Robert R. Prechter is known for developing a theory of social causality called socionomics, for developing a new theory of finance and for his long career applying and enhancing R.N. Elliott's model of financial pricing called the Wave Principle.
Prechter has developed a theory of the causality of social action—called socionomics—which accounts for the character of trends and events in finance, macroeconomics, politics, fashion, entertainment, demographics and other aspects of human social history. His "socionomic hypothesis" is that social mood, which is endogenously regulated, is the primary regulator of social action. Under development since the 1970s, this idea first reached a national audience in a 1985 cover article in Barron's. Prechter has made presentations about socionomic theory at the London School of Economics, MIT, Georgia Tech, SUNY, University of Cambridge, University of Oxford, Trinity College Dublin and various academic conferences. Follow this link for a description of socionomic theory. Essential publications relating to this aspect of Prechter's work include:
"The Financial/Economic Dichotomy in Social Behavioral Dynamics: The Socionomic Perspective," by Prechter and Wayne D. Parker. Journal of Behavioral Finance, 2007.
"Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results," by Prechter, Deepak Goel, Wayne D. Parker and Matthew Lampert. SAGE Open, 2012. It was SSRN's third-most-downloaded paper in 2012.
History's Hidden Engine (2006)
Watch the full documentary at this link.
Notable articles/books/papers that discuss socionomics:
I Know What You'll Do Next Summer," New Scientist, August 31, 2002, by John Casti.
"A Literature Review of Social Mood," Journal of Behavioral Finance, 2006, by Kenneth R. Olson.
Mood Matters: From Rising Skirt Lengths to the Collapse of World Powers, 2010, by John Casti.
Ahead of Change: How Crowd Psychology and Cybernetics Transform the Way We Govern, 2011, by Constantin Malik.
Moods and Markets: A New Way to Invest in Good Times and in Bad, 2012, by Peter Atwater.
Prechter has developed a new theory of financial causality that proposes a fundamental separation between the fields of finance and economics. His Socionomic Theory of Finance (STF) opposes the Efficient Market Hypothesis (EMH)—which equates economic and financial markets—on ten major points. In brief, Prechter accepts that in the economic realm, because producers and consumers are knowledgeable of their own needs and desires, the pricing of utilitarian goods and services is mostly objective and motivated by conscious utility maximization; in this context the balance of desires (supply and demand) between heterogeneous groups of producers and consumers leads to equilibrium-seeking in prices. But his STF proposes that in the financial realm, because investors are ignorant of what other investors will do, the pricing of investments is mostly subjective and motivated by unconscious herding; in this context, unfettered changes in desire (demand) within a homogeneous group of investors produce unceasing dynamism in prices at all degrees of activity. In economics, substantial certainty about one's own values induces mostly rational thought; in finance, substantial uncertainty about others' values induces mostly non-rational herding. Prechter's proposed Law of Patterned Herding (LPH) is that investors' moods and their resulting decisions to buy and sell are regulated by waves of optimism and pessimism that fluctuate according to a fractal model called the Wave Principle, or the Elliott wave model. Prices of goods and services are important because they regulate supply and demand. But prices of investments are irrelevant because they are merely a transient byproduct of mood-induced impulses to buy and sell.
Prechter is known for a long career in the development and application of the Wave Principle, an empirically derived model of financial pricing identified and described by Ralph Nelson Elliott in the 1930s. According to this model, financial market prices—especially aggregate stock market prices, which are particularly sensitive to changes in social mood—develop in a series of five "waves" in the direction of the immediately larger trend and in a series of three waves (or combination thereof) when moving contrary to the immediately larger trend, thereby producing a patterned, hierarchical fractal. This 5/3 construction leads naturally and efficiently to fluctuation at all scales, to trending at each "degree" of the hierarchy and to a tendency of price movements to form Fibonacci relationships. These waves take certain described forms called Elliott waves. This model is compatible with socionomics and Prechter's theory of finance. Prechter has written/edited a dozen books on the Wave Principle, including the original works of R.N. Elliott and his successors. Essential publications relating to this aspect of Prechter's work include:
Elliott Wave Principle (1978/1983), a description of the Wave Principle and a forecast for a great bull market.
Conquer the Crash (2002), an application of Elliott waves, associated technical indicators and the history of credit to forecast a period of financial, monetary and economic crisis.
Prechter began applying the Wave Principle to financial markets in 1972. Each month, he writes The Elliott Wave Theorist. His colleagues at Elliott Wave International produce Global Market Perspective, a 100-page analysis of all major markets around the world. His firm also provides monthly market publications covering the U.S., Europe and Asia; three times a week Short Term Updates for each region; intraday analysis of the S&P and other markets; and specialty services for investors in currencies, metals, commodities and energy markets.
Prechter won the U.S. Trading Championship in 1984 with a then-record 444% return in four months in a monitored, real-money options trading account. His publication, The Elliott Wave Theorist, won numerous speaking, timing and publishing awards during the 1980s, and in 1989, he was named "Guru of the Decade" by the Financial News Network (now CNBC). In 1999, Prechter received the Canadian Society of Technical Analysts' inaugural A.J. Frost Memorial Award for Outstanding Contribution to the Development of Technical Analysis. In 2003, Traders Library granted him its Hall of Fame award. The Market Technicians Association presented Prechter its Annual Award in 2013.
Since founding EWI in 1979, Prechter has focused on applying and enhancing the Wave Principle, R.N. Elliott’s fractal model of financial pricing. Prechter shares his market insights in The Elliott Wave Theorist, one of the longest-running financial publications in existence today. Prechter has developed a theory of social causality called socionomics, whose main hypothesis is that endogenously regulated waves of social mood prompt social actions. In other words, events don’t shape moods; moods shape events. Prechter has authored and edited several academic papers. He has written 18 books on finance and socionomics, including a New York Times bestseller.
The essence of Prechter's socionomic hypothesis is that fluctuations in social mood--producing waves of optimism and pessimism--are a natural result of human association and have consequences in social action. Social mood is not conscious, rational and objectively reactive but unconscious, non-rational and subjectively active. While people almost universally believe that the character of social events determines social mood, socionomics recognizes that the causality is the reverse: Social mood determines the character of social actions. The causality of social mood is unidirectional; there is no feedback loop of events back to social mood. Events do stimulate brief emotional reactions, but they are transient and do not affect social mood.
Some forums of activity are ideal for the immediate expression of social mood. The one in which the most detailed and pristine data exist is the stock market, where investors in the aggregate buy and sell stocks almost immediately to express changes in their mood. Other qualities and activities, such as facial expressions, voice timbre, the music people choose to hear and the clothes they choose to weard, might serve as equally good "sociometers" if accurate data were available.
Many actions taken in response to trends in social mood take time to manifest. For example, business people might decide, in expressing the social mood, to expand or contract operations. But it takes time to implement such plans, so changes in macroeconomic activity lag changes in the stock market. The same is true of political actions, which generally require a large consensus and thereby substantially lag social mood trends. This is why sociometers such as the stock market averages are leading indicators of macroeconomic trends and political actions.
Socionomics postulates that waves of social mood are endogenously regulated, fluctuating toward the "positive" (optimistic) and then the "negative" (pessimistic) direction according to a patterned, hierarchical fractal called the Wave Principle, identified as a stock market model by Ralph Nelson Elliott in the 1930s. Waves have substantial quantitative leeway but adhere to one overall form, under which there are five specific forms and a limited number of variations thereof, as described in the literature. Because Elliott waves are patterned, they are probabilistically predictable, thereby making the character of social trends probabilistically predictable as well.
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