How History Happens, or Why the Conventional Wisdom is Always Wrong

Actions Denitely Speak Louder than Words

SUPPOSE
You could predict which incumbent presidents would win or lose re-election? You could predict which genres of pop stars would next rule the airwaves and movie screens? You could predict the ups and downs of the economy? You could identify the peaks in popularity for major sports, like baseball and basketball?

JOHN L. CASTI

You could predict the next big thing in fashion? You could predict when a country would be peaceful and when it would be beset with labor strikes, protest demonstrations, and war?

John L. Casti received his Ph.D. in mathematics under Richard Bellman at the university of Southern California in 1970. He worked at the RAND Corporation in Santa Monica, CA, and served on the faculties of the University of Arizona, New York University, and Princeton before becoming one of the rst members of the research staff at the International Institute for Applied Systems Analysis (IIASA) in Vienna, Austria. In 1986 he left IIASA to take up his current post as a Professor of Operations Research and System Theory at the Technical University of Vienna. He is also a member of the research staff of the Institute for

How much would this ability be worth to companies, governments, cultural leaders, and every person affected by such events?

CONVENTIONAL ERROR
It is no accident that futurists of all types (including economists and political analysts) fail at prediction. They get excited at major peaks in society and predict all kinds of wonderful things at the very moment a downturn is imminent. Then they get cynical at major bottoms in society and predict doom and gloom when in fact an upturn is just around the corner. As a result, Investors take risks at major tops and pull in their horns at major bottoms just when they should be doing the opposite. Armies are bloated and girded for battle when no wars occur and nd themselves dilapidated and unprepared when wars break out just when they should be doing the opposite. Governments spend too much money in boom times and have no money to spend in bad times just when they should be doing the opposite.

12

C O M P L E X I T Y

2003 Wiley Periodicals, Inc., Vol. 8, No. 6

Clearly the failure of futurists to anticipate change, indeed their long record of predicting pretty much the opposite of what actually occurs, has immense social and personal costs.
Clearly the failure of futurists to anticipate change, indeed their long record of predicting pretty much the opposite of what actually occurs, has immense social and personal costs. The problem with almost all social prediction is that it is based on the extrapolation of present trends into the future. It always fails. Why? Because trends change. There has never been a useful approach to anticipating changes in social trends until now. All that is wrong with social prediction today is due to one simple error: the presumption that events cause social moods and trends. This assumption, in fact, like the predictions it produces, is exactly backward. And it is this taken-for-granted assumption that forms the foundation for the explanations, the so-called conventional of social events and actions given by the media, the intellectual community, the Op-Ed writers, and assorted pundits of all sizes, shapes, and colors. They are always wrong! And the reason they are wrong is that they are based on an unquestioned belief as to the causal relationship between social mood and social events: moods (read: thoughts)

cause actions, not the other way around.

THE SOLUTION
Most people think that the outcome of elections causes the mood of the country to change. The opposite is true: The mood of the country determines the outcome of elections. Most people think that a plethora of happy popular music on the charts makes the public happy and that a plethora of depressing popular music on the charts makes the public depressed. The opposite is true: A happy public pushes happy songs up the charts, and a depressed public pushes depressing songs up the charts. Most people think that a productive economy makes people optimistic and that an unproductive economy makes people pessimistic. The opposite is true: Optimistic people make a productive economy, and pessimistic people make an unproductive one. Most people think that peace makes people content and tolerant, whereas wars make people angry, fearful, and patriotic. The opposite is true: Content and tolerant people make peace, whereas angry, fearful, and patriotic people make war. It sounds so simple, yet no one in the social sciences has made this case until now.

A REVOLUTION IN THE SOCIAL SCIENCES

For 25 years, beginning in New York City and now in a remote enclave in north Georgia, Robert R. Prechter, Jr. and his staff of edgling researchers have been developing a new science, the science of socionomics. Its beginning came with a brief manifesto published in 1979 and has culminated in two products of seminal importance: A ground-breaking, two-volume book entitled Socionomics: The Science of History and Social Prediction and a new sociological research organization that is attracting the interest of academic scholars worldwide.

Scientic Interchange, Torino, Italy, and the Systmes Research Group of the Austrian National Research Center, Vienna. In addition to numerous technical articles and a number of research monographs, Professor Casti is the author of several volumes of trade science, including Paradigm Lost, Searching for Certainty, Complexication, Would-be Worlds, The Cambridge Quintet, and The One, True, Platonic Heaven.
2003 Wiley Periodicals, Inc.

The hypothesis that Prechter and his team have honed is as simple as it is profound: The character of social events does not determine social mood, but rather social mood determines the character of social events. From this hypothesis has owed a new understanding of social trends and reversals as well as the ability to predictin probabilistic termsall types of social trends, from movie genres to geopolitics. The roots of socionomics are deep and interesting. They begin with a stock market researcher named Ralph Nelson Elliott, who in the 1930s, without the aid of computers, discerned and described the patterns in the stock market as composing a robustly recursive self-similar hierarchy, which today we call a fractal. (See this column in the July/August issue of Complexity for more details on Elliotts Wave Principle.) Socionomics is the social science that recognizes the inescapable conclusions to be drawn from Elliotts discovery: If the stock market is patterned, then it cannot be the product of random forces, as the professors of nance tell us, and it cannot move up and down in response to conditions or events, as economists of all persuasions tell us. The direction of causality, says the Fundamental Principle of Socionomics, must be in the opposite direction. The natural fractal patterns of shared mood are hardwired-in to society, and the mood of society determines how it will behave. In other words, the natural ebbs and ows of positive and negative social moods are the engine of all social trends, from arts and entertainment to economics and politics. Because these mood trends are patterned, they and their reversals are predictable, not as specic events but in the same way life insurance companies can predict statistically the number of deaths in a given year but not the specic individuals who will die. But how could one possibly measure the social mood of an entire population? After all, at any given moment the
C O M P L E X I T Y 13

FIGURE 1

Presidential elections, 1770 2000.

population may have many different moods, depending on the time frame under consideration. People may be optimistic about the way things will be tomorrow, pessimistic about the prospects for the end of the year, and just plain uncertain about what the state of affairs might be a year or two from now. So we need a measure of social mood, a sociometer if you like, that can accommodate all these various time scales at once. The large body of empirical evidence suggests that the best possible sociometer is . . . an index of stock prices such as the Dow Jones Industrial Average (DJIA) or the Standard and Poors 500 Index (S&P500)! In short, what counts in forming the social mood is how individuals really feel and act, not how they say they feel or claim they will act under the type of hypothetical circumstances created by pollsters from CNN or interviewers in shopping malls. Here actions denitely speak louder than words. And the actions that most accurately reect
14 C O M P L E X I T Y

All that is wrong with social prediction today is due to one simple error: the presumption that events cause social moods and trends.

the overall social mood are found in the type of bets people really do place about their views of the future. Those bets are simply the decisions people take (or are taken for them by their agents, the nancial fund managers) about how to invest their money. As the biennial political wars are just now heating up for the elections in the fall of 2004, let me consider an illustration of the foregoing notions in action as applied to the reelection of incumbents.

POLITICAL RE-ELECTIONS
The conventional wisdom is that political trends are a key determinant of the stock markets gyrations. As an election

approaches, commentators endlessly debate the effect the outcome of the election will have on stock prices. Investors argue over which candidate is more likely to inuence the market to go up or down. We often hear statements like, If so-and-so gets elected, it will be good/bad for the market. If this causal relationship were valid, then there would be evidence that a transfer of power from one partys leader to another affects the stock market. There would also be evidence that certain political parties or policies reliably produce bull or bear markets. There is no study that shows any such connections or correlations. A socionomist, on the other hand, can show the opposite ow of causality at work. Examining Figure 1 showing U.S. presidential elections over a period of more than 230 years, its easy to see that strong and persistent trends in the stock market predict without fail whether an incumbent president will be re-elected in a landslide or defeated in
2003 Wiley Periodicals, Inc.

The hypothesis that Prechter and his team have honed is as simple as it is profound: The character of social events does not determine social mood, but rather social mood determines the character of social events.

one. In all cases where an incumbent remained in ofce in a landslide, the stock markets trend was up. In all cases where an incumbent was rejected by a landslide, the stock markets trend was down. There is not a single case in which an incumbent won re-election despite a deeply falling stock market or lost in a landslide despite a strongly rising market. The socionomic conclusion is clear: When social mood waxes positive, as reected by persistently rising stock prices, citizens vote to retain the leader who symbolizes their upbeat feelings and who they presume helped cause the positive social mood. When the social mood turns negative, as reected by persistently falling stock prices, voters decide to throw out the incumbent who symbolizes their downbeat feelings and who they presume helped cause the conditions leading to their pessimistic outlook. The political policies of the incumbent and his challenger are irrelevant to this dynamic. The key is a desire for change per se, not for any particular type of change. The conventional wisdom has no explanation for reconciling the relationship between these phenomena. The current brouhaha in California surrounding the recall of Governor Gray Davis is an excellent example of how this predictable general social trend shows itself in a specic situation. A recent headline in The New York Times stated, California Mobilizes Recall of Governor Gray Davis. During the bull market, California voters eagerly voted for Governor Davis. He was elected in November 1998, obtaining 58% of the vote. In a September 2002 statewide survey on his handling of economic issues, 45% approved of Mr. Davis and 40% disapproved. He was re 2003 Wiley Periodicals, Inc.

elected Governor in November 2002, capturing 47.4% of the vote versus Bill Simons 42.5%. But today Daviss popularity as a political leader is at a level last seen in the Nixon era during the Watergate Scandal, and a coalition has formed with the goal of turning him out of ofce. A statewide referendum recently gathered far more than the number of signatures needed for a recall election, which is now scheduled to be held on October 7, 2003. Recent polls indicate that 51% of eligible voters will vote to remove him. The New York Times of June 16, 2003 quotes James L. Brulte, who heads the state Senate Republican caucus, Its unbelievable how hated he is, Brulte said referring to Mr. Davis. What explains this turnabout in Daviss fortunes? Opponents of Davis cite a list of his bad policies and behavior as reasons why voters have turned on him: A massive state budget decit, mishandling of the states deregulation of electricity, and other sorts of questionable actions and decisions. By way of contrast, The New York Times sees no specic actions taken by Davis as causing the revolt. It surmises that, Mr. Davis may be the victim of the increasingly rancorous climate in state and national politics, from the Clinton impeachment to the 2000 election ght in Florida. This is the wisdom of the conventional analyst speaking. But this type of answer does not account for the current change in sentiment. For example, Daviss opponents cannot explain why voters loved him for more than four years, reelecting him to ofce, only to turn upon him suddenly to such a degree that his popularity has plummeted to the point of a possible recall. After all, hes the same person now, with the same moral character and political philosophy, that he was then. No change in Davis himself can explain this change in voter attitude. One might wonder why Davis was reelected in November 2002 despite the fact that the social mood as measured by the Dow Jones Industrial Average (DJIA) made a major low on October

9 of that year. The reason is that it takes time for people to mobilize social political actions. And in this case it took about six months for the recall movement to gain momentum and visibility. By way of contrast, Richard Nixon was forced to resign right at the 1974 market low with no lag, at all. But this resignation took place immediately after the eight-year bear market and right at the low. But with Davis this was not the case; hence, the time lag. An increasingly rancorous climate that presumably originated in February 1999 with the Clinton impeachment and simmered in November 2000 over the Florida election battle cannot explain Daviss re-election in 2002 and the subsequent call for his removal just one year later. A socionomist understands exactly what is going on here. As Robert Prechter put it: What a leader does is mostly acausal with respect to the publics opinion of him. There are two reasons for this fact. First, his actions, despite their endless analysis in the press, do little to affect his popularity. Second, his popularity is dependent upon a social mood and economy over which he can exercise no countertrend inuence. To conclude this example, socionomics asserts that an increasingly negative social mood impels voters to magnify politicians weaknesses, minimize their strengths, perceive that old political styles have failed, and eventually oust the incumbent at the next election or even before it occurs. A bear market has raged for three years. Voter hostility had to erupt somewhere. Summarizing the overall lesson: The conventional analyst asks: How do political leaders actions cause a change in their popularity (social mood)? The socionomics analyst asks: How does the social mood affect voters perceptions of political leaders? The socionomic line of argument is certainly cause to ponder the fate of
C O M P L E X I T Y 15

President George W. Bush in the forthcoming 2004 presidential election. If the social mood, i.e., nancial markets, take off between now and then, Mr. Bush will be reelected; if they fall a long way by the autumn of 2004, then his political career and presidency is going to go the way of Van Buren, Nixon, Hoover, Carter, and all the other political dodo birds of the species politicus americanus.

A collection of planets like our solar system doesnt have a mood; a collection of living animals such as the humans on planet Earth do.
population sharing a common social mood. This picture is very much like the emergence and spread of an infectious disease, except that instead of germs and viruses being transmitted from one body to another, it is ideas or, as Richard Dawkins would put it, memes. So one of the many challenges to the complex systems world is to create a workable theory for how such individual ideas and moods form an epidemic that we call the social mood.

THE FUNDAMENTAL PRINCIPLE OF SOCIONOMIC

Socionomics argues that it is the collective social mood in a population that drives and generates collective human behavior and observable events-what we call historyand it has always been that way. To put it compactly, social mood is the engine that drives history. This constellation of ideas can be compactly expressed in the following diagram, which I term The Fundamental Principle of Socionomics:

WHY DOES THE CONVENTIONAL ANALYST ALWAYS GET IT WRONG?

In the face of example after example of the type shown by the presidential reelection example, how can it be that the seers, movers, and shakers of public opinion persist in seeing social events through the wrong end of the telescope? An important part of the claim made by socionomists is that the causal basis upon which conventional analysts explain events like the impact of social mood on political elections or the outbreak of warfare rests upon the type of causality were familiar with from the world of physics. This is a realm that humans have learned to manipulate and control. It is a world in which literally nothing happens until the system is disturbed by an outside event. Ideal billiard balls moving without friction continue in their motion until a cue ball interferes with their behavior; planets merrily move along in their orbits until an outside event like a cometary intrusion acts upon the system causing a reconguration of those orbits. This principle that actions cause changes is enshrined in the physicists lexicon as Newtons First Law of Motion: Material bodies continue in their state of motion until acted upon by an outside force.

herding impulse 3 social mood 3 collective human social events

This diagram makes it clear where complex system theory enters into a research program to provide a scientic basis underwriting the Fundamental Principle. The key element in the entire story is the social mood, which we claim can be measured by the movement of the nancial markets. But, you ask, How does the social mood itself arise? As the diagram indicates, it arises from the herding instinct hard-wired into the deepest part of every human brain. Each of us makes up our own mind about how we see the future on all time scales. These ideas are then transmitted into other brains via the media, personal conversations, and other sources of information available to us. Under the right conditions, a critical mass of people coalesce together into a

Of course, traders in a nancial market or drivers in a road-trafc network are not material bodies, at least not as Newton thought of such things. But never mind. Interestingly, even in physics this kind of thinking, in which events cause changes, works only because the linkage between the system (the solar system, for instance) and the outside event (a cometary intrusion) have an extremely weak reciprocal interaction. So at least in the classical as opposed to the quantum realm, one can get away with pretending that there are events that are really outside the system. But in the social arena there is simply no such thing as outside the system; everything is connected together inside The System. Moreover, planets, billiard balls, and electrons do not herd together and then come apart, each collective aggregation having its own characteristic type of mood giving rise to events. A collection of planets like our solar system doesnt have a mood; a collection of living animals such as the humans on planet Earth do. The arrows in the Fundamental Principle of Socionomics represent the processes of formation of a herd mentality and the time lag from when a herd forms to when it generates a mood, as well as the period between the formation of a social mood and its manifestation in some type of social behavior or event, like a corporate scandal or a new fashion trend. For the most part these issues have not been addressed at all in the scientic or social science literature.

REFERENCES
1. Frost, A.J.; Prechter, R. Elliott Wave Principle: 20th Anniversary Edition; New Classics Library: Gainesville, GA, 2001. 2. Prechter, R. Socionomics: The Science of History and Social Prediction; New Classics Library: Gainesville, GA, 2003. 3. Casti, J. I know what youll do next summer. New Scientist 31 August 2002, 29 32.

16

C O M P L E X I T Y

2003 Wiley Periodicals, Inc.