With more than $4 trillion in losses, 9% of the labor force now unemployed, industrial production down 13% from a year ago and most company profits falling or crossing the zero line into losses, it has become starkly evident that the economists who failed to see the crisis coming don’t understand socionomic causality.
Aggregate human psychology, which we call social mood:
1) Trends in recognizable Elliott wave patterns
2) Is endogenous (arises from within us) and
3) Does not respond to exogenous causes (outside forces or events).
This means that the conventional assumption that markets and the economy respond to events is wrong. Socionomics posits that positive and negative waves of social mood govern stock prices and the timing and character of social events. These fluctuations in mood are the primary engine of human history.
Several leading academics, some of whom have won Nobel prizes, are helping turn the tide against the old ways of thinking. Two of these insightful and courageous economists are Robert Shiller and George Akerof, who just released a highly recommended new book, Animal Spirits. By saying that human psychology drives the economy, the authors embrace one of the core tenets of socionomics.
Other economists are beginning to describe problems with the conventional view.
A February 2009 paper by eight American and European economists titled, “The Financial Crisis and the Systemic Failure of Academic Economics,” describes the:
Systemic failure of the economics profession…. Misallocation of research efforts in economics…. Models that, by design, disregard the key elements driving outcomes in real-world markets…. The need for a major reorientation of focus in the research economists undertake… [The fact that the recurring phenomenon of] ‘systemic crisis’ appears like an otherworldly event that is absent from economic models.
Finally, they say “What we need are models capable of envisaging such ‘exceptional times’” as today’s crisis.
We already have one. Socionomics has provided exactly this for years. The model incorporates human behavior, evolutionary biology, the Fibonacci mathematics that regulate growth and Robert Prechter’s thirty years of observation of markets, psychology, social expressions and economic activity. Socionomics provides a broad, deep picture of the roots, patterns and outcomes of human social behavior.
By contrast, today’s academic economists:
- Labor under flawed assumptions using inadequate, simplistic models seemingly designed for the convenience of the modelers
- Design their theoretical models with “strong and highly unrealistic restrictions to assure stability”
- Ignore “hard-to-measure factors like human psychology and people's expectations about the future…”
- Prefer analytical simplicity, and thus exclude from their models crucial, but mathematically-difficult concepts such as unemployment
- Don’t understand the Financial/Economic Dichotomy
- Don’t recognize the role of herding in the embrace or avoidance of risk
- Don’t understand how social mood regulates financial regulation and de-regulation
- Confuse cause and effect. They think financial institutions “fomented the current crisis, by creating risky products, encouraging excessive borrowing among consumers and engaging in high-risk behavior themselves….” In reality, social mood prevented the embrace of risk after the Great Depression and strongly encouraged it for the last three decades.
It will take time for socionomics to become more widely understood and embraced by the mainstream, if indeed that ever happens. In the meantime, you can use the waves of social mood to your advantage. You don’t have to be hampered by an inadequate model.
Want to learn more?
“Endogenous waves of social mood that trend in a patterned hierarchical fractal” is a mouthful, but it really isn’t that complicated. In fact, it’s fascinating, and, if you “get it,” it changes the way you view the world and boosts your independence. You can read a free, detailed description of how the human social experience forms a fractal in an essay by Robert Prechter. It originally appeared in Arthur C. Clarke’s book about fractals, The Colors of Infinity. If you are a subscriber or ClubEWI member, click here and log in. If you are a first-time visitor, just sign up here first. It’s free, and it’s worth it.
Also, If you're new to Robert Prechter's Elliott Wave Theorist, the May 2009 issue is the perfect place to start your journey. It's an exceptional resource for busting the widespread myths about market analysis, market timing and bull-bear causality. Prechter shatters the myths most mainstream investors simply take for granted. Then with a remarkable dose of common sense, Prechter goes on to explain what really can make you a successful investor.