Social Mood Conference  |  Socionomics Foundation
By Robert Folsom | Excerpted from the January 2014 Socionomist

 


 

Oil and water. Alligators and household pets. These things do not go well together. Neither do two economists with irreconcilable financial theories.

In this article, writer Robert Folsom explains that a deeply mixed social mood prompted the Nobel committee to award the 2013 Nobel Memorial Prize in Economic Science to two academics – Eugene Fama and Robert Shiller – who hold incompatible economic perspectives.

Here is an excerpt of Folsom’s January 2014 article.

It is as if an outspoken theist and an outspoken atheist each received the same Nobel Prize because they each had “advanced our understanding of the great hereafter.”

Fama is the economist most closely identified with the efficient market hypothesis (EMH) and its many variations, all of which assume the financial markets are priced rationally. … From at least the early 1970s the EMH was the dominant financial model in academia, and eventually on Wall Street. Roger Lowenstein, author of When Genius Failed, put it this way: “Modern finance is built on mathematical models designed around a presumption of efficient and random markets.”Other assumptions built into the EMH in turn led to or strengthened other investor dictums, including “buy and hold” and “diversification,” and the notion that “news moves the markets.”

In stark contrast, Shiller is the economist most closely identified with the behavioral finance model, which says markets are not just inefficient but often irrational. Shiller challenged EMH early in his career,yet it was after the October 1987 stock market crash – which was virtually inexplicable under EMH – that he and behavioral finance began to draw wide attention. In his 1990 book Market Volatility, Shiller said,

… investor attitudes are of great importance in determining the course of speculative assets. Prices change in substantial measure because the investing public en masse capriciously changes its mind.

The curiosity of Fama and Shiller as simultaneous Nobel recipients did not go unnoticed in the media. … Yet if some commentators at least noticed that Fama and Shiller were “the oddest of bedfellows,”none even attempted a thoughtful explanation of why the Nobel committee gave equal recognition to utterly incompatible schools of financial thought.

The answer to this otherwise vexing question comes into focus via socionomic analysis, in three particular ways:

  1. Even at extremes, social mood is always at least slightly mixed (see Figure 1). We have often made this observation regarding cultural and social trends, including music (The Elliott Wave Theorist, February 1989), politics (The Socionomist, November 2010), pot laws (The Socionomist, August 2013), and television programming (The Socionomist, July 2012). …
Expressions

Figure 1
Click to enlarge

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In the remainder of this packed, three-page report, Robert Folsom provides two more socionomic truths that illuminate the Nobel committee’s unusual choices. Continue reading to discover how the social mood influenced the committee’s October 2013 decision, as well as its selections for the past forty years.

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