Socionomics is the study of social mood and the resulting social actions. The theories have been used to analyze waves of social mood and forecast changes in fields such as economy, political preferences, financial markets, fashion and pop culture. Socionomics predicts the direction of the social mood and its effects, but it does not forecast the actions of specific individuals or the occurrence of specific events. For example, it predicts whether the market will be bullish or bearish but does not predict whether a specific investor will buy or sell a certain stock.
Social mood continuously changes from positive to negative and back to positive again. Positive social mood results in positive social occurrences such as bull markets, re-election of government officials, peace and short skirts. By contrast, negative social mood leads to bear markets, the fall of incumbent politicians, conflicts and longer skirts and pants.
Unlike fields where experts focus on the effects of actions, socionomics looks at the causes behind incidents and creates tools to anticipate them. As such, socionomics theories often contradict traditional views. For example, traditional analysts say that recessions cause businesses to act cautiously, but socionomists believe that cautious businesses cause recessions. Traditional wisdom teaches that scandals outrage people, but socionomics theories point the finger at the outraged people who look for scandals.
According to socionomics theories, social mood affects events, but such events have no impact on the direction of social mood. Social mood is governed by the wave principle, which theorizes that social mood, and therefore social action, follows a pattern. Ralph Nelson Elliott, who created the wave principle, modeled the movements of financial market index prices and found that the market follows a wave pattern. Elliott believed that market sentiment causes a bull market to have five waves and a bear market to have three waves.
Far from being finance theory, socionomics suits a behaviorist's thought patterns better because it analyzes how market psychology affects incidents. Robert Prechter, who is considered by many to be the modern guru of socionomics, has a degree in psychology, not economics. Despite his lack of a finance background, he won awards for market timing during the 1980s bull market in the United States. His predictions on stock market outlook after the 1987 crash met similar success. Socionomics should not be seen as a miracle formula to predict the market, though, because Prechter generally has underperformed a U.S. stock market index by 25 percent annually from 1985 to 2009.