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 scholarly 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 and rationalization. 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.
The Wave Principle
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 fractal 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 display 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.
Market Analysis and Forecasting
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, bonds 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.