Social Mood Impels Feelings of Certainty and Uncertainty

Social Mood Impels Feelings of Certainty and Uncertainty

By Alan Hall, originally published in the August 2012 Socionomist

Today, your boss could hand you a raise—or a pink slip. Tomorrow, you might narrowly avoid a car crash—or get T-boned.

The future is equally uncertain at all times—in both bull and bear markets. Yet many investors and the media perceive the world to be far more uncertain during negative mood phases. Consider this excerpt from Chapter 18 of The Wave Principle of Human Social Behavior (1999):

[People] equate uptrends with predictability and downtrends with unpredictability. The Harper’s Weekly quote from 1857 includes the phrase, “never has the future seemed so incalculable as at this time.” Translation: “The market has been falling for several years.” The media constantly characterize market setbacks as injecting “uncertainty” into a picture of the future that presumably was previously as clear as crystal. I am not exaggerating when I say that this foible is timeless.1

The distinction is more than academic. It illustrates that humans use events to justify their collective mood. The reason? Social mood itself is unconscious—and therefore, by definition, unperceived. Yet it produces powerful feelings. One of those feelings is uncertainty. When we observe widespread expressions of certainty or uncertainty, we can use them as indicators of public mood—and plan accordingly.

Quantifying Uncertainty Over the years, researchers have developed hard evidence that allows us to link changes in the volume of expressions of uncertainty with bull and bear markets. Let’s begin by looking at several uncertainty indexes.

1. Measuring Economic Policy Uncertainty Economists Scott R. Baker, Nicholas Bloom and Steven J. Davis developed their Index of Economic Policy Uncertainty in their February 2012 paper, “Measuring Economic Policy Uncertainty.”2 The authors used three measures to construct their index: (1) newspaper coverage of economic policy, (2) the number of federal tax code provisions set to expire, and (3) what they refer to as “disagreement among economic forecasters.”

Figure 1

Figure 1 plots the monthly Inflation-Adjusted Dow (the Dow Jones Industrial Average divided by the Producer Price Index) against the authors’ index. The Dow/PPI reveals the true extent of the 13-year bear market that has been largely disguised by repricing stocks in depreciating dollars. This index has also reflected fear and uncertainty in the past, as its largest declines prior to 2000-2012 occurred in the bear markets of 1929-1932 and 1966-1980.

Note that social mood creates a major division on this chart at the Dow/PPI peak in January 2000. Now observe that just a few months prior, the uncertainty index reached its second-lowest level in nearly three decades. Note also that most of the significant peaks in the uncertainty data correspond to significant lows in the Dow/PPI. And finally, note that the overall negative social mood trend since 1999 has accompanied increasing expressions of uncertainty.

Figure 2

Figure 2 shows the authors’ Index of Economic Policy Uncertainty as published in their paper. The authors labeled each significant peak in their index with an accompanying event and wrote, “The index spikes near consequential presidential elections and after major events such as the Gulf wars and the 9/11 attack.” At first glimpse, one might think these events—most of which are “negative” in nature—caused the spikes in uncertainty. But socionomics asks this critical question: “What generated the negative events?”

Figure 3

To answer that question, Figure 3 plots the nominal Dow against the same Index of Economic Policy Uncertainty. We shaded significant positive-mood trends (rising stock prices) blue and negative-mood trends (falling stock prices) brown. As you can see, uncertainty increases during negative social mood trends.

But here’s the shocker: In every major uncertainty spike except 1986, multi-month downturns in the Dow and upturns in uncertainty preceded the events listed in Figure 2. Given this chronology, it appears that negative social mood motivated both the scary events and the uncertainty.

A final observation: Baker, Bloom and Davis rightly connect uncertainty and fear…

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  1. Robert JR Graham » Boost Your Mood with Visualization

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