Socionomics: Not a Typo

Published on June 7, 2013

Socionomics is often mistaken as just another word for socioeconomics, or worse: a typo. However, the two terms refer to entirely separate concepts. The primary difference revolves around which has more influence: markets or the people in the markets.

Socioeconomics

Socioeconomics is the study of the social impact of economic change. This social science seeks to determine how various economic phenomena and shifts affect social processes and society in general. Examples range from how new technology affects consumption and behavior to how the Great Depression affected every area of life for most Americans.

Socionomics

Socionomics is the study of how social mood in the aggregate impacts macroeconomic, financial, cultural, and political behavior. The Socionomics theory is somewhat controversial insofar as it holds that social mood drives markets and not the other way around. Proponents of Socionomics believe that certain indicators of social mood can be predictive for macroeconomic and market direction (as well as cultural and political direction).

Though the field of Socionomics is relatively new (the concept was launched in the late 1970s), it gained considerable traction over the last decade due to attention from the popular media and several prominent economists, as well as research funding from the National Academies of Science. In the theory's favor is the lack of clear correlation between short-to-medium term market movements and the underlying fundamentals of those markets. Over the long run, there does exist some degree of correlation between strong markets and a strong economy, but in the short-to-medium term, stocks can (and do) go up or down regardless of the underlying health of an economy at the time.

Economic statistics, in and of themselves, do not provide clear direction for us to accurately predict market movements - otherwise, markets would be relatively efficient and easy to predict, based on the broadly distributed and publicly available reports and trends of economic data. The fact that market movements can be so independent of economic fundamentals (in both directions) demonstrates the fallacy of the efficient market hypothesis (the general belief that market prices are determined by the publicly available information on a real-time basis). If the data set that was once a backdrop for higher market prices stays essentially the same during a major market correction, the only remaining culprit for the disparity in price action is the public's reaction to the data. This lends credence to Socionomic's central idea which suggests that the discrepancy in market reactions to the same fundamental data sets can be explained by swings in social mood.

Since businesses and markets are run by and owned by human beings, it follows that the overall direction of the economy is susceptible to the swings of human emotion. After all, the economy is ultimately an aggregation of individuals making decisions on a daily basis. When we look at the data as a whole we tend to forget the people behind each blip on the chart. Socionomics provides rational insight into the swings of human emotion, which ultimately drive individual decisions, and in the aggregate: businesses, markets, governments, and economies.