Socionomics Hypothesis of Cause-and-Effect Relationships

Throughout history, it’s been a common belief that social events, be it war, prosperity, civil protest or even the latest fad dictate the overall social mood. A strong economy, great leaders, an attractive stock market and even fun, pop-cultural trends created positive social mood. Conversely, a bad economy, inept leadership, a declining stock market, a disturbing pop-cultural trend create a negative, fearful social mood. At least that is the presumed cause-and-effect relationship. However, there is a group of researchers at the Socionomics Institute in Gainesville, Georgia in the US who believes that the exact opposite is true, namely that the social mood actually determines the character of social events and not the other way around.

These researchers believe that a positive upbeat society creates a strong economy, makes leaders appear talented, generates the desire to buy stocks and produces happy pop-cultural trends, while a nervous fearful society creates a recession, makes leaders appear inept, goes to war and produces negative themes in popular culture. They also believe that this seeming paradox in cause-and-effect relationship can be linked to not only facts in human psychology but even to biological principles found in the natural world and that these social mood trends follow a discernible pattern, a pattern that involves repetition and hence a degree of predictability.

They began developing their hypothesis by observing that for centuries, fashion has been one of the more colorful ways humans have expressed themselves and how clothing and what people wear speak about how people and society in general feel about themselves. In recent decades, a handful of financial analysts have also observed a correlation between stock markets and fashion. In the late 1960’s, for example, financial researcher Ralph Rottnam created a stock market indicator called “The Hemline Indicator” that correlated the hem of women’s dresses to the rise and fall of the stock market. This became the first roughly quantified measure of the link between popular culture and financial trends. As strange as this sounds, the indicator said that you bought stocks when hemlines were low and you sold stocks when hemlines were high. And it worked.

It wasn’t until the mid 80’s that market analyst and socionomics researcher Robert Prechter, president of Elliot Wave International, postulated an array of significant links between popular culture and the stock market. In a 1985 report entitled “Popular Culture and the Stock Market”, Prechter explored connections between stock prices and music, movies, television and even pop-stardom. Prechter ascertained that the types of movies, music, clothing and other fashion and entertainment trends people follow shed light on a general social mood that also propels the stock market. Horror movies, for example, are a staple of a bear market and adventure, heroism and family movies are more popular when stocks are rising.

The correlations don’t stop with fashion and movies either. The stock market is incredibly sensitive to social moods and many people alive today can relate to the changes just over the last 50 years to notice quite clearly that when stock markets are rising, songs tend to be joyous and fun, and when the stock markets are falling, they tend to be somber or angry, Prechter said.

So, here's the question: Is popular culture paving the way for the stock market or is it the other way around? Or is there another explanation entirely different? The answer, socionomic researchers believe, is that they all track each other because they stem from the same cause which is the rise and fall in overall social mood. When the mood is positive, people want to listen to happy music, they want to wear frisky clothes and they want to buy stocks. And when they’re in a negative mood, their tendencies are in the opposite direction.

Pop-cultural trends tend to track along with the stock market. People express and act on their collective social moods in such a way that gives rise to history, political trends, economic trends, and even philosophic and scientific trends. When we look at 300 years of stock market history, we see that the economy follows the primary register of social mood – the stock market. When the trend in social mood is up, people are adventurous and productive, and when the trend reverses, they become cautious and produce less, Prechter said.

The environment is always more peaceful after a bull market has been going on for a while. The hypothesis is that as people’s mood improves, they feel less like fighting. The opposite happens in a bear market as people get angry or more fearful they begin to feel like fighting or defending themselves or attacking someone else. Wars take time to mobilise, so they don’t generally erupt early in bear markets, they tend to erupt very late in bear markets. In fact, war tends to break out not on the first decline in the bear market but on the second decline.

Another interesting observation made by these researchers is that the size of the war is almost always related to the size of the bear market that creates it. When one looks at the chart of the US stock market since 1785, one sees that the civil war followed the 24-year bear market that ended in 1859 and that World War II followed the bear market of the early 1930’s. These two wars followed the largest bear markets and were the largest in terms of American casualties.

The outcomes of elections, particularly presidential elections, are also in sync with the stock market, Prechter claims. The moods that drive social trends also determine how the electorates choose the president and how they rate his performance once he is in office. Bull market brings re-elections and bear market tends to throw out and replace serving politicians, as can be easily verified by examining the history of presidential elections in the United States.

All of these ideas represent the more comprehensive hypothesis that socionomics researchers believe is true, namely that events do not dictate the character of social mood, as almost everyone presumes, but that the general social mood dictates the character of social events.

This non-conventional socionomics way of thinking about cause-and-effect recognises that the stock markets and cultural trends are linked and that the key to understanding why social mood is the driving factor is that the stock market is patterned.

So might the vicissitudes of the social mood really be patterned? R.N. Elliot, a corporate accountant specialised in financial restructuring, who pioneered this research in the early 1930’s and 1940’s identified an overall pattern to fundamental market movement. He observed that the pattern occurred over and over again in the market. Soon he realised that if you can identify where you are in the pattern, then you can predict where prices are likely to go next. These socionomics researchers hypothesise that since the markets and the social mood are correlated and the markets are patterned, one can conjecture that the social mood is also patterned. Elliot claims that the basic pattern of the market unfolds in five waves which he named the Wave Principle.

The Wave Principle is a unique mathematical way to help forecast the markets. Because it is a mathematical principle, it really doesn’t matter what the fundamental facts are on the ground at the time, whether it’s wars, scandals or a Fed’s statement, the market will always follow the Elliot wave patterns.

The Elliot Wave Principle is based on complex mathematical phenomena such as those describing fractals and spirals and is also connected with a mathematical number sequence called the Fibonacci sequence. It seems to be governed by the laws of growth, progress and regress found in the natural biological world and its importance stems from the mathematics behind nature’s vibrant forms that plays an important role in the wave principle and socionomics.

In our future articles, we will describe in further detail the Elliot Wave Principle and similar principles based on fractal mathematical models such as our own model that we use to predict turning points and large significant events that affect the market, social moods and humanity in general. But for now, we close by stating that the socionomic hypothesis that the social mood actually determines the character of social events and not the other way around is a rather intriguing and compelling hypothesis and one that deserves further examination by a large multidisciplinary team of researchers since it challenges the conventional model of thinking about cause-and-effect relationships in a very interesting and constructive manner.

* With contribution from Bruce H. Pugesek, President of Voyageur Research

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