Psychology is mathematical and Socionomics is a subjective and non-quantifiable study. The article below was First Published: Mon, April 02 2007. 00:00 IST when I believed behavioural finance and Socionomics were important breakthrough subjects.
It may appear funny to use the hemline indicator to predict stock prices, but as an indicator it makes money.
When we first read about the hemline indicator, it seemed like a funny joke. A market going up and down with the length of skirts was a strange idea of an economic indicator. Ralph Rotnem was a Harvard graduate and he created the indicator after seeing an uncanny pattern, which kept reappearing.
Because skirt lengths have limits (the floor and upper high respectively), the reaching of the limit implies the concurrence of an extremely positive or negative mood. The social mood was linked with stock market expression.
Working from Europe helped us relate to this indicator with conspicuous clarity. The skirt lengths of women around have witnessed a sharp decrease over the last 24 months.
And even from an extremely open mind, December did not seem that warm, despite all the talk about warm winters. We were sure that there was not much further north, the skirt could travel. A little higher would mean a beach like a scenario. At Christmas parties the debate was hot, and speculations were ripe, and we all were waiting for the desired results.
Well fortunately for us, the stock markets turned down. This diverted our attention to more important stock portfolios away from skirt lengths. The hemline indicator had worked yet again. Strange but transcribing this social mood indicator to other emerging markets was not easy.
In India the dress sense is conservative. How could a pop culture indicator be extended to Indian markets? There must be a way to find out what women in India were expressing, as the stock markets headed up. If only they wore skirts, trading in global stock markets would be as easy as sitting in a park taking down notes, diligently for months. And when we hit an extreme, it’s a ‘Sell’.
We express social moods in many ways. When we are happy, then along with skirts or business suits, we also buy cars, listen to a vibrant music and see a lot of films. A social behavior expert could have predicted the big bull market in India after seeing just a couple of Bollywood films. A majority of Indian films had themes of love, dancing around trees and were overall a celebration of life.
This was an expression of socially positive mood and consequently a positive time for stock markets. HBO’s Sex and the City got a celebrity status during such times. After all, Carrie Bradshaw, despite all her knowledge about good sex was looking for love and finally did settle down with Mr. Big, a similar theme over occident and Asian cultures in similar periods.
Human emotions are rhythmical and have a wave nature. And these waves are hypothesized to govern all human activities including business, politics, and pleasure. When mood trends up, people buy stocks, just like they buy clothes, film tickets, jewelry, and clothes. And when the social mood trends down, the broad consumption pattern flags, and people don’t buy stocks, they sell.
Robert Prechter has illustrated this concept of social behavior in his two seminal books on ‘Socionomics”.
He talks about the polarity of behavior. And how humans oscillate between positive and negative moods i.e. between concord and discord, inclusion and exclusion, forbearance and anger, confidence and fear, embrace and avoidance of effort, practical and magical thinking, constructiveness and destructiveness, desiring power over nature and people, all of which has a consequent effect on markets trending up or down.
Just like the hemline indicator, there is also a skyscraper effect. The higher up we go to the sky, the more prosperous we are. And the more prosperous we are, the more near a top we reach. A study of the tallest buildings of the world has historically given accurate signals of intermediate and primary degree tops.
For example, the World Trade Centre of 1973 marked the Dow 1000 top. You can look at the Burj Dubai skyscraper timing. The first press release on their site is dated March 2005. The Dubai stock Index peaked months after in November 2005.
The Index is down 62 percent from the top. Some might call it a strange coincidence, but this happens, again and again, a historical characteristic associated with skyscrapers. “Let’s make the tallest building”, is associated with prosperity high. And after prosperity high comes a fall.
Men desire change or at least bring it about, even when it appears superficially. For example, adversity eventually breeds a desire to take charge and responsibility, achieve and succeed, while prosperity eventually breeds irresponsibility, complacency, and sloth. Events are perceived as turning points for mankind.
This is a conventional, cause, and effect relationship. The very reason it does not work. Turning points are generally the opposite as each positive point is a step towards negativity. And each negative point is a step towards positivity. Men produce more goods and services when the dominant social mood is positive.
The reason for the lag between the mood (tracked by the stock market) and the result is that people take time to put their transformed energy to work. And then reap the fruits of its employment. Plot depressions, recession, and economic booms, and you see the correlation work.
Prechter has even gone ahead and plotted music as a social expression. How the music we like expressed the social mood of the society. Recent work also connects our preferences for cars. As we go up in stock markets our color preferences are black, white, and red and angular straight cars, remember the white Ambassador? And as our preferences change to transition colors like grey and silver moving to brown and green and rounded cars, we as a society are becoming more negative.
So, when you see a green ‘Swift’ on the road, you should be sure that an intermediate top is here. The car is less angular more rounded and it’s green, then the negative social expression has started. We humans see things more rounded as we become negative as a society.
We can afford to be sharp when we go up, but as we go down, smoothing the edges becomes imperative, be it cars or clothes or shoes, rounding just gets in. It has also to do with our ability to visualize. We cannot see inversions like inverted yield curves or an inverted picture.
There are a host of trend studies about when we like ghost movies and when we appreciate the animation. Why having the hamburger cheapest in Tokyo is not a coincidence? Why making more babies is a positive social mood? And being single or an aging society comes after a society undergoes negativity in the social mood?
As the future is going to be socially negative and these are times, we as a society don’t enjoy the celebration of love but big-screen sex and sirens.
Markets lead events and events are caused by social mood. And the social mood has a mathematical Fibonacci relationship linked with it. Ask an open-ended question to a group of 100 people, the answer will most likely be a 62/38 polarity.
And if this still does not hit you, remember your next boss might just be a woman. Women do better in a socially falling transition. And if she drives a green ‘Swift’ and wears a skirt, you might just have got your trade signal.