Socionomic Theory of Finance, Chapter One

Friday March 17,2017

Update for 3/27/17

the comments section is now open, please post your thoughts

Accounting Students

As the ACCT 5308 Ethics Class is aware,  Director of Research   Matt Lampert and Executive Director Alyssa Hayden of the Socionomics Institute

will be attending the Student Research Symposium, here May 5-6.    Robert Prechter    is  the President and Founder of  the Institute,

We have a unique opportunity to take the national  stage of academic thought. Mr. Prechter has a new book out, the Socionomic Theory of Finance. .

Here is the link to the excerpt from Chapter One. 

Re-defining causality is a major  theme of the book. The media is constantly attempting to connect a physical or external or exogenous event with what happens in the stock market.

For example, the day after the Trump speech to Congress, the DJIA jumped 300 points. The media implied this was the result of an improved economy world wide and more positive reaction to Trump than was expected.   But then for the next few days, the market gave back every single point.The media was scrambling to explain what exogenous event could have caused the change.

The first chapter challenges the conventional view of causality.  Several examples are given like the above demonstrating that again and again, the markets do not necessarily follow what is deemed to be conventional causality.  The conventional view is that external or exogenous events determine social action. Individuals are acted upon by news  in the active sense.

Socionomic thinking turns this idea on its head. Instead the argument is that social mood is generated internally or endogenously.   Thus the often unrealized, unremembered mood of the public generates social action.

I am asking our accounting students to read the excerpt and post a comment here on the weblog.

Learn more about socionomics at the Institute website.

Comments

[Vicky Salazar]

As Robert Pretcher mentions in chapter 1 of the Socionomic Theory of Finance book, most people believe in the theory that the fluctuation of the stock market changes as good or bad news are reported. I can say that I thought the same thing. I believe this is very interesting topic because it got me thinking that if dramatic news do not affect the financial markets, then what affects these changes? There has to be something related to mood that affect the fluctuation in the stock market, but what specifically does affect it is what got me engaged to continue to learn about socionomics.

[Heather Grant]

I find the correlation between the movement of the DJIA, up or down, and the social mood of the day wildly fascinating. I am looking forward to demonstrating this with my SRS project.

[Nelson Thomas]

I found Prechter's deconstruction of the exogenous cause claims very appealing especially in light of his analysis related to the anthrax attacks in 2001. The idea that news does not necessarily move the markets in a causal relationship demolishes the prevailing paradigm. Prechter's explanations about the fall of oil prices after Hurricane Katrina suggests that it is quite possible for most of the media's commentary about what provokes market reactions to be completely false.

Prechter's commentary on the false application of cause and effect in the markets could revolutionize the way in which we study economics. Instead of an action causing a reaction, I suspect that some kind of a feedback loop or fluidity is in effect when describing societal mood and market behavior.

Socionomics offers an exciting alternative to the existing thinking about market shifts. I hope that, over the coming years, more resources can be shifted to studying behavioral economics so that we can debunk common myths about the way society interacts with the markets.

Vicky- Great question about what actually affects the changes in the markets? What is beneath all of the moods that we experience as a society? I suspect that the answer is a mix between groupthink, individual mood and other variables like the subconscious mind. What do you think?

Heather- I would love to hear more about your SRS project. Socionomics seems like a field ripe with research topics and new ways to look at society and the markets.

I also found this lecture which explains socionomics in a succinct fashion using a clever analogy.
https://www.youtube.com/watch?v=wdLTu6bdRzo

[Christina Marie Dotson]

I think one thing we all need to remember is that the stock market is based on company performance and growth. Although sometimes the media and/or historians enjoy treating it like a magic 8 ball that cannot be predicted or that it is impacted by the slightest social event, the bottom line is that stock prices will grow if a company is doing well. Many US companies had amazing Q4 results, (almost all except the mall stores and some brick & mortar, thanks to Amazon :). However we understand that Q1, & Q2 will not look the same, so the market will fall.

[Pete Galvan]

Stock values fluctuate for different reasons. One cannot predict the effect an event will have on stock value based on the magnitude of the event. As Prechter explains, not all events have the effects we predict they may have. There are two things I believe one needs to take into consideration: media coverage and society’s perception. Figure 1 in chapter 1, is a good example of how media portrays the relationship between an event and the market. Not all readers could comb through these assumptions to determine if this type of coverage is accurate of the truth. This can then play into society’s perception thus influencing the market price.