Subjecting the Principle of Technical Analysis into theoretical diagnosis of Efficient Market Hypothesis and Socionomics

International Federation of Technical Analysts defined Technical Analysis as the systematic method of analysing financial instruments, including securities, futures and interest rate products with only market delivered information such as price, volume, volatility and open interest.

When the above stated principles that guide technicians were subjected to the scientific analytics of neoclassical economists, in the theory of efficient market hypothesis, it debunk the theoretical application on the sole grounds that, economics and financial causality are fundamentally the same, therefore judge the technicians to be delusional. The prima facie of this theory continues to stand as an uphold theory in main stream economics and behavioural finance studies in the face of alternative evidence submitted to correct such error in modern theory.

Socionomic as a modern theory strives to delineate finance and economics dichotomy, which distinguishes between the field of microeconomics where the law of supply and demand applies with a paradigm of rationality in utility maximization and external causality but in the field of finance it proposes the law of patterned herding within a paradigm of pre-rational herding and internal causality.

It observed that, the neoclassical economic theory seems to be efficient, when economic analysis in display has finance as a subject of variable in the context of the holistic analysis but suffer a default under a complete financial market analysis.

As a result, the following contrast below is established under the Socionomic and the neoclassical theoretical perspective towards the financial markets behaviour for evaluations and decisions:

  1. Socionomics theory argue that the financial market is subjective, unconscious, pre-rational impulses to herd is what determines the financial value, while the Neoclassical theory submits that, the financial market is objective, conscious, rational in decisions to maximize utility, is the cause that determines financial value.
  2. Socionomic theory state that, financial markets are dynamic and do not revert to anything, while the Neoclassical theory suggests, the financial markets tend towards stability(equilibrium) and revert to mean value
  3. Socionomics alludes to investors in financial markets typically using information to rationalize mood-induced imperatives while the neoclassical theorists are of the view that investors in financial markets typically use information to reason
  4. Socionomics state that investors’ decisions are fraught with ignorance and uncertainty while the neoclassical concludes that investors’ decisions are based on knowledge and certainty
  5. Socionomic theorists believes, endogenous social processes determine most investment decisions while the neoclassical theorists believe exogenous variables determine most investment decisions.
  6. Socionomic theory argues that financial prices are derived from herding activity and trends in social mood, while the neoclassic theory submits that price is derive from individual decisions about value.
  7. Socionomic theory state that, financial prices adhere to the organizing principle at the aggregate level while the neoclassic theory argues that financial market changes are essentially random.
  8. Socionomic theorists argue that, financial prices are probabilistically predictable, so is the character of news, while the Neoclassic theorists submit that, in the financial markets prices are unpredictable, as well as the character of the news.
  9. Socionomics alludes to changing values of financial instruments presage changes in associated events while the Neoclassic believes changing events presage changes in the values of associated financial instruments.

This paper therefore concludes that, the Socionomic theorists believe socionomic principles govern the financial markets, while the Neoclassical theorists argue that, economic principles govern the financial markets.

Appreciating the theoretical arguments of both fashion, and understanding how the financial markets pragmatically obey the Elliot wave theory, then it  will be logical to submit that socioeconomic theory seems to hold answers to the deep unanswered questions in the financial markets beyond the theoretical foundation of neoclassical, and call for a special attention to [socionomic] as a theory for further examination and evaluation towards the financial markets in response to trend analysis and price movement of instruments by market triggers or catalysts.

Reference

  1. ifta.org
  2. Robert R. Prechter (1999) robetprechter.com
  3. socionomics.net

————————————————————————————————————–

Emmanuel Tweneboah Senzu (Ph.D.), Professor of Frederic Bastiat Institute, Cape Coast Technical University Ghana. Tsenzu@fbiresearchedu.org

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