I write a weekly newspaper column for the Andrews County News. Andrews, TX is at the literal center of the Permian Basin, the largest land based oil producing area of the US and Texas. Crude oil prices are a literal mental barometer of the economy. In this week's column I explain how socionomics works.
How
We Decide
Which Lonesome
Dove character did you prefer?
Augustus McCrae (Robert Duvall) was the carefree spirit; ‘let’s chase
buffalo while there are still buffalo left to chase!.’ Woodrow Call (Tommy Lee Jones) was the
western version of Mr. Spock; giving son Newt his horse was as close as he could come to a fatherly
conversation. Of course, most
people preferred Gus!
We make decisions emotionally. The car we drive,
the church we attend or chose not to attend, the person we marry are all
emotionally driven decisions. This includes the stocks and real estate and
business deals we buy and sell. Yet business theory would have us believe these
are quantitative decisions. Finance theory postulates that decisions are made abstractly in some mental
laboratory festooned with TI 84 calculators and nanosecond speed
computers. The social
science of behavioral economics or socionomics argues otherwise.
Socionomics is the study of social mood and its results in social
actions. It studies how waves of endogenously regulated social mood in turn
regulate changes in the economy,
political
preferences, financial
markets, pop culture,
etc.
It is
important to grasp that market participants make their decisions external to
the market. At $145 oil ‘economists’ were calling for $200 prices. There was absolutely no basis for that call, it
was rather an emotional decision. If all the participants reacted solely on
external stimuli, oil would have gone to $200. But it did not. The collective
wisdom of the markets halted the price rise at $145, as we noted at the time.
In fact markets run out of buyers at top price. Wiley Coyote has run off the
cliff in pursuit of the Roadrunner. Motorists scaled back on their driving.
Those decisions were made internally, the collective mental caution light went
on.
Months
later, as hedge funds dumped everything they owned to meet withdrawal demands,
prices plunged to $35. There were, of course, media calls for $25. But again,
the market decided, internal to these external predictions, that $35 was cheap
enough. Indeed the distant months
traded at the higher prices above $40. And so price found a bottom as
participants made collective decisions about value. It must be this way.
Otherwise price would continue to zero in down markets and infinity in up
markets, but that does not happen.
Manias
can be on display in multiple forums. West Texans, burned on oil in the slump
of 1986, decided that ostriches and emus were a much more risk free, solid investment.
Absurd prices of thousands of
dollars were quoted for a fertile ostrich egg. Was this the case in Australia or Africa? How
could one afford to ‘harvest’ such a supposed valuable animal? No doubt
participants envisioned an ostrich ‘Exchange.’ Perhaps it would be located in Andrews or Crane, bringing
financial stability to the beleaguered oilfield economy. Wonder cures were
attributed to emu oil. But in
fact, the Texas Department of Transportation finally issued a warning. Please do not release emus into the wild,
they can wreck an automobile if hit on the highway. The real value of emus had
been determined.
We
can learn a lot about economic direction by observing the popular culture.
Emotions determine what we read and watch on television and at the movies. HBO
was searching for another vehicle after the popular Sopranos series ended. A socionomist would realize the Sopranos
were simply the Corleones brought up to date. The parallels of the 1970s and
now are obvious, so are the emotions of the participants. The Exorcist
was popular along with the Godfather.
And so, True Blood came to the
screen, and millions of viewers. Edward and Bella of Twilight fame are followed by millions of
female readers, Nancy Drew is no more. No one forced those volumes on the
readers, rather they endogenously chose to put down traditional romance novels
for something, well, more novel.
And
so it goes. We are now over optimistic about stock values and in the silly
season of September/October. When will the music stop, well, once collective
wisdom decides prices are too high, and buyers become too few.
Professor Elam 