socionomic theory: an alternative to emh and a foundation
TRANSCRIPT
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Robert R. Prechter
2014 IFTA Conference
London, England
October 11, 2014
Socionomic Theory:
an Alternative to EMH
and a Foundation for
Technical Analysis
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EMH is elegant and
internally consistent.
It is not externally consistent.
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Essence of EMH:
1) External cause
2) Rational reaction
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Do interest rates move the
stock market?
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1999-2014 Robert Prechter www.socionomics.net Figure 4
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1999-2014 Robert Prechter www.socionomics.net Figure 5
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1999-2014 Robert Prechter www.socionomics.net Figure 6
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1999-2014 Robert Prechter www.socionomics.net Figure 7
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Does war affect the
stock market?
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1999-2014 Robert Prechter www.socionomics.net Figure 9
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1999-2014 Robert Prechter www.socionomics.net Figure 10
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1999-2014 Robert Prechter www.socionomics.net Figure 11
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1999-2014 Robert Prechter www.socionomics.net Figure 12
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What about peaceful times?
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1999-2014 Robert Prechter www.socionomics.net Figure 14
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1999-2014 Robert Prechter www.socionomics.net Figure 15
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Do political parties affect the
stock market?
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1999-2014 Robert Prechter www.socionomics.net Figure 17
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 1929-32 omitted, Republican average is 7.7%
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What about “oil shocks”?
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1999-2014 Robert Prechter www.socionomics.net Figure 19
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1999-2014 Robert Prechter www.socionomics.net Figure 20
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1999-2014 Robert Prechter www.socionomics.net Figure 21
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What about terrorist attacks?
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1999-2014 Robert Prechter www.socionomics.net Figure 23
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1999-2014 Robert Prechter www.socionomics.net Figure 24
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Does inflation make gold go up?
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1999-2014 Robert Prechter www.socionomics.net Figure 26
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1999-2014 Robert Prechter www.socionomics.net Figure 27
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Does QE make gold go up?
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1999-2014 Robert Prechter www.socionomics.net Figure 29
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1999-2014 Robert Prechter www.socionomics.net Figure 30
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1999-2014 Robert Prechter www.socionomics.net Figure 31
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Conclusion:
Exogenous factors do not
regulate financial markets.
Data from the real world
are inconsistent with EMH’s
causal claim.
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Socionomics
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1999-2014 Robert Prechter www.socionomics.net Figure 34
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1999-2014 Robert Prechter www.socionomics.net Figure 35
Social mood is an unconsciously shared
motivational impulse arising from social
interaction independently from events.
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1999-2014 Robert Prechter www.socionomics.net Figure 36
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The stock market is a
meter of social mood.
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1999-2014 Robert Prechter www.socionomics.net Figure 38
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1999-2014 Robert Prechter www.socionomics.net Figure 39
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1999-2014 Robert Prechter www.socionomics.net Figure 40
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1999-2014 Robert Prechter www.socionomics.net Figure 41
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1999-2014 Robert Prechter www.socionomics.net Figure 42
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1999-2014 Robert Prechter www.socionomics.net Figure 43
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1999-2014 Robert Prechter www.socionomics.net Figure 44
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1999-2014 Robert Prechter www.socionomics.net Figure 45
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1999-2014 Robert Prechter www.socionomics.net Figure 46
posted at ssrn.com
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1999-2014 Robert Prechter www.socionomics.net Figure 47
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1999-2014 Robert Prechter www.socionomics.net Figure 48
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In none of these cases does either
variable control the other.
A hidden variable—social mood—
controls both.
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The character of
lagging social actions
is highly predictable.
News doesn’t predict
the stock market;
the stock market predicts
the news.
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1999-2014 Robert Prechter www.socionomics.net Figure 51
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The Socionomist
www.socionomics.net
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Socionomic Theory of Finance
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The Price/Demand
Dichotomy in Economic
vs. Financial Markets
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1999-2014 Robert Prechter www.socionomics.net Figure 55
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1999-2014 Robert Prechter www.socionomics.net Figure 56
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1999-2014 Robert Prechter www.socionomics.net Figure 57
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1999-2014 Robert Prechter www.socionomics.net Figure 58
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1999-2014 Robert Prechter www.socionomics.net Figure 59
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1999-2014 Robert Prechter www.socionomics.net Figure 60
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The Equilibrium/Dynamism
Dichotomy in Economic vs.
Financial Markets
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1999-2014 Robert Prechter www.socionomics.net Figure 62
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In economics, relative pricing
also seeks equilibrium and
is fairly stable.
One price is a benchmark
for another.
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In the stock market, there are
no useful benchmarks of value.
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1999-2014 Robert Prechter www.socionomics.net Figure 65
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1999-2014 Robert Prechter www.socionomics.net Figure 66
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1999-2014 Robert Prechter www.socionomics.net Figure 67
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1999-2014 Robert Prechter www.socionomics.net Figure 68
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1999-2014 Robert Prechter www.socionomics.net Figure 69
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1999-2014 Robert Prechter www.socionomics.net Figure 70
The Elliott Wave Model of
Financial Price Fluctuation
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1999-2014 Robert Prechter www.socionomics.net Figure 71
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1999-2014 Robert Prechter www.socionomics.net Figure 72
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How the Elliott wave model
relates to bubble theories.
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1999-2014 Robert Prechter www.socionomics.net Figure 74
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1999-2014 Robert Prechter www.socionomics.net Figure 75
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1999-2014 Robert Prechter www.socionomics.net Figure 76
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Herding
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1999-2014 Robert Prechter www.socionomics.net Figure 78
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1999-2014 Robert Prechter www.socionomics.net Figure 79
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1999-2014 Robert Prechter www.socionomics.net Figure 80
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The only sub-group that
does not consistently herd is the
“Commercials”.
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1999-2014 Robert Prechter www.socionomics.net Figure 82
Bubbles are not rational.
Crowds are not wise.
The herding impulse is a blunt tool of survival,
maladapted to finance.
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1999-2014 Robert Prechter www.socionomics.net Figure 83
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1999-2014 Robert Prechter www.socionomics.net Figure 84
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1999-2014 Robert Prechter www.socionomics.net Figure 85
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1999-2014 Robert Prechter www.socionomics.net Figure 86
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EMH asserts that economic laws
rule finance.
STF proposes that financial laws
govern finance.
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1999-2014 Robert Prechter www.socionomics.net Figure 88
Contrasting Models of Finance
Efficient Market Hypothesis (EMH) Socionomic Theory of Finance (STF)
1. Objective, conscious, rational decisions to
maximize utility determine financial values.
1. Subjective, unconscious, prerational impulses
to herd determine financial values.
2. Financial markets tend toward equilibrium
and revert to the mean.
2. Financial markets are dynamic and do not
revert to anything.
3. Investors in financial markets typically use
information to reason.
3. Investors in financial markets typically use
information to rationalize mood-induced
imperatives.
4. Investors’ decisions are based on knowledge
and certainty.
4. Investors’ decisions are fraught with ignorance
and uncertainty.
5. Exogenous variables determine most
investment decisions.
5. Endogenous social processes determine most
investment decisions.
6. Financial prices derive from individual
decisions about value.
6. Financial prices derive from trends in social
mood.
7. Financial price changes are essentially
random.
7. Financial prices adhere to an organizing
principle at the aggregate level.
8. Financial prices are unpredictable;
the character of news is unpredictable.
8. Financial prices are probabilistically
predictable; so is the character of news.
9. Changing events presage changes in the values
of associated financial instruments.
9. Changing values of financial instruments
presage changes in associated events.
10. Economic principles govern finance. 10. Socionomic principles govern finance.
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STF is elegant and
internally consistent.
It is also externally consistent.
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Most “fundamentals”
are results, not causes.
Mood change is causal.
It is also patterned,
providing a basis for
technical analysis.
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Socionomics.net
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Slides available at:
www.socionomics.net/wave/14IFTA