While markets (and companies) are generally valued based off quantitative metrics, that is not always the case. For instance, sometimes it is social mood and individuals impulsively revaluing stocks, because of cues from people around them, that drives both the markets and the economy as a whole. This concept is called socionomics (also known as social economics) and is a relatively unconventional philosophy which claims that economics, leaders, and policies do not always create social mood, but instead, are an expression of it.
Many find socionomics interesting to consider because it directly challenges what we know about mainstream economic theories. For example, traditional economists tend to believe that specific events shape social mood and it is reflected through moves in the financial markets. Therefore, rising markets would make investors optimistic while crashing markets would do the opposite. Conversely, according to socionomics, it is the mood of the investors that determines the economic cycle — causing rises and crashes. As such, the underlying belief is that the optimistic investors cause the markets to rise while pessimists cause it to crash. Further yet, under these assumptions, major stock market activities (booms and busts) happen despite the actions by world leaders, bulge bracket banks, policy makers, or politicians. Thus, if you want to understand the changes in politics and markets you can look towards trends in social moods even though mainstream theory suggests that they both dictate moods rather than being a byproduct of them. Consequently, this means that politicians are behind the curve and election outcomes do not offer a reliable basis for predicting stock market movement. Meanwhile, the stock market does tend to anticipate election outcomes.
Beyond just the ideology, there are real world applications of socionomic theory. For instance, in the eyes of a socionomic thinker, the 2007-2008 financial crisis was not merely caused by an overflow of cheap money and unregulated lending practice, but rather by a sudden change in mood in The United States. Similarly, while many conservative leaning individuals give President Ronald Reagan (and his policies) credit for the bull market of the 80’s, and liberal leaning people give credit to President Franklin Roosevelt for the economic recovery of the 30’s — socionomics would suggest that those two events happened as part of the natural economic cycle.
Although at this point you might be thinking that socionomics contradicts everything you have ever learned about traditional economics, there is some common ground between the two. For example, there is little debate as to whether financial markets can be driven by large scale waves of optimism or pessimism. Moreover, while some economists find socionomic ideas to be outlandish, modern behavioral economics and behavioral finance do agree that investors do not make perfectly rational decisions. This means that decisions are often made based off feeling (mood) rather than rational thinking. Ultimately, this leaves a significant hole in efficient market hypothesis. Additionally, we know that people are often influenced by emotion and various biases. Accordingly, dramatic rallies and sudden-sell offs show that there is a tendency for people to “follow the herd” rather than independently thinking for themselves.
The intent of this article is not to claim that the use of socionomic theory is the correct way to analyze market movements and economic conditions. That said, having a better understanding of the different economic theories that exist is important because it might provide you with more context the next time you make an investment decision. As always, though, the best way to make informed decisions is to commit to your own due diligence!