elliott-today

 



The Wave Principle of Human Social Behavior And The New Science of Socionomics

by Robert R.Prechter, Jr. 

Home   Elliott Wave Principle    Elliottwave International  Socionomics   Terms of Service   Disclamer   Datenschutz   Frequently Asked Questions (FAQ)    Impressum

 



 

The Wave Principle of Human Social Behavior And The New Science  of Socionomics

Socionomics postulates that, in any society, trends in the stock market, economy and culture change due to fluctuations
in the mass (or social) mood of the citizens. Positive social trends - such as unity, peace, and tolerance - are prevalent 
in bull markets, while negative social expressions, like xenophobie, anger and divisiveness, dominate in bear markets. 
The stock market, says socionomics, is the leading indicator of social change and is governed by the Wave Principle. 
In other words, economics is a rearview mirror, socionomics is a windshield. Socionomics shows that bull markets lean toward
inclusive behavior, while bear markets lean toward division. That explains the thirst to expand EU membership during the run-up 
in the bull market dispite concerns about financial stability of prospective entrants. In May 2004, as the wave b rally in 
Euro Stoxx became fully established, no fewer than 10 countries joined the union. A full seven were former eastern-bloc nations. 
While this constituted the "single largest enlargement of the EU in terms of people and landmass, "according to the Institute of 
Cultural Diplomacy,it was the "smallest in terms of GDP (wealth). Now, these new members are labeled "Europe's subprime." 
Their fiscal problems were well known at the time, but those who questioned their financial health were ignored. 

The bull market's appetite for togetherness, and the debt bubble's escalating need for new borrowers, guaranteed their entry. 
As optimism faded, the market immediately registered the decline. Stocks plunged. And along with market value went the 
once-welcoming attitude toward the eastern-bloc. With all due respect to both countries (Romania, Bulgaria) contenting that
either was welcomed to "pursue the reunification of our European family," as European Commission president, Jose Barroso, 
claimed at the time, is akin to U.S. mortgage lender Fannie Mae alleging that its loan programs helped "families reach the 
American dream of homeownership." Both declarations are political rhetoric worthy of only the most optimistic Pollyanna. 
Here's the more compelling  reason: there was profit in it. Surprisingly, Mr Baroso admitted as much. 

His quote...enriched both Romania and the EU itself," was made during a speech before the Romanian parliament in September 2007. 
The statement is largely accurate but omits one crucially important fact: the "enrichment" he speaks of was just an illusion fostered 
by debt. Now with optimism gone, markets down and profits from the eastern bloc nowhere to be found, attitudes have changed. 

We're All One is replaced with You're On Your Own. At a speech in London, former Bundesbank President Karl Otto Pohl warned that 
a "bailout of a debtor country from a surplus country like Germany would be like open the box of Pandora." Chancellor Merkel echoed 
Pohl's sentiment at an early March summit when Hungarian Prime Minister Ferenc Gyurcsany (since ousted by parliamentary vote) 
pled for $225 billion in loans." A resounding "nein,"" was her response, reported Bloomberg figuratively. And almost every paper 
we read picked up on Gyurcsany's use of the term "New Iron Curtain," to describe western Europe's abandonment of eastern Europe.
[Prechter's Global Market Perspective, April 2009] 

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 

 

 

 

 

 

 

Socionomics In A Nutshell

Understanding socionomics requires comprehending the contrast 
between two postulations:


(1) The standard presumption: Social mood is buffeted by economic, political and cultural trends and events. 
News of such events affects the social mood, which in turn affects people’s penchant for investing.

(2) The socionomic hypothesis: Social mood is a natural product of human interaction and is patterned
according to the Wave Principle. Its trends and extent determine the character of social action, including
the economic, political and cultural. 

The contrast between these two positions comes down to this: The standard presumption is that in the social setting,  
events govern mood; the socionomic hypothesis recognizes that mood governs events. In both cases, 
the stock market is seen as an efficient mechanism. In the first instance, it presumably revalues stocks continually 
and rationally in reaction to events; in the second, it revalues stocks continually and impulsively as the independent 
social mood changes. We will now investigate five presumed “outside forces” to see which of these views their relationship 
to the stock market supports.

 

 

 

The Wave Principle of Human Social Behavior 
and the New Science of Socionomics


R.N.Elliott's announcement of his discovery of the Wave Principle sixty years ago was a major breakthrough 
in sociology. To summarize Elliott's achievements, he discovered that the stock market displays fractal geometry, 
he discovered and described the component patterns and how they link together, he recognized (with the help 
of Charles Collins) the basis of the patterns in Fibonacci mathematics, and he concluded from all this evidence 
that human social progress regulates itself according to natural laws of growth and expansion that are
found throughout the universe. 

As Robert Prechter explains herein, this simple yet profound formulation reveals that, on the whole, the endogenous 
ebb and flow of social mood that propels mankind's progress follows a robust fractal and spiral design that closely 
resembles the development of all kinds of living forms. The practical value of the Wave Principle is that it forms the
basis for a new science, the science of socionomics. 

Socionomics is the study of the formological imperative of human interaction, which in turn is the engine of culture 
and history. Because people have an impulsive nature that rules in collectives, and because that nature is patterned, 
mass emotional change has a fair degree of predictability. As a result, its product, social action, does so as well.

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 

 

The Socionomic Insight

The socionomic insight is that the conventional assumption about the direction of causality between social mood 
and social action is not only incorrect but the opposite of what actually occurs. Socionomics is based on a principle 
developed by deduction from the existence of the Wave Principle and by induction from the chronology of market 
behavior and other social actions. The principle is that social mood determines the character of social events.

As previous studies demonstrate, rising stock trends do not improve the public mood; an improving social mood makes 
stock prices rise. Economics do not underlie social mood; social mood underlies economics. Stock trends do not follow 
corporate earnings; corporate earnings follow stock trends. Politics do not affect social mood; social mood affects politics. 
Demographics do not determine stock market trends; the social mood that determines stock market trends determines 
demographics. Styles of popular art and entertainment do not affect the social mood; the social mood determines 
the popularity of various styles of art and entertainment. War does not impact stock market trends; the mood that 
governs stock market trends determines the propensity for war. And so on. All economic, political and cultural developments 
are shaped and guided by the Wave Principle of human social behavior. It is the engine of everything from popular fads 
and fashions to the events of collective action that make history.

Conventional belief is the opposite of the above insight. It is solidly entrenched and pervasive almost to the point of ubiquity. 
It is deeply intuitive and utterly wrong.

The conventional mind sees social events as causes of social mood. Few ever ask the causes of the events themselves. 
Those who do simply assign the causes to other events.

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 


The Economy

The standard presumption is that the state of the economy is a key determinant of the stock market’s trends. 

All day long on financial television and year after year in financial print media, investors debate the state of the economy 
for clues to the future course of the stock market. If this presumed causal relationship actually existed, then there would 
be some evidence that the economy leads the stock market. On the contrary, for decades, the Commerce Department 
of the federal government has identified the stock market as a leading indicator of the economy, which is indeed the case. 
If the standard presumption were true, then changes in the economy would coincide with or precede trend changes in 
aggregate stock prices. However, a study of Figure 1 will show that changes in the economy coincide with or follow trend 
changes in aggregate stock prices. Except for the timing of the recession of 1946 (which supports neither case), 
all economic contractions came upon or after a downturn in aggregate stock prices, and all economic recoveries came 
upon or after an upturn in aggregate stock prices. 

In not one case did a contraction or recovery precede a change in aggregate stock prices, which would repeatedly 
be the case  if investors in fact reacted to economic trends and events. 

This chronology persists back into the nineteenth century as far as the data goes.The socionomic hypothesis 
explains the data. Changes in the stock market immediately reflect the changes in endogenous social mood. 

As social mood becomes increasingly positive, productive activity increases; as social mood becomes increasingly 
negative, productive activity decreases. These results show up in lagging economic statistics as expansions and 
recessions. The standard presumption has no explanation for the relative timing of these two phenomena.

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 

The "Potent Directors" Presumption

Virtually all conventional financial analysts and economists accept assumptions about certain men's ability to control the social future, 
be they presidents, treasury secretaries or central bankers. 

Last month, an article from  The Washington Post entitled, "Key Players Control Money Supply,"  tells us that the Bank of International 
Settlements "helps keep the banking system steady in turbulent times... protests the world financial system...[and] focuses on ensuring 
that [a local] crisis doesn't  threaten the world's intricate [banking] system. "

The BIS, says the article, has "secret conversations that can shape the course of global economy."  

This type of belief permeates practical economic discourse. It persists despite failure after failure of officials to control money, interest rates, 
commodity prices, retail prices, stock markets, and economic growth and contraction. The fact is that central banking authorities never reverse
a financial spiral, in  either  direction. They  participate in [and typically encourage] them in uptrends and fail uselessly at them in downtrends. 
As I type this sentence, I am looking at this headline in  The Wall Street Journal: 

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 

 

A Socionomic Manifesto 

Men have tried for millennia to forecast human events. 
In the long history of social forecasting, the chronic propensity for immense error 
has resulted from linear thinking, the extrapolation of current trends into the Future. 

This nearly ubiquitous approach is a result of the assumption that laws governing billiard ball behavior apply to human behavior. 
Simply stated, most people, including economists, are social mechanists. They believe that markets and societies share the property 
of an object in motion, which will continue along a calculable path until some new outside influence – a force or an obstruction – 
alters its trajectory. It remains a source of amazement to me how often I am asked what events will cause (or, in modified form, 
what “catalyst” will “precipitate”) a change in the direction of the market, politics or the economy, a query which has as its basis
the unquestioned assumption that the record of  human history is somehow at the mercy of random outside influences, such as 
earthquakes, volcanoes and floods but with regard to one presumed social influence over another presumed social effect. 

Yet social forces cannot be “outside influences” because they reside within the human social experience, in which all elements are 
interrelated. The general assumption of outside causality nevertheless persists and has as its result the continuing bizarre state 
of affairs in which most people involved in areas of life where the future is important waste hours debating the various potential 
“causes”  of the trends they hope to predict. They usually conclude that forecasting with any reliability is impossible,yet they persist 
in the exercise anyway! Successfull anticipation of future events is possible. However, it is possible only with the knowledge that 
human behavior changes as a result not of external forces but of internal ones. 

Generally speaking, the human mind has two aspects, which impel two types of actions. Rational, conscious mental processes can 
induce actions that create airplanes, computers and skyscrapers. Unconscious mental Processes do not produce goods and services 
but rather generate hard-wired emotional signals that trigger impulsive actions. These emotional signals developed through eons of 
evolution, which is why they impel all kinds of actions with respect to concerns that are common to lower animals, such as territorialism, 
fighting, fleeing and sex. (The production of art probably involves both mental aspects, which is why it provides the richest experiences.) 
One of the unconscious mind’s occupations is increasing the changes of survival through mimicking, which is reflected in the herding 
impulse, a fact that provides a biological and psychological basis for socionomics. 

Conventional economists have been mired in the error that trends in finance result from the exercise of the first type of thinking: 
the rational and the conscious. It is a false premise, which has just begun to be undermined. In twenty years, academic economists 
have gone from believing that markets are rational, efficient calculators of intrinsic value – and therefore random – to believing that 
psychology occasionally might have something to do with extremes in short term financial valuation. Someday, a large segment of the 
profession will surely come to understand that a mix of randomness and psychology is not the answer to overall financial market behavior. 

At the forefront of the new understanding is the Chairman of Psychiatry at Metro West Medical Center (Boston), Dr. John Schott, who is 
also an instructor at Harvard and Tufts medical schools and a successful money manager. Even on the subject of practical investing for 
the individual, he states unequivocally. “Emotions are central, they are the entire ball game.” Emotions are certainly the entire ball game 
for many individuals, so that as a rare few investors’ individually informed and rational decisions cancel each other out, what remains 
on the stock market graph is a record of the trends of shared emotion, the mood of the herd. 

It is not in the social nature of mankind to accept and be content with stasis. If there is one constant regarding social mood, it is its 
continuous flux. However, the fact that social mood is ever-changing is not, as many would assume, an impediment to forecasting; 
it is the key to it. Investigations by R.N. Elliott in the 1930s and 1940s yielded the crucial knowledge that social behavior changes not 
randomly but according to a pattern. Social mood, experiences and conditions vary from time to time and place to place, the patterns
of behavior that lead to a reversal in trend do not. In order successfully to anticipate changes in society reliably, one must understand 
the consistent pattern of society’s internal dynamics. (Pioneering Studies in Socionomics, 2003 by Robert R. Prechter ,Jr.)

 

 

 

 

 

What is Socionomics: Learn the Basics of the Theory and Its Application
Socionomics Theory


By Elliott Prechter

Imagine a modern, ground-breaking theory, which could link all human social behavior — cultural, economic, political, and more — into a single, 
elegant and unifying framework

Have you ever noticed how economists, politicians, and business leaders consistently fail to foresee major turning points in history? With all of 
today’s science and technology, why are we still unable to anticipate wars, economic depressions, financial bubbles and even fashion trends?

Conventional models for forecasting economic and social trends simply do not work because they rely on a fatally flawed assumption about how 
people behave. Unfortunately, “fatal assumptions” are common throughout scientific history, and they often languish for far too long. New ideas can 
blossom only after wrong assumptions are discarded. When evidence refutes long-held assumptions, truth has a chance. A new theory emerges, and
the old theory’s plethora of special cases and exceptions fade away. A proper perspective enhances our ability to predict and prepare for the future.

The fatal flaw that economics and broader social science fields rely upon is external causality, or the notion that major events are the primary influence 
and shaper of history. This model is just as attractive –and just as mistaken — as the notion of the four elements, the four humors or a geocentric 
universe. Yet even in the face of contrary evidence, 
people find it hard to divest themselves of deeply ingrained notions.

Now imagine a modern, ground-breaking theory, which could link all human social behavior — cultural, economic, political, and more — into a single, 
elegant and unifying framework. Well, such a framework is here, and it’s called socionomics.

Socionomics succeeds by turning the assumption of external causality on its head, and it instead recognizes internal causality. People in groups share
an unconscious collective disposition that is endogenously regulated. This shared social mood steers the actions that groups take and therefore the 
events that unfold across time to create history. In other words, psychology precedes actions, not vice-versa. Furthermore, social mood’s fluctuations 
are patterned, which makes it possible to forecast the type and character of social and economic events. Socionomic causality is the engine of history.

The power of socionomics is radical and unprecedented. Conventional social theory would have had you trapped in Germany when the Nazis took 
over; socionomics tells you when the political environment is likely to turn dangerously unstable. Conventional economics would have you lose 
everything in a major financial crash; socionomics tells you when and where to expect them. As research marches on, the evidence continues to mount
in favor of the socionomic insight.

[The Wave Principle of Human Social Behavior and The New Science of Socionomics, 1999, Robert R.Prechter jr.]

 

 

[Article] How to Apply Socionomics Properly
2011, Alan Hall, Article, Socionomics Theory, The Socionomist
By Alan Hall, originally published in the September 2011 Socionomist

While socionomic theory is relatively straightforward, applying it can be a challenge. Expressions of social mood vary in myriad ways, and often they are 
difficult to measure. Misapplying socionomics can lead not only to errors but also to misconceptions about the theory’s utility.

On the other hand, learning to apply the model properly can help you anticipate a social system’s tendencies as well as understand its past and present.

Let’s briefly review some sociometers and then examine the core ideas necessary to use them.

Sociometers Vary in Utility
There are no perfect sociometers. As Robert Prechter explained in “Sociometrics—Applying Socionomic Causality to Social Forecasting,” in the 
September 2004 issue of The Elliott Wave Theorist:

Sociometers are selective measures of certain types of social actions, not mood itself, and probably always will be. Therefore, unlike a thermometer,
they are not perfect gauges of what they attempt to measure, which is the underlying social mood.1

Sociometers vary widely in utility because they differ in data quality, breadth of social expression, the relative speed at which the manifestation of mood 
becomes observable, and the extent to which they indicate the tenor (positive or negative direction) and character (specific traits such as optimism/pessimism) 
of social mood. Prechter wrote, “In every case, then, socionomic data are impure, inexact, relative and/or limited.”1

Stock indexes are the benchmark sociometers because they are broad in scope, contain plenty of clean data and rapidly reflect social mood. The cash stock
markets are the best sociometers most of the time. Yet, even nominal equity indexes can be improved upon at times. Prechter explains,

Some sociometers are expressed as ratios. The DJIA, for instance, is commonly quoted in terms of dollars. One may also quote it in terms of gold or the PPI 
(which I often do) or anything else. Sometimes using multiple ratios provides more information. I am impressed, for example, how well the constant-dollar Dow 
has matched other expressions of social mood over the past half century. In other historical times, money and gold were equal or the money supply was constant, 
making choices among such graphs moot.1

As a socionomist, you must choose the most appropriate sociometer for the social environment you intend to measure.

Socionomics Essentials
When applying the theory, socionomists should keep the following key points in mind:

Principle #1
Social mood motivates social actions, not the other way around. People frequently apply the basic physics model of causality—action and reaction—to human 
affairs. In other words, they assume that external events “impact” society’s mood in the same way one billiard ball impacts another. Under the physics model, 
for example, recessions make businesspeople cautious, whereas socionomics argues the opposite: cautious businesspeople cause recessions. One must apply the 
counter-intuitive socionomic insight —that changes in social mood regulate changes in social expressions—to understand and use sociometers properly and 
conduct useful socionomic analysis. Prechter wrote,

I find myself upon occasion having to work hard at dispelling old contradictory thought patterns in order to re-establish mental integrity on the more difficult 
challenges of the socionomic insight. … The average person’s resistance to the socionomic insight is so formidable that it compares to having one’s view of existence
challenged. I believe that the reason for this resistance is the easy naturalness of the idea of event causality: It works in physics, so people assume that it must operate
in sociology. This deeply rooted assumption is stronger than piles of evidence to the contrary.2

Even practicing socionomists must fight the impulse to explain phenomena via backwards causality.

Principle #2
Socionomics is a tool for understanding the tendency of the social system, not a crystal ball for predicting specific events. Socionomic analysis can help provide
a probabilistic assessment for the future of a complex, dynamic social system. It cannot tell you exactly which events will occur as a mood trend develops, but it can tell 
you the tenor and character they likely will express. For example, Chapter 14 of The Wave Principle of Human Social Behavior (1999) lists many of the categories 
of behaviors and the emotions that society tends to display in response to social mood. Here are a few examples:

Concord/Discord: A rising mood leads to a substantial consensus in politics, culture and social vision; a falling mood leads to a divided, radical climate.
Inclusion/Exclusion: A rising mood leads to expressions of social brotherhood and acceptance among races, religions and political territories … . A falling mood leads
to apartheid, religious animosity, cavalier cruelty, secession [and] independence movements … .
Confidence/Fear: A rising mood leads to speculation in the stock market and in business. A falling mood causes risk aversion in the stock market and in business.

Knowledge of the mood-driven tendencies of society, used in context, may clue you to the likelihood of specific events. For example, the October 2003 issue of 
The Elliott Wave Theorist attempted a number of specific forecasts based on the conjecture that a large-degree negative social mood trend was under way. 
Several of these predictions, quoted below, have already happened, and others are trending:

Wave (a) of the bear market in social mood will bedevil more than one president.
The U.S.will increase restrictions on immigration.
Society will label the Federal Reserve chairman a fool who is greatly responsible for the collapse.
Politics will become far more polarized, splintered and radical.
The U.S.will shut down its space program.
The Drug War will turn more violent. Eventually, society will decriminalize possession and sale of recreational drugs.
The suicide rate will go up.
The birth rate will continue to fall in the U.S. and Europe.
Fannie Mae and Freddie Mac will shut down.
Society will discredit and then abolish the Federal Reserve System.

As you can see, the proper application of socionomics enables you to envision specific events that may occur under certain mood states. It does not, however, say that 
those events must happen.

Principle #3
Socionomics is more than a theory of stock price fluctuation. The Elliott Wave Principle is a model for explaining stock price fluctuation based on changes in social mood. 
Socionomics is a broader theory that describes the relationship between social mood and many kinds of social action, including changes in how society values stocks. 
Stock indexes are useful tools when conducting socionomic analysis because they provide a quantified and nearly instantaneous measure of social mood.

Principle #4
Fringe social manifestations are less important than central ones. A basketball analogy is useful here. Coaches tell defending players to watch the belly button of offensive 
opponents. The idea is that by focusing on the center of mass, which moves the least, they are less likely to be fooled by head fakes, feints and limb or ball movements. 
A socionomist must watch society similarly. Soft sociometers, such as characteristics of fashion, music or movies, can offer valuable information, but the stock market is 
more precise.

Principle #5
The stock market and the economy are fundamentally different. Financial and economic behaviors have different motivations and produce different results. In the economic 
marketplace, the law of supply and demand in the context of opposing desires between producers and consumers produces price equilibrium. This same law is irrelevant in 
the financial context, where speculative buying and selling reigns, buyers and sellers frequently switch roles, and demand is uncertain and subject to herding. This produces
wild and continuous price fluctuation. Prechter and Wayne Parker wrote in the Journal of Behavioral Finance,

If the law of supply and demand were regulating financial markets, prices and relative values for investments would be as stable as those for shoes and bread. … 
When certainty about personal valuation applies, people maximize utility and markets seek equilibrium. When uncertainty about others’ valuations applies, people herd and 
markets are dynamic.3

Principle #6
Socionomists must collect and compare data properly. Sociometers must be theoretically defensible. It is true that for some socionomic studies the lack of data can make it 
necessary to compare one country’s stock index to another’s production index. But where data are available, compare apples to apples.

Principle #7
Extreme expressions of social mood signal increased potential for trend change, not trend continuation. Investors tend to buy near market peaks and sell near lows because
they are most aligned with the collective sentiment at the extremes. In financial markets, opinion convergence and sentiment extremes therefore tend not to presage trend
continuation but rather imminent reversal. Likewise, other extreme social manifestations signal that a mood trend may have reached an extreme and is ripe for reversal.

Principle #8
There is a “relative temporal relationship between immediate social actions, which can constitute sociometers, and lagging social actions, which often constitute news.”1 
Stock purchases tend to lead slower indicators of mood, such as economic indicators, war, legislation and the like, for the reasons described in Prechter’s explanation of 
varying lag times among different types of social activity.

Principle #9
Social mood is never completely positive or negative but always a mix. For example, when social mood turns down from a major top, everyone’s mood does not shift 
suddenly to the negative extreme. Rather, pessimism emerges and begins to increase within the mostly optimistic mix of social expression. The reverse is true at a bottom. 
The important item to watch is the aggregate trend of social mood’s predominant expressions.

Principle #10
The social mood trend waxes and wanes in the fractal pattern described by Elliott waves. So, depending on the sociometer, small-degree positive expressions of mood 
constantly occur within larger-degree negative trends and vice versa.

In Summary
As socionomics continues to move from the stage of being ignored to that of being criticized, it becomes ever more important for those of us applying socionomics to do
so consistently and properly. Among many examples of the theory’s utility is the November 1982 issue of The Elliott Wave Theorist (EWT), which forecast an asset mania: 
“The next few years will be profitable beyond your wildest imagination. … Tune your mind to 1924.”4 Conquer the Crash, Robert Prechter’s 2002 best-seller, contained 
many of the startling financial media stories that broke in 2007–2011. EWT also nailed the 2009 bottom in stocks. In all of those cases, socionomics also forecast the social 
climate that would result. The Socionomist has done likewise, forecasting moves toward drug legalization, a rise in secessionism and authoritarian conflict, widening rifts
in the EU and Mideast violence.

Socionomics has demonstrated its value as a social forecasting tool, but as with any tool, the operator must understand it and use it correctly in order for it to be effective.■

CITATIONS

1Prechter, R. (2004, September). Sociometrics—applying socionomic causality to social forecasting. The Elliott Wave Theorist, 
Retrieved from http://www.socionomics.net/2004/09/sociometrics-applying-socionomic-causality-to-social-forecasting.

2Prechter, R. (2003). Pioneering studies in socionomics.Gainesville,Georgia: New Classics Library. Chapter 26.

3Prechter, R., & Parker, W. (2007). The financial/economic dichotomy in social behavioral dynamics: the socionomic perspective. 
The Journal of Behavioral Finance, 8(2), Retrieved from http://www.socionomics.net/pdf/JBF_Financial-Economic-Dichotomy.pdf.

4Prechter, R. (1982, November). The Elliott Wave Theorist, 3.


 

 

Let's Be Reasonable About Financial Markets
Exogenous-cause reasons for market behavior are based on a false premise

By Bob Stokes
Tue, 30 Jul 2013 

Brand Blanshard was a philosophy professor at Yale who believed that a life well-lived is based on being reasonable. 
At the age of 92, Blanshard expressed that belief in his book, Four Reasonable Men: Marcus Aurelius, John Stuart Mill, 
Ernest Renan, Henry Sidgwick. Blanshard lived to be 95. Here's a quote from his obituary in The New York Times (1987):

He espoused rationalist thought and wrote a trilogy on reason. ''What is reasonable is right,'' he said in an interview in 1977. 
''How many people have succeeded in being reasonable for a day, a week, a life?''

Of course, "reasonable" means being fair, thoughtful, open-minded, etc. We've all heard the phrase, "Let's be reasonable," 
spoken as a request for people to tame their emotions and reach a satisfactory outcome.

Yes, we're all also aware that things don't always work out that way. Bias and emotion at the unconscious level often block
the path of reason. The "logic" we have for a course of action is too often a rationalization for what we want. That's certainly 
the case in financial markets, where emotion rules. When the prevailing sentiment is bullish, investors find endless "reasons"
for why stocks will continue to rise. When sentiment is bearish, investors never run out of reasons to support their bearish view.

For example, pundits may say stocks are going higher because equities are undervalued. But those same pundits were silent 
about the market's valuation around the time of the previous major low, when stocks were even cheaper. In a downtrend, pundits
 might point to slow economic growth to justify a bearish view even though they ignored equally poor economic indicators during 
the prior rally.The truth is: All exogenous-cause market reasoning is based on a false assumption. 
But, investors and the financial media continue to hold that assumption nearly every day.


(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 

A Power Law in the Stock Market

R.N. Elliott's depiction of the progress of the stock market unequivocally implied that while larger stock 
market reactions occur less often than small ones, they do not occur less often relative to the size of 
advances that precede them, but in fact just about as often. In other words, Elliott  implied  that the 
stock market follows a power law. 

In 1995, Boston University physicists  Gene Stanley and Rosario Mantegna found that the fluctuations 
in the Standard & Poor's Composite index of the 500 highest capitalized stocks do follow a power law. 

This particular power law is a Levy stable law (named after a French mathematician of the early 20th century), 
which produces a bell curve with "extended wings,"  indicating that far- from - normal fluctuations in terms of 
size occur a bit more often  than they would  if they followed a one-to-one  relationship to the  duration of
the  data  sample.  Figure 2-16,  from Mantegna and Stanley's article in Nature, demonstrates that the S&P's  
fluctuations are  quite uniform  throughout the time scale, from 1 minute to 1000 minutes.  This finding  is  
consistant  with the added  wrinkle that large fluctuations, at least in this data example, occurred a bit more 
often than smaller  ones relative to the time intervals between them.  Levy laws also  govern birds'  flying and
landing patterns, drips from leaky faucets, the wanderings of ants, and fluctuations in  cotton prices  and 
heartbeats. Stanley is applying the behavioral similarities of complex systems to  understanding 
landscape formations,  traffic  patterns,   Alzheimer's  disease  and the  behavior  of  neutron  stars. 
Like fractals, power laws suffuse nature. 

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 


The Conflict Between Reality and False Premise


Even though most economists use the stock market as a leading economic indicator, they habitually present
arguments reasoned in the other direction because they cannot imagine the proper chain of causality to be
true. Conventional analysts try to reason from economics and political policy, which they call "the fundamentals,"
to mood (i.e. , stock prices). This approach is backward, which is why it consistently fails at the most critical 
times. The so-called fundamentals are the caboose on the train. This approach appears successfully predictive 
occasionally when the train is on a long straightaway. Then the trends are the same. Those in the caboose, 
however, are unequipped to predict a coming curve in the track that will change the direction of the locomotive. 
However, those up ahead observing the direction of the locomotive can tell you quite reliably what the caboose 
will do.This is why an economist cannot predict the stock market, but a stock market observer can do quite well 
at predicting the economy. 

The actual direction of cause and effect does not stop economists from continuing to assert its opposite. 
Six months after the stock and currency collapses in Thailand, the Associated Press on December 8,1997 
said, "The permanent closure of insolvent finance companies is expected to leave 5000 to 10,000 workers 
unemployed, rattle the already battered stock market and spark a further drop in Thailand's currency, the baht, 
which has lost more than 40% of its value against the dollar." Observe, that the stock market and currency 
collapsed first,  precipitating the failure of companies and unemployment. Despite this chronology, experts 
interviewed by the presscannot help presuming that those events will be causal of stock market trends. 
If that were so, why did  stocks bottom nearly a year before unemployment hit its peak in the Great Depression 
of 1933? 

Why didn't the highest number of business failures and workers unemployment in nearly a century then "rattle 
an already battered stock market"?  

The Washington Post likewise said on May 28, "..the latest display of labor unrest threatens to plunge South
Korea into a new financial crisis." However, there was no "labor unrest" or any other social crisis preceding the
latest financial crisis, was there? Indeed, that country's social mood in the summer of 1997 was confident, 
ebullient, even downright giddy. But overwhelming contradiction is no deterrent to conventional analysts, where 
an erroneous underlying assumption stubbornly governs all commentary. This foible is not new. Garfield Drew 
and John Train describe how investors of the late 1940s braced for a "typical postwar depression" that the 
majority of economists predicted would follow World War II. It never came. Nor should it have. A financial crisis
in the 1850s preceded the Civil War. A financial crisis in the 1930s preceded World War II. 

While a deep recession did follow World War I, which is one of two apparent precedents that economists were 
using, the usual chronology is evident there as well in that before the war started, the stock market had been 
falling for two years, it was below its peak of eight years previous, and the economy had been in recession for 
an unprecedented four years out of five. While there is no tradition of postwar economic contraction, there is a 
very consistent precedent of prewar bear market. Because these facts do not fit the conventional prescription, 
they are ignored as meaningless.

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

 

 

Socionomics

Finance

1. Stock markets around the world will continue to fall. Ultimately, the averages will drop
more than 90 percent.
2. Real estate values will fall more than they did in the 1930s and 1940s.
3. Rating services will resume the trend of downgrading bond quality. Eventually, states, 
counties, cities, corporations and even nations will default on bonds in record amounts.
4. Debt packages made of mortgage-backed bonds, auto loans and credit card debt will 
become viewed as unworthy investments. 
5. Many, if not most, pension plans will fall in value and be unable to provide the promised 
benefits. Anger over this development will result in demonstrations, violence and tardy 
and ineffective political reform.
6. Prices for collectibles will continue to fall. Many will become little more than curios.
7. More banks will fail than failed in the 1930s.
8. The total amount of credit outstanding worldwide will decline substantially.
9. The Federal Reserve chairman will be labeled a fool who is greatly responsible 
for the collapse.

The Economy

10. The trend toward economic contraction that began in 2001 will continue to develop 
into a depression.
11. The unemployment rate in the U.S. and in most countries around the world will rise 
and eventually exceed  25 percent.
12. A record number of manufacturing companies in the U.S. will fail.



Politics

13. George W. Bush, as we have said since his election and through his highest popularity 
ratings, will lose the 2004 election, probably in a landslide. [Editor's note: Did not happen, 
mainly because the stock market held up.]
14. A Democrat will be the next president. (I think it will be Hillary Clinton, currently not a 
candidate.) [Editor's note: Did not happen, but came close in 2008 as Hillary Clinton lost the
Democratic primary to Barack Obama who became president.] 
15. Many of the entities that were privatized or “de-regulated” during the bull market will be 
re-nationalized and re-regulated. (A less-likely but possible alternative is that many regulatory 
agencies will be abolished.)
16. Wave (a) of the bear market in social mood will bedevil more than one president.
17. The occupation of Iraq by the U.S. will progress from a quagmire to a financial, political 
and public relations disaster. 
18. Terrorists will attack the U.S. again, more severely than on 9/11/01, 
probably within the next 18 months. [Editor's note: Did not happen in this timeframe.]
19. Separatist movements will gain momentum. Many will successfully establish new 
geopolitical entities.
20. Fears about technology will lead to restrictions on its development.
21. Politics will become far more polarized, splintered and radical.

 


Other Social Trends

22. Social groups, including economic, political, religious, genders and classes, will polarize 
and splinter further. That is, they will polarize both internally and with respect to opposing groups.
23. The birth rate will continue to fall in the U.S. and Europe until the bear market in social mood 
(as indicated by the downtrend in stock prices) ends.
24. Religion will become increasingly popular. Its advocates will become increasingly passionate. 
Religious intolerance will increase.
25. Belief in magic will increase.
26. Science will be turned to manipulative or malevolent purposes.
27. Epidemics will increase in number and severity. Malaria will return to the U.S. Eventually, DDT 
will be re-legalized.
28. Films will break new ground in horror, probably with themes that include suicide and torture.
29. Environmentalists will become militant and intentionally destructive.
30. Disney’s family-fare feature cartoons will fall in popularity, and the studio will stop making them.
31. Professional baseball and basketball will suffer difficulties. 
New record performances by individuals will become rare. No team will have a “dynasty” during 
the bear market. Leagues will restructure. Attendance and viewership will fall. Salaries will decrease. 
32. New brutal sports will be introduced and gain popularity.
33. Physical fitness (“working out”) will go out of style

(The Wave Principle of Human Social Behavior, Robert R.Prechter 1999) 

        

 

 

 

 

 

 

 

 

 

 

 

 

 

Elliott Wave Principle    Socionomics   Terms of Service   Disclamer   Datenschutz   Frequently Asked Questions (FAQ)    Impressum

Copyright ©   2018. ELLIOTT today. All Rights Reserved.  None of these stocks are buy or sell recommendations. 
There is a high degree of risk in trading. 
CLICK HERE FOR FULL RISK DISCLOSURE.

The Elliott Wave Principle is a detailed description of how markets behave. The description reveals that mass investor psychology swings from  
pessimism to optimism and back in a natural sequence, creating specific patterns in price movement.Each pattern has implications regarding  the 
position of the market within its overall progression , past, present and future. The purpose of this publication and its associated services is  to 
outline the progress of markets in  terms of the Elliott Wave Principle and to educate interested partiesin the successful application of the Elliott 
Wave Principle. This is probably the most comprehensive trading education on how to project high probability time & price targets based  on
Elliott Wave pattern structure.

The material is ONLY PROVIDED FOR EDUCATIONAL PURPOSES AND PAPER TRADING. The recommendations are for paper trading 
to develop your skills for real time trading. If you can make profits in paper  trading, and wish to trade real time with real money and need 
assistance, then seek help from a qualified financial advisor. 
THIS IS NOT FINANCIAL ADVICE.