldn’t predict stock prices. The stock market moves
on waves of social mood. If you know that, you know
more than the person who knows where interest rates
are going. And, of course, no one knows where interest
rates are going. Except that sometimes socionomists
do know, because we study the history of waves and
their attending social attributes.

What was the next big insight?

By 1999, I had become an almost complete purist.
I was able to turn every exogenous-cause argument
on its head: prove it was wrong, and then show that
socionomic causality successfully explains the very
same data. But I still had this residual belief,
carried from the past, that the Federal Reserve had
the power to control the money supply and thereby
move markets around. One day I realized that this
idea, if it were true, challenged my whole model.
I posed the same question I always did: When
I reverse the order of causality, how does it re-form
the question?
So instead of asking how the Fed
controls the markets, I asked how the mood behind
the market controls the Fed. I discovered that people
create central banks at certain times in the wave
structure. I plotted interest rate data and realized
that the Fed just follows the T-bill rate, which
is set by the market. I studied the Fed’s historical
actions and realized that the Fed does not act; it reacts.
The whole Wizard of Oz image went up in smoke. That
was my last bout with exogenous causality.

Was it useful?

Oh, yes. This specific exercise proved very useful,
because it led me to an understanding of credit and
the Fed that allowed me to write a unique book predicting
deflation. Everyone else I had read or heard-Keynesians,
Monetarists, Austrians, you name it-fervently believed
that deflation is utterly impossible in a fiat money
system. They still do. They are all stuck in the
exogenous-cause paradigm, a corollary of which is
that politicians and central bankers can direct the
economy. But it’s the other way around. The economy
pushes them around. And social mood pushes
the economy around. So if you know the trend of social
mood, you can predict what the Fed will do.

I am sure that along the way, you had several
additional major breakthroughs. What were the key
one or two?

Right. Well, I had to tie all my ideas together
theoretically. For one thing, I realized that the
causality attending economics and finance are completely
different. This is also an idea that, as far as I
can tell, no one had proposed before. I wrote about
it with Wayne Parker in a paper for
the Journal of Behavioral Finance in 2007.

Realizing that the Elliott wave model described
the structure of waves of social mood-not just financial
pricing-was another insight. I also figured out that
most financial thinking is rationalization, not reasoning.
One evening in 2004, I developed a diagram that shows
how all the related ideas fit together. [Ed:
See Figure 1.]

Figure 1 – Click Image to Expand

Has anyone ever shared an “aha moment” of
their own regarding socionomics with you?

A number of people have come up with valuable insights
about socionomics.

Wayne Parker proposed a metatheoretical context
for the theory, which was very important. Also, Wayne
and I collaborated to come up with the distinction
between mood and emotions. Alan Hall and I figured
out that the center of wave 3 is the mood-direction
delineator, an idea that we wrote up for The
Socionomist
. Other people have done some excellent
supportive studies. Pete Kendall showed how the sport
of basketball has grown and contracted in concert
with social mood, and he has linked the outbreak
of fighting in the Middle East with worldwide social
mood peaks.

Working from a suggestion from Pete Kendall, Professors
John Nofsinger and Kenneth Kim demonstrated a strong
relationship between stock market trends and the
timing of when the government adds and removes regulations
on investing. Mark Galasiewski connected stock market
trends to the popularity of automobile colors; DuPont
included it in its annual Automotive Color Popularity
Report, and Radar magazine wrote it up. And Brian
Whitmer used socionomics to predict the Greek debt
crisis and a coming breakup of the European Union.
There must be three dozen such contributions.

When Brian published his report, the media
said nothing. There was no interest. Then a few months
later when the Greek debt crisis occurred, it was
a bit late to take action. This kind of thing happens
regularly, doesn’t it?

Socionomic insights are their most useful precisely
when most people are least inclined to pay attention
to them. It is unfortunate and ironic, but socionomic
theory explains why it is also axiomatic.

You also mentioned mood versus emotions. What
is the difference?

Emotions are exogenously referred, consciously experienced
feelings, regulated by a combination of mood, conditions
and events. Mood is an endogenously regulated, unconsciously
experienced mental state, regulated by Elliott waves.

Mood predisposes people toward certain emotions.
But before a person can experience an emotion, he
must have a referent. People in a positive mood trend
might credit a political leader or a musical group
for their happy feelings. People in a negative mood
trend might blame a political leader or their spouses
for their unhappy feelings. So unconscious moods
can produce conscious emotions via an external referent,
but the root cause-mood-goes unrecognized.

Which brings me to another point. I recently realized
something very exciting about this area: People
have no memory for their shared moods
. They
do remember emotions, however, which are expressed
with reference to exogenous circumstances.

Does a specific mood produce more of a certain
type of emotion? For example, during a bear mood,
do people in general feel more fearful and angry?

Yes. I published a list of emotional expressions of negative
and positive social mood. It’s in Chapter 14 of The
Wave Principle of Human Social Behavior
.

Back to your earlier point: You said people
cannot remember their moods. Is that because mood
is unconscious?

Exactly. People will remember a powerful emotion
their whole lives. For example, if you ask them how
they felt when their child was born or when a beloved
pet died, often they can tell you. But if you ask
them how they felt at the last market top, they have
forgotten it already, and they think that any fool
should have seen it was a terrible time to own stocks!
Clearly the brain has no storage mechanism for social
mood. It exists only for the moment. It fluctuates
in a fractal pattern. People sense it unconsciously,
so they don’t recognize it, which is why they don’t
remember it.

And yet they act on their mood all the time.

Yes, without realizing it.

If I understand the concept of a “fractal”
properly, at the same exact instant mood will almost
always be both bearish and bullish at various degrees
of trend. This is hard for most people to understand.

You are so right. Theorists who talk about financial
or social tipping points think the market or society
is going in one trend and then reaches some point
at which it “tips” in the other direction, as if
it were a tree leaning over and finally falling due
to one last wind gust. But the market is a fractal.
It is changing direction every split second. Is every
one of those changes a tipping point? People who
reason from mechanics take some major trend change
as an example of the point that “tipped.” But doing
so is selective, because at smaller degrees the market
had multiple other trend changes. And there are larger
ones as well. Once you see it graphically, it’s pretty
clear. The market and the social mood behind it move
according to the Wave Principle. It’s not mechanics.

Are you saying that social mood is completely
endogenous? That nothing, no matter how wonderful
or calamitous, has any effect on it at all?

We have investigated every exogenous-cause
argument we have heard, and we have tested every socionomic
cause-and-result claim that we can think of. Usually
they are two sides of a coin, and the established
theory fails, and ours works. Now, we have yet to
demonstrate all our conclusions with rigorous statistics.
We have a paper in the works right now about political
forecasting. But I will also say that we have found
no papers that prove exogenous causality in the stock
market. The theory is simply assumed, as if it were
a law of physics. And that’s exactly what it is,
which is why it doesn’t apply to social behavior.
I would welcome any challenge to socionomics that
someone thinks we may have overlooked.

If I accept, as you say, that mood drives
events, I then have to ask this: What drives mood?

Social mood arises when humans interact socially.
It is not passed from one person to another as in
contagion. It is not imparted by leaders. It is not
imposed by authorities. If anything “drives” the
emergence of social mood, it is the herding impulse.
At least the process seems closely related to the
herding impulse.

How exactly do herding impulses interact in
a group setting?

We don’t know. Maybe someone well-versed in fMRI
studies can figure it out. (Ed: fMRIs, short
for functional MRIs, are imaging tests that show
which parts of the brain “light up” when it performs
a function.)

What role do Elliott waves play?

Elliott waves describe the fluctuations of social
mood, just as branching rules describe the pattern
of trees. Elliott waves probably constrain social
mood fluctuations, just as branching rules constrain
branching systems.

Meaning that social mood does not move outside
the form of an Elliott wave?

Correct.

You have written about Fibonacci relationships,
golden spirals and so on in the natural world and
noted that those same growth principles turn up in
human behavior. Do you have a theory connecting physical
manifestations in nature and social manifestations
in groups?

Many living systems display Fibonacci relationships.
So do Elliott waves, which describe a living system.

How are fractals involved?

A special type of fractal is found in living beings
and systems. I call it a robust fractal.

Most fractals in non-living nature are indefinite,
or random, fractals, and a few are self-identical
fractals. Clouds and seacoasts are indefinite fractals.
Heated silicone oil produces a self-identical fractal
of stacked hexagonal patterns.

Robust fractals do have a specific pattern, but
they do not repeat it exactly; there are quantitative
differences; a robust fractal is self-similar but
not self-identical. Trees, circulatory systems and
pulmonary systems are all robust fractals. The small
branches look a lot like the larger ones but not exactly like
them. That’s how component waves look relative to
encompassing waves.

Are you also saying that there absolutely
is never a case in which an event drives the markets?

Not quite. Transitory emotional reactions move prices
occasionally for a few seconds or minutes. The market
quickly adjusts to where it would have been without
the disturbance. Larger trends are completely independent
of exogenous cause.

Now recall my observation that people remember their
emotions. This is a big reason why people think that
news moves markets. They remember the big up opening
on news, or the sharp one-minute reaction. But they
can not consciously register the unconscious mood
that guided the vast bulk of the market’s moves.
They do not sense the causality, so they don’t remember
it.

Where do you see the science heading next?

We need to test all our ideas rigorously. We are
doing so little by little. The Socionomics Foundation
offers grants to interested academics.

What is your biggest dream for socionomics?

I would like to see departments of socionomics in
universities. The demand is growing, and some universities
now include socionomics in certain classes. So it
is beginning to happen.

Will you see it in your lifetime?

Depends on how long I live.

Don’t stop learning about socionomics now. Learn
how to apply socionomics
in this free article
from the Socionomics Institute (www.socionomics.net).

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