Socionomic Theory: an Alternative to EMH and a Foundation for Technical Analysis

Transcription

1 Socionomic Theory: an Alternative to EMH and a Foundation for Technical Analysis Robert R. Prechter 2014 IFTA Conference London, England October 11, 2014

2 EMH is elegant and internally consistent. It is not externally consistent.

3 Essence of EMH: 1) External cause 2) Rational reaction

4 Do interest rates move the stock market?

5 Robert Prechter Figure 4

6 Robert Prechter Figure 5

7 Robert Prechter Figure 6

8 Robert Prechter Figure 7

9 Does war affect the stock market?

10 Robert Prechter Figure 9

11 Robert Prechter Figure 10

12 Robert Prechter Figure 11

13 Robert Prechter Figure 12

14 What about peaceful times?

15 Robert Prechter Figure 14

16 Robert Prechter Figure 15

17 Do political parties affect the stock market?

18 Since 1857, the stock market's average annual gain has been approximately equal under Democrat and Republican presidents Average annual return under Democrat presidents: 7.2% Average annual return under Republican presidents: 5.9% With omitted, Republican average is 7.7% Robert Prechter Figure 17

19 What about oil shocks?

20 Robert Prechter Figure 19

21 Robert Prechter Figure 20

22 Robert Prechter Figure 21

23 What about terrorist attacks?

24 Robert Prechter Figure 23

25 Robert Prechter Figure 24

26 Does inflation make gold go up?

27 Robert Prechter Figure 26

28 Robert Prechter Figure 27

29 Does QE make gold go up?

30 Robert Prechter Figure 29

31 Robert Prechter Figure 30

32 Robert Prechter Figure 31

33 Conclusion: Exogenous factors do not regulate financial markets. Data from the real world are inconsistent with EMH s causal claim.

34 Socionomics

35 Robert Prechter Figure 34

36 Social mood is an unconsciously shared motivational impulse arising from social interaction independently from events Robert Prechter Figure 35

37 Robert Prechter Figure 36

38 The stock market is a meter of social mood.

39 Robert Prechter Figure 38

40 Robert Prechter Figure 39

41 Robert Prechter Figure 40

42 Robert Prechter Figure 41

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44 Robert Prechter Figure 43

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47 posted at ssrn.com Robert Prechter Figure 46

48 Robert Prechter Figure 47

49 Robert Prechter Figure 48

50 In none of these cases does either variable control the other. A hidden variable social mood controls both.

51 The character of lagging social actions is highly predictable. News doesn t predict the stock market; the stock market predicts the news.

52 Robert Prechter Figure 51

53 The Socionomist

54 Socionomic Theory of Finance

55 The Price/Demand Dichotomy in Economic vs. Financial Markets

56 Robert Prechter Figure 55

57 Robert Prechter Figure 56

58 Robert Prechter Figure 57

59 Robert Prechter Figure 58

60 Robert Prechter Figure 59

61 Robert Prechter Figure 60

62 The Equilibrium/Dynamism Dichotomy in Economic vs. Financial Markets

63 Robert Prechter Figure 62

64 In economics, relative pricing also seeks equilibrium and is fairly stable. One price is a benchmark for another.

65 In the stock market, there are no useful benchmarks of value.

66 Robert Prechter Figure 65

67 Robert Prechter Figure 66

68 Robert Prechter Figure 67

69 Robert Prechter Figure 68

70 Robert Prechter Figure 69

71 The Elliott Wave Model of Financial Price Fluctuation Robert Prechter Figure 70

72 Robert Prechter Figure 71

73 Robert Prechter Figure 72

74 How the Elliott wave model relates to bubble theories.

75 Robert Prechter Figure 74

76 Robert Prechter Figure 75

77 Robert Prechter Figure 76

78 Herding

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80 Robert Prechter Figure 79

81 Robert Prechter Figure 80

82 The only sub-group that does not consistently herd is the Commercials.

83 The herding impulse is a blunt tool of survival, maladapted to finance. Bubbles are not rational. Crowds are not wise Robert Prechter Figure 82

84 Robert Prechter Figure 83

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87 Robert Prechter Figure 86

88 EMH asserts that economic laws rule finance. STF proposes that financial laws govern finance.

89 Contrasting Models of Finance Efficient Market Hypothesis (EMH) 1. Objective, conscious, rational decisions to maximize utility determine financial values. 2. Financial markets tend toward equilibrium and revert to the mean. 3. Investors in financial markets typically use information to reason. 4. Investors decisions are based on knowledge and certainty. 5. Exogenous variables determine most investment decisions. 6. Financial prices derive from individual decisions about value. 7. Financial price changes are essentially random. 8. Financial prices are unpredictable; the character of news is unpredictable. 9. Changing events presage changes in the values of associated financial instruments. Socionomic Theory of Finance (STF) 1. Subjective, unconscious, prerational impulses to herd determine financial values. 2. Financial markets are dynamic and do not revert to anything. 3. Investors in financial markets typically use information to rationalize mood-induced imperatives. 4. Investors decisions are fraught with ignorance and uncertainty. 5. Endogenous social processes determine most investment decisions. 6. Financial prices derive from trends in social mood. 7. Financial prices adhere to an organizing principle at the aggregate level. 8. Financial prices are probabilistically predictable; so is the character of news. 9. Changing values of financial instruments presage changes in associated events. 10. Economic principles govern finance. 10. Socionomic principles govern finance Robert Prechter Figure 88

90 STF is elegant and internally consistent. It is also externally consistent.

91 Most fundamentals are results, not causes. Mood change is causal. It is also patterned, providing a basis for technical analysis.

92 Socionomics.net

93 Slides available at: