Decision Making In Uncertainty
Two Paradigms: Mechanist and Socionomic
The Mechanist Paradigm: Action is followed by reaction.
Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, Because so-and-so has happened, it will cause such-and-such to happen. (The Socionomic Theory of Finance, page 3)
The Socionomic Paradigm: A context-specific paradigm, limited to the domain of human social systems in contexts of uncertainty. (STF, page 621)
I suggest that serious thinkers of all disciplines are unwitting mechanists when facing uncertainty, assuming that their belief in a trend’s continuation is based solely on the facts at hand without any other influence. I believe there is compelling evidence that any decision or conclusion made on a matter for which there is uncertainty is made contextually, and the result is that decisions and conclusions are bound to be different when the context in which the matter is being considered is different, even if the facts appear to be the same.
The mechanist paradigm of decision making in uncertainty is a myth. The socionomist can show, in an extensive cataloguing of past decisions, that decisions made in uncertainty are heavily influenced by the underlying mood and pattern of the social system to which the decision makers belong.
The consequence is that the mechanist makes serious and costly mistakes at important points in the pattern. The mechanist, which is almost everybody, will be overly expansive and optimistic late in the pattern’s rising period, and overly negative at the optimal time, when the risk is minimal owing to the massive liquidation of investments and the failure of plans made before the collapse. The irony is that mechanists never take this into account when looking at their failures, pointing instead to other external causes to rationalize their losses.
The bad rap given to socionomics: mechanists ask two questions about the future: What is going to make a socionomist’s forecast happen (exogenous causation), and when is it going to happen (timing). Mechanists will be skeptical about the notion that the cause is endogenous (mood and the pattern of the particular social system-The United States of America, for example), and quick to dismiss the theory when the forecast, which was made probabilistically, does not happen “right on schedule.”
Why I like socionomics: I have studied the theory as it has evolved, and seen it in action over the last thirty-five years, with the result that the ebb and flow of markets, the behavior of individuals and the evolving economic and political direction of the nation has not surprised me or caught me unawares.
Socionomics is best at anticipating the conditions which create high risk in markets, followed by conditions that present the greatest opportunity. The socionomically-informed market participant desires first to avoid getting caught unawares when risk is high. Sidestepping a big crash makes it much easier to buck the pessimistic crowd when it’s time to step in and buy.
Socionomics had its beginnings in a method for forecasting stock market direction developed by Ralph Elliott in the 1930s. Elliott called his discovery Nature’s Law. Robert Prechter and A. J. Frost, using all of Elliott’s published material and their own observations, refined the method and published the definitive text, Elliott Wave Principle, in 1978. Prechter continued his observations, linking the pattern of the market to his further observations that there were changes in social mood that adhered to the pattern of the waves in the markets. Ultimately, he posited that social mood, abetted by the unconscious herding instinct, was the driving force in the pattern of the Wave in the markets. The result was a hypothesis, which he named Socionomics in his 1999 book, The Wave Principle of Human Social Behavior and the New Science of Socionomics.
Over the years, Prechter has presented the hypothesis in many academic settings, including the London School of Economics. The hypothesis garnered the interest of a number of social scientists, many of whom have contributed to the theory’s application. The Socionomic Theory of Finance, was published in January of 2017.
I continue to study socionomics and to arrange my affairs in order to be in sync with the probabilistic expectations of the theory. I find that socionomics is the way to understand the ebb and flow of man’s history. I see socionomics in Homer, The Bible, Western History and in my everyday conversations with friends and neighbors.
One of the big problems I’ve been contemplating is whether I’ve done a disservice to my family and friends in writing these essays, which purport to save the reader from the disaster of an expected economic crash. Lao Tzu held that we gain wisdom, the ability to make good decisions, by first making bad decisions. Should I not let nature take its course and allow everyone to experience what the markets have in store for the millions of people who are not prepared?
I don’t know. But then, I’m not so presumptuous as to think that what I have to say is the last word to my readers. I’m sure you’ll figure it out.