“Socionomic” Theory Predicts Market Catastrophe

Question: During the financial crisis you enlightened us to the fractal geometry of Nassim Taleb and Benoit Mandelbrot. Recently the New York Times introduced the fractal geometry of the Elliott Wave and Robert Prechter’s gloomy forecast. What does Nassim Taleb think of this forecast? How similar are their mathematical approaches?

Paul Solman: First of all, neither man’s approach is really “mathematical,” though both use math to analyze the world in general, and investing in particular.

Prechter, as the Times article conveyed quite well, is an analyst of a society’s “mood.” (He calls his approach “socionomics,” remember.) His catastrophic forecast — the Dow below ONE THOUSAND – is based on mass psychology, i.e., mass dread.

Taleb, by contrast, thinks that too many unsustainable promises were made and there comes a point — now or soon — when those promises are simply no longer credible.

As I put it in my summing-up question to Taleb and Nouriel Roubini recently:

PS: So basically what happened is there were a whole lot of bad mostly private promises out there, the governments of the world said we’ll issue public promises to buy up the private promises and you guys are both now worried about the credibility of the public promises?

Here are their responses, though I can’t remember which gave which:

“Exactly. Yes. Yes.”

“That’s the concern.”

As to Taleb’s assessment of Prechter, he doesn’t yet have one. He wrote that he doesn’t know Prechter’s work, but will give it a look. If he responds and says it’s okay to share his judgment, I’ll pass it along on this page.