In Mood Matters, John Casti introduces socionomics, an approach developed by Bob Prechter, the "Gainesville guru", and his colleagues at the Socionomics Institute in Gainesville, Georgia. Socionomics analyses the impacts of social mood not only on financial markets but also on the broader economy, society and geopolitical structure.
Its central hypothesis is that herding instincts generated by interactions between individuals create a "social mood" that influences events. If "mood polarity" is negative and mass psychology pessimistic, then financial markets falter. Skirts will be longer, horror movies will be popular, people will buy dull-coloured cars and governments will favour protectionist policies. When the social mood is positive, optimism will prevail, bubblegum pop will be popular and miniskirts will be everywhere. It can be a good time for politicians: Bill Clinton "got lucky" and was re-elected during a hopeful phase. When, in 2007, Russia enjoyed a very positive social mood, Vladimir Putin was idolised, and even lauded in a pop song called A Man Like Putin (in which the singer dreams of swapping a drunken boyfriend for someone like the leader).
This hypothesis is moulded into a story emphasising the inevitability of cycles and waves, inspired by Ralph Nelson Elliott, a Kansas-born accountant and author of The Wave Principle (1938). That principle forms the foundation of modern "chartism" (a deterministic approach to financial analysis that focuses on examining patterns in market fluctuations). Elliott postulates that stock market cycles can be divided into sets of eight "waves", with wavelengths determined by the Fibonacci sequence (in which the sum of two successive numbers gives a third, for example, 1, 1, 2, 3, 5, 8, 13...). A "golden ratio" derived from the Fibonacci sequence determines the amplitude of the waves.
In socionomics, these cycles can affect all aspects of human action and operate on every timescale. Microscopic "subminuettes" last a few minutes; "grand supercycles" last for decades. Casti postulates that cycles can operate even on a millennial scale: a millennium upward bull market wave following the Dark Ages was preceded by a downward bear market wave that began after Christ's death. Alas, he fears we are heading into a new millennial bear market: "The period of social mood that began around AD1000 is now coming to a close."
Casti rules out feedback effects from events to social mood. Mass psychology determines events but no event, not even those of 11 September 2001, can feed back into social mood. In defending this assertion, he notes that financial markets barely faltered after 9/11 because the social mood was positive, but it is hard to imagine that an event such as recession could fail to affect the mood of the newly unemployed.
Here, the focus on anecdote, together with the existence of lags, generates an unfalsifiable argument. To illustrate, most of the political examples show incumbent politicians winning elections when social mood is positive. There is one exception: Californian governor Gray Davis was re-elected in 2003 despite a trough in social mood as reflected in a flagging Dow Jones Industrial Average. (Another example, not cited by Casti, is the 2010 UK election: by mid April the FTSE 100 had reached heights not seen since the middle of June 2008, and yet the Labour government was defeated.)
For Casti, these exceptions can be explained by lags: social mood "takes time to mobilise". So what evidence could encourage him to question socionomics? He offers plenty of charts, but interpreting visual patterns is inevitably subjective and, with statistical analysis largely avoided, it is difficult to assess whether or not this is just a well chosen but ultimately superficial collection of anecdotes. Casti admits that multiple interpretations are possible: "To ignore or not to ignore (Elliott's wave rules) is the essence of the art of the Elliott Wave Principle, not its science."
This fantastic account peaks with a forecast grandly entitled the "Fundamental Working Hypothesis", which predicts an accelerating shift towards negative social mood. As this "social tsunami" approaches, Casti's advice is conservative: "Do not rely on your government...it's up to you to save yourself."
"Group action is needed" (Big Society, anyone?) but there is a "silver lining in each wave down" because negative social mood will encourage us to shun consumerism and celebrity culture for more traditional social values. Urge your children to avoid "toxic occupations" in financial services, internet advertising and the media; encourage them instead to become teachers, pharmacists or environmental engineers. Casti's final advice? "Hang loose!" - although if his pessimism is justified, that's going to be hard to do.
Mood Matters: From Rising Skirt Lengths to the Collapse of World Powers
By John L. Casti
Springer, 210pp, £19.99
Published 7 July 2010