Weekend March 31, 2019
Executive Director Alyssa Hayden at the Socionomics Institute asked me for feedback on a quiz posted on the SI Facebook page. I took the quiz and here is my answer.
Robert Prechter was first known for bringing the world the theories of Ralph Nelson Elliott, an accountant, on stock price movements. Elliott postulated a three steps forward two steps back that reflected public mood.
Fascinated by multiple theories regarding the real cause of price movements, Prechter began analyzing the media imagined reasons for movements. An article in Barrons formed the basis for the new predictive social science of mass behavior-which he calls socionomics.
Socionomics seeks to answer the most basic of questions. Simply put, why do things happen the way they do? The media continually attempts to link a market move with a physical or social event. One day stocks are up, the reports are that the public applauds the latest FED move. But if stocks are down the next day, investors are worried about Chinese US Trade Relations.
The quiz sets out to debunk the idea that mass psychology is affected by exogenous events. In one example after another, it would appear the 'event' caused the worst decline. But that in fact is not the case, the mass psychology typically led the event, drawing as its source unrealized and unremembered internal or endogenous events.
Studies show that the FED does not lead but rather closely follows the actual pattern of interest rates set by the markets themselves. The Current National Bank was formed in 1913 after the Panic of 1907. In fact it was formed to rescue banks from their bad decisions. But this has not prevented recurring panics in 1929, 1958, 1973-4 (drawn out), 2008, etc.
The quiz challenges the basic conventional wisdom that individuals and the market in mass is affected by external events. Whether it is a hurricane and oil prices or a political event, market mood drives events typically in a patterned sequence.
This should be of interest to the growing field of behavioral analysis as well as more studies using Twitter/Google feeds as evidence of mood change.
The Socionomics Institute helps bring this reality to academia by sponsoring a paper seeking an outstanding student paper on the topic of how social mood drives social events. In fact if one wants to attempt to predict events, the answer is not so much in external events as in realizing one must be
in the Mood, (with a nod to Glenn Miller!)
Dennis Elam PhD CPA
Associate Professor
College of Business
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