No External Causality
The model is wrong because it assumes that each element of the social scene is as discrete as billiard balls. But they are not. Here is a pertinent passage from The Wave Principle of Human Social Behavior: When dealing with social events, what is an “external shock”? What is an “outside cause”? Other than the proverbial asteroid striking the earth, which presumably might disrupt the NYSE for a couple of days, or the massive earthquake or destructive hurricane that we repeatedly observe does not affect financial market behavior in any noticeable way, there is in fact, in the social context, no such thing as an outside force or cause. Every “external shock” ever referenced in finance is in fact an internal event. Trends in the stock market, interest rates, the trade balance, government spending, the money supply and economic performance are all ultimately products of collective human mentation. Human minds create these trends and change both them and their apparent interrelationships as well. It is men who change interest rates, trade goods, create earnings and all the rest. All social events, whether a rise in interest rates, a drop in the stock market, or even a war, are the result of collective human mentation. To suggest that such things are outside the social phenomenon under study is to presume that people do not communicate (consciously or otherwise) with each other from one aspect of their social lives to another. This is not only an unproven assumption but an absurd one. All financial events, indeed all social movements, are part and parcel of the interactive flux of human cooperation. All such forces are intimately commingled all the time. Yet to the conventional analyst, each is as detached a cause as a cue stick striking a billiard ball. It is this error that so profoundly undermines the conventional approach.9
The more useful model of social (including financial) causality is socionomics, the theory that aggregated unconscious impulses to herd conform to the Wave Principle, a patterned robust fractal. In this model, social actions are not causes but rather effects of endogenous, formologically determined changes in social mood. To learn more about this new model of finance, see the April and May issues of The Elliott Wave Theorist and the two-volume set, Socionomics.
Many people, by the way, dismiss the Wave Principle as impossible because they think that news and events move the market. We have shown that this notion is highly suspect. I hope that the demonstrations offered in this and the previous issue remove a primary impediment to a serious exploration of the Wave Principle model of financial markets.
A Stone’s Throw This discussion about the natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills. There is no such thing as a “born trader” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you. Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich. Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t. The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.
NOTES: 3 Associated Press, “Possible rate increase sends stocks reeling,” The Atlanta Journal-Constitution, p. C5. May 21, 2004. 4 The real story here is that the market went down despite his upbeat comments, not because of anything he said. 5 Walker, Tom, “Stocks plunge on Greenspan’s rate-boost hint,” The Atlanta Journal-Constitution, April 21, 2004. 6 Walker, Tom, “Greenspan soft-pedals on rates; market rebounds,” The Atlanta Journal-Constitution, p. F4. April 22, 2004. 7 Shell, Adam, “Greenspan calms jittery investors,” USA Today, April 22, 2004. 8 Walker, Tom, “Identifying sell-off trigger difficult.” The Atlanta Journal-Constitution, p. F3. August 6, 1998. 9 See page 325 in The Wave Principle of Human Social Behavior.
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This article was syndicated by Elliott Wave International and was originally published under the headline Stock Market Is Not Physics: Part IV. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
