Socionomic Theory

The essence of Prechter’s socionomic hypothesis is that fluctuations in social mood—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 activity. 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 independent of 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 activities, such as the music people choose to hear and the clothes they choose to wear, 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.