Prechter theory of financial causality 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 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 speculators 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 Law of Patterned Herding (LPH) proposes 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. Prices of goods and services are important because they regulate supply and demand. Prices of investments do not regulate anything; they are merely a transient byproduct of mood-induced impulses to buy and sell. STF is not derivative of any preceding theory, making it a new paradigm. Essential resources include:
Book: The Socionomic Theory of Finance
Video: The Socionomic Theory of Finance: An Alternative to EMH and a Foundation for Technical Analysis
Paper: The Financial/Economic Dichotomy in Social Behavioral Dynamics: The Socionomic Perspective