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Setting the Record Straight About Socionomics

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Socionomics has moved past the stage of being ignored to that of being criticized. From there it's a shorter step to it being considered self-evident.

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Five years ago, we were chatting with Robert Prechter about the well-known progression of social attitudes toward breakthrough theories. We agreed that when socionomics moved past the stage of being ignored to that of being criticized, it would be a shorter step from there to it being considered self-evident. With that in mind, all of us at the Socionomics Institute were glad to see James Kostohryz's article critiquing socionomics and hope it spurs healthy dialogue.

Mr. Kostohryz seems well-meaning and in search of truth. We respond in that spirit. And following his lead, we've written this article with general readers in mind.

We'll begin with Mr. Kostohryz's main criticism of socionomics: that much of its published supporting evidence to date is derived through statistically informal methods. This is true. For now, much of the theory's evidence does come from detailed correlation studies and historical examinations. But in sum they show socionomics' compelling power to explain and in many cases predict. And they surely justify rigorously testing its hypotheses. Statistical studies that support the tenets of socionomics are in fact coming to the fore, as we note below. We will have more to say about observation, theory and statistics at the end of the article.

But first, we address the critique itself. Mr. Kostohryz makes several crucial errors in explaining socionomics, its empirical support and its application to date. We hope that by setting the record straight, readers will be better equipped to appreciate the significance of the perspective and make an informed decision about its potential uses.

Here are the most important misconceptions in Mr. Kostohryz's essay:

1. The essay reads:
The socionomics literature isn't clear at all on the issue of whether cultural trends as reflected in social phenomena such as television shows are predictive of stock market trends, or whether stock market trends are predictive of the cultural trends reflected in social phenomena such as television shows.
The literature does not offer either of these formulations. The essence of socionomics is that changes in social mood motivate decisions to take social actions of many types, including-to use the examples cited above-the aggregate buying and selling of stocks and decisions of which television shows to watch. So, where does prediction come in? Actions that can be taken almost immediately in response to social mood tend to register first and can therefore be used to anticipate actions that take more time to effect. For example, investors can act to buy or sell stocks faster than a business owner can act to complete plans to expand or contract operations and faster than a government can act to draw up a peace treaty or start a war. This is why the stock market is a good leading indicator of many other types of social actions, including macroeconomic and political trends.

Recent studies by Eric Gilbert and Karrie Karahalios, and Johan Bollen et al, and additional preliminary work by Peter Gloor and others, all suggest that society may register its mood via social media such as LiveJournal and Twitter even faster than it does via the stock market. This finding fits socionomics because average people can tweet faster than they can make a stock trade.

2. The essay reads:
…most available evidence points to the contrary thesis. Social mood actually tends to get darker after a bear market has been underway, not before. Likewise, social mood actually seems to get brighter after a bull market has been underway, not before.
This statement is exactly what socionomics predicts. Where we differ is on the fundamental issue of causality. Many people think that rising stock prices make society increasingly optimistic. Socionomics proposes that increasingly optimistic people make stock prices rise. So, the more positive social mood gets, the higher stock prices go; and the more negative it gets, the lower stock prices go. This is why social mood is "brighter" after a bull market has been underway for some time. Mood does not reach maximum positivity the moment after a stock market bottom. It is simply a bit less negative. The converse is true at market tops.

By the way, the idea that a relationship exists between mood and stock prices is a key observation of socionomics and hardly self-evident. In fact, it is anathema to the Efficient Markets Hypothesis, under which stock prices reflect only objective-value criteria and so should be independent of people's moods.

Similarly, the essay goes on to say:
It wasn't until the economy started growing after 1983 and the stock market boomed that social mood turned around and Americans started feeling good about themselves again.
This comment is also fully compatible with socionomics. As the bull market began, people felt a bit less bad about themselves. By its midpoint, they were feeling good about themselves. By the peak in the stock market in 1999, when they proclaimed a "New Economy," they felt great about themselves.

But again, the implicit assumption behind the author's statement, that events change social mood, is commonly believed yet challenged by socionomic theory. To develop this point a bit further: Prechter often comments, "No one asks where the booming economy came from in the first place." Socionomics both asks the question and provides an answer: The stock market turned up in immediate response to a trend toward more positive social mood that began in August 1982; the recession ended three months later. The lag occurred because increasingly optimistic investors could act almost instantly by bidding up the price of stocks, whereas it took time for increasingly optimistic consumers to purchase a new car or house, and for increasingly optimistic producers to get bank loans, hire employees, rent space, purchase materials, manufacture goods, design advertising campaigns, etc. Under socionomic theory, this is why the bottom of the recession lagged the bottom in the stock market.

3. The essay claims:
If you had invested based on any measurable gauge of social mood, there's little doubt that you would have bought stocks at the top of the bull market in late 1999 and early 2000.
It is important to understand that socionomics is not a market forecasting discipline but rather a theory that describes the relationship between social mood and the character of social action. Nevertheless, socionomically informed investors understand better than others what an extreme in social mood implies for financial markets. So, the essay's statement is the opposite of what socionomically informed investors should do. Under the socionomic model, it is logical to buy stocks when social mood is depressed and to sell when it is elevated. Measures of investors' actions show that this is the opposite of what most investors do; instead, they buy when fundamentals-which socionomics recognizes as lagging actions brought about by social mood-look good (before and after a top) and sell when they look bad (before and after a bottom).

As to what socionomically minded analysts actually said at that juncture, readers might wish to examine the labeled stock market graphs in The Wave Principle of Human Social Behavior, published in 1999; they all have a Roman numeral "V" at the peak, indicating by the Elliott wave model that the fifth wave of the great bull market from as far back as 1932 was ending. Several graphs in that book demonstrated the point that social mood was extremely elevated at that time. You can also read a socionomist's actual published market analysis from December 1999 here. Its bearish view was radically at odds with mainstream economists' published opinions at the time. The point here is not to claim anything about market forecasting accuracy, which can vary. The point is that the author's charge against socionomics is demonstrably inapplicable to socionomists, who have tools to recognize an extreme in social mood. The objection is properly applicable only to non¬-socionomists.

The essay makes the same error later when it says:
If you invested in stocks based on the social mood in the aftermath of 9/11 you would have sold stocks, right before one of the most powerful rallies in modern history.
This too is the opposite of the theory and how socionomically inclined forecasters applied it in real-time in conjunction with the Elliott wave model. On the evening of September 11, 2001, as panic gripped the investment community, Elliott Wave International published a report with charts and commentary calling for an impending bottom ("within days") and then the largest rally since the market's peak in 2000. As far as we know, this is the only such forecast to be issued at the time. Read the entire report here (to view only the forecast, see the highlighted text on page 7).

4. The essay reads:
Finally, social mood, by virtually any objective measure, was flying high right before the onset of the housing and financial crises in the 2007-2008 period. A person [who] had bought stocks based on such a reading of social mood would have been crushed by the most dramatic bear market since the Great Crash of 1929.
On the contrary, during this period Elliott Wave International issued emphatic warnings about frothy peaks in real estate, stocks and commodities because social mood was historically elevated and ripe for a major reversal. Much of EWI's commentary of 2002-2007 is documented in Conquer the Crash (2nd ed.) and in The Mania Chronicles-A Real-Time Account of the Great Financial Bubble, 1995-2008.

5.
The essay says:
In all of these cases [as listed in points 3 and 4], the turn in social mood did not precede but followed a turn in the stock market, the economy or in broader social events (such as wars).
This is incorrect. When the real estate market topped in 2006, for example, there was no identifiable social event-no economic downturn, no war, no speech, no legislation-that caused it. Socionomics has an explanation. Social mood, having reached a positive extreme, turned toward the negative, eroding credit confidence and depressing property prices, all of which precipitated the crisis that led to an economic downturn a year and a half later. This sequence of events expressed socionomic causality all the way through, as did the other examples the author mentioned.

Part 2 of the essay also includes several important errors.

1. The critique reads:
Super short miniskirts and stiletto heels were the hot trend according to market analyst Prieur du Plessis in June of 2008. Did that signal a bull market?
First, this statement gets socionomics backwards. Under socionomic theory, the mass popularity of miniskirts-which reflects a frisky attitude-should coincide with peaking social mood, therefore implying a coming bear market in stocks. Second, by mid-2008, stocks had rebounded in a counter-trend rally (in "wave 2," per the Elliott wave model) and mini-skirts re-appeared on some fashion runways. But as mood soured going into early 2009, stocks fell to new lows and long skirts became one of the year's notable fashion trends. Finally, socionomics does not claim that a certain fashion is produced exclusively at any time; there is always a degree of variety. Rather, it provides a guide for anticipating and assessing the relative popularity of those fashions.



2. The essay states that an econometric paper found that:
…hemlines were neither leading nor coincident indicators of economic growth.
Other economists disagree. Psychology Today (2009) reported, "The economists George Taylor (1926) and Paul Nystrom (1928), and more recently Helmut Gaus (1992) had noted that hemlines fluctuated in accordance with economic indicators." Nystrom was a professor at Columbia University who wrote "a large and scholarly work" titled The Economics of Fashion; George Taylor was a professor at Wharton School of Business where the George W. Taylor Professor of Management is named in his honor.

Further, the essay here discusses the stock market and the economy as if they were the same thing. They are not. Socionomic theory posits that the stock market, where social mood is quickly registered, is a better sociometer than the economy. To support their case, Prechter and his colleagues have completed a statistical paper that shows the stock market is superior to the economy as a predictor of U.S. presidential re-election results. The paper is in the peer-review process now. If reliable data over a sufficient period become available, it may be possible to complete a similar study regarding the relative degrees to which the stock market and the economy are statistically related to changes in hemline lengths and other fashion-related variables. Socionomics proposes that the stock market will have the edge.

3. The essay challenges the socionomic claim that negative trends in social mood, as indicated by bear markets in stocks, produce more intense horror films than do bull markets. It lists 13 titles. They are: The Shining, An American Werewolf in London, The Evil Dead, The Hitcher, Nightmare on Elm Street, Child's Play, Poltergeist, Scream, Candyman, The Blair Witch Project, Misery, Dead-Alive and Silence of the Lambs. To follow this discussion, please refer to Figure 1, a chart published in Prechter's book titled Beautiful Pictures (2003).



The chart delineates those times that Elliott wave analysts identify as Primary-degree bear market periods within the great Cycle-degree bull market of 1974-2000. The bear periods are 1977-1982 and 1987-1990, with the resulting recession carrying officially into 1991 but actually through 1992 and 1993 with respect to many economic statistics such as major job layoffs. Thus out of 26 years total, there are 13 years in which socionomists would expect horror movies to be more horrible, numerous and popular than in the other 13 years. Now observe the years of release of the 13 movies in Mr. Kostohryz's list of supposed exceptions: 1980, 1981, 1981, 1986, 1984, 1988, 1982, 1996, 1992, 1999, 1990, 1992 and 1991.

As Part 1 of Mr. Kostohryz's essay correctly stated, "Social mood was at its darkest point in modern American history in the late '70s and early '80s." This period includes the three years 1980-1982, in which four of 13 movies on his list appeared. In fact nine of these 13 titles (69%) came out in the 13 bear market years, but just four of them (31%) came out in the 13 bull market years. The rate of issuance of these titles during the bear years, then, was just over twice that of the bull years. These titles fit nicely into a socionomic template (Figure 1) that was published seven years earlier. And remember, the essay listed only supposed exceptions. A scientific study would analyze the release frequency of all popular horror films, compare their levels of intensity and assess their relative levels of popularity in relation to the markets. We must also point out that the critique's list does not mention the truly ground-breaking slasher and zombie movies of the 1966-1982 bear market in inflation-adjusted terms nor the horrific "torture-porn" movies released after the stock market high in 2000-or, more accurately, the real-value peak in 1999. (If you can't feel the negative social mood expressed in those movies, you are a zombie!)

5. In discussing the documentary History's Hidden Engine, the essay reads:

…the film conspicuously omits mention of the Spanish-American War, World War I, and the Vietnam War.

That is true. The one-hour video overview of socionomics necessarily highlighted only the broadest, major points. Nevertheless, a socionomist did address all three of these wars, on page 269 of Prechter's 1999 book, The Wave Principle of Human Social Behavior. Figure 2 below, from Prechter's speech at the University of Cambridge in February 2010, illustrates the timing of their occurrence. These examples dramatically support socionomic theory. World War I was fought during the second half of a 30-year bear market in real stock prices (1892-1920), the same period that produced the comparatively small Spanish-American War.



The Vietnam War, as stated in the 1999 book, is a partial exception to socionomic expectations in having simmered prior to the eight-year bear market that started in February 1966. But as the bear market progressed from that time forward, the nascent conflict became far more intense, as did the public's opposition to it, the latter culminating with the Kent State shootings at the stock market bottom of May 1970. (A former music critic at Entertainment Weekly, who is not a socionomist, recently wrote a piece about the turmoil in popular music that occurred that same year.) Also consider the other mass killings during the bear market: Mao's Cultural Revolution, Cambodia's Killing Fields and the Soviet Union's Afghanistan War, all events reflecting the global negative trend in social mood.

The socionomic view of causality, especially when married with an accurate stock market forecast, has special predictive value. In 1982, The Elliott Wave Theorist predicted that in concert with a stock market boom there would be no major international war for "at least ten years." That offered some comfort during the worried climate of 1982. As the stock market turned down in 2000, socionomists became concerned anew about war risk. The following year, terrorists attacked the U.S. Two years after that, the U.S. entered the Iraq conflict.

The essay reads:
And where was the multi-year decline in social mood leading up to the First Gulf War, the invasion of Afghanistan, the Iraq War, or the broader War on Terror? These military conflicts were all preceded by major multi-year bull markets and positive indicators of social mood generally.
These statements are erroneous on all four counts. U.S. involvement in the Gulf War began within weeks of the end of the bear market of 1987-1990, per Figure 3.



The War on Terror began with the attack on the Twin Towers, 18 months into a bear market. The Iraq War was authorized by Congress on the bottom day in the stock market in October 2002 and was launched on the bottom week of the test of the low in the Dow (it was the low in the World Stock Index) in March 2003. Socionomists have illustrated all of these events in published literature (see Figure 4).



As for the Afghanistan conflicts: The Soviet Union attacked that country in 1979, near the bottom of a major decline in social mood (see Figure 2), and the U.S. invaded it on October 7, 2001, about two weeks after the market bottomed for that year.

All four of the essay's examples provide yet more compelling evidence that sizeable negative social mood trends lead to wars.

6. The essay asks:
How can a documentary that claims to analyze the relationship of music to social mood and the stock market fail to analyze the social moods expressed in the music of Elvis and The Beatles even though these were arguably the two most important musical phenomena of their respective eras?
The question has four answers. First, the one-hour documentary does not make the claim Mr. Kostohryz says it makes. Rather, it presents an overview of socionomics and many of its related manifestations, of which music is just one. Second, the film includes Elvis in the label "Rockabilly" on the film's accompanying graph and includes an audio clip of the Beatles singing "She Loves You" as an expression of elevated social mood. (The director tells us, by the way, that it was not easy to get permission for that clip, and just try getting permission for an Elvis clip!) Third, page 251 in 1999's The Wave Principle of Human Social Behavior and the accompanying illustration, shown here as Figure 5, discuss and illustrate the roles of Elvis Presley and the Beatles, along with three other popular music icons, in expressing positive social mood.



Finally, in July 2010, Prechter's Elliott Wave Theorist contained a 40-page analysis of the Beatles' paths of progress and regress as they relate to rises and falls in the stock market. The report was years in the making. It was published two weeks before Mr. Kostohryz's critique was posted; readers may access it here.

The essay similarly says:
Another omission in the film is in regard to disco music in the late '70s. Disco is clearly very positive and upbeat in terms of lyrics and harmony, and yet stocks at this time were in a deep bear market.
Again, this one-hour introduction to socionomics necessarily omitted many pop-music events – including disco, garage bands, comedy records and beat poetry, to name but a few. However, Prechter's article "Popular Culture and the Stock Market" (1985), which is included in Pioneering Studies in Socionomics (2003), discussed disco music and even illustrated its role graphically with respect to the dichotomous stock trends of the day. You may view the illustration here.

Finally, the critique names a pop-music performer who supposedly contradicts socionomics because her negatively themed material was successful in a bull market. Socionomics proposes that in sum the general character of popular music expression reflects the underlying social mood. It does not claim that any type of musical expression will completely disappear during any period; such a claim would be logically inconsistent with both the theory and reality. The human social experience is complex. There is always a rich mix of music, fashion styles, film genres, etc. It is never all black or white, all upbeat or all downbeat, even on the very day of a major peak or trough in social mood. Citing one seemingly contrary example does not refute the socionomic hypothesis any more than a missed goal refutes the hypothesis that Pele was a good football player.

Conclusions


Socionomics describes how changes in social mood influence the character of social actions. Because the theory offers a method to measure and anticipate changes in social mood, practitioners are able to use the model to forecast social change, a goal that frequently eludes social scientists. Perhaps the primary reason that failed social forecasting methods have yet to be supplanted is that social scientists have not been presented with a compelling theoretical alternative, until now.

The biggest breakthroughs of knowledge have typically come via new explanatory theories. People such as Copernicus, Darwin, and Watson & Crick developed new hypotheses for natural phenomena. Once they formulated their theoretical insights, scientific inquiry took over to test them. The articulators of heliocentricism, natural selection and the structure of the double helix are not renowned for conducting statistical studies. Yet they certainly engaged in science, and their work initiated breakthroughs in understanding that led to many useful lines of inquiry. Observation came first, hypotheses second and testing third. The first two phases can be particularly difficult because they require meticulous observation and then a process of assimilation and induction to achieve a breakthrough in perspective. In the case of socionomics, Prechter has dedicated the bulk of his efforts toward formulating an empirically and internally consistent theory. Wayne Parker has elucidated socionomics' metatheoretical context. Others are constantly probing, leading to further refinements. The testing phase, to which a number of new socionomists have recently begun to contribute, has only just begun.

We well understand the power and necessity of performing methodologically sound tests-both statistically and in the lab-of socionomics' clearly articulated, falsifiable hypotheses. We at the Institute have already begun the laborious process of testing them, per the elections study mentioned above and others underway.

Socionomics can be difficult for even bright individuals to grasp immediately. That is why we have endeavored to explain it clearly in the literature. It is also why we have taken the time to respond to Mr. Kostohryz's critique in detail. To readers: If you would like to learn more about socionomics and why people are talking about it, we suggest our two-book set, Prechter and Parker's paper published in the Journal of Behavioral Finance (2007), and Prechter's two-hour speech to the London School of Economics (2004). Prechter's 2010-2011 presentations to faculty and students at the universities of Cambridge, Oxford and Trinity will be available soon. We also have under development two new books on socionomics, which will present the latest studies and essays about the theory – many of which comprise our monthly publication, The Socionomist. Theoreticians have covered much more ground than you might imagine. We would also like to invite you to attend our first-ever Socionomics Conference, which features a stellar list of speakers, on April 16, 2011.

The Socionomics Foundation, a not-for-profit entity, makes funds available to scientists whose research will help advance socionomics from its current stage, as a comprehensive theory that is consistent both internally and with empirical observation, to a full-fledged social science discipline. Join us if you can.

Again, we thank Mr. Kostohryz for taking considerable time to pen a thoughtful critique. We hope that he will continue to avail himself of the socionomic literature and, perhaps, become one of a growing number of advocates.


Mark Almand is director of the Socionomics Institute in Gainesville, Georgia. Matt Lampert is the Socionomics Institute's Research Fellow at the University of Cambridge.


Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
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