Free Will Vs. Herd Mentality, Regarding Trading

Free Will Vs. Herd Mentality?

Throughout the ages, man has grappled with the philosophical issue of free will. Those that believe that G-d created and runs the world have further complications with this issue.  While some believe that G-d gave man the power of self-determination, some feel that such an unfettered power resting within man diminishes G-d’s sovereignty and omnipotent divinity.

In the past, we have discussed the Newtonian physics concepts, which generally provide that once an object is placed in motion, the results are somewhat deterministic.  Therefore, an individual who subscribes to this concept would view the future of the universe as inevitably bound and dictated by prior actions within the history of the universe.

The Greek Philosopher Chrysippus of Soli summarized this view as follows:

"Everything that happens is followed by something else which depends on it by causal necessity. Likewise, everything that happens is preceded by something with which it is causally connected. For nothing exists or has come into being in the cosmos without a cause. The universe will be disrupted and disintegrate into pieces and cease to be a unity functioning as a single system, if any uncaused movement is introduced into it."

However, as we have also pointed out in the past, Albert Einstein stated: “During the second half of the nineteenth century new and revolutionary ideas were introduced into physics; they opened the way to a new philosophical view, differing from the mechanical one.”

Socionomics

I would like to present a bit of a different, bifurcated, paradigm, to which I have come about through the new science of socionomics.  The socionomic hypothesis proposes that social mood determines the character of social events. Through biologically based impulses originated within the human brain stem, patterns in social mood have been identified which adhere to Fibonacci mathematics.

As Robert Prechter has written:

This patterning of social mood creates a sociological imperative that mightily guides and influences the character of individual and social behavior.  The resulting human actions, in turn, cause the trends and events of history.  The overall process may be termed historical impulsion.  As opposed to the traditional mechanistic models of aggregate behavior that are based upon presumptions of multiple exogenous causes and ultimate effects, socionomics recognizes that patterns of aggregate human behavior are endogenous, self-causing, self-regulating, self-reinforcing, and, to a far greater degree than has heretofore been imagined, predictable.

Phi – The Building Block of the World

In 1228, Leonardo Fibonacci da Pisa published his monumental work entitled Liber Abaci, in which he “rediscovered” what is commonly known today as the Fibonacci sequence of numbers:  1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc.  Within this sequence, each higher number is the sum of the prior two numbers, and the ratio of any two consecutive numbers approximates 1.618 or its inverse, .618.  The higher you move through the sequence, the closer you move towards the 1.618/.618 relationship. This .618 number has been referred to as the “Golden Mean” throughout history.  We also refer to this number as Phi.

Phi is a number which, as we stated before, exhibits many unusual mathematical properties, and is also the solution to a quadratic equation. These concepts have been understood by Plato, Pythagoras, Bernoulli, Da Vinci and Newton. Historic structures have been built by architects of famous Greek structures, such as the Parthenon, based upon the concept of Phi, and even as far back as the architects of the Great Pyramid of Giza in Egypt, who recorded their knowledge of Phi as the building block for all man nearly 5,000 years ago.

What makes Phi even more unusual is that it can be derived in many ways and is exhibited in relationships throughout the universe, such as proportions within the human body, plants, DNA, the solar system, music, population growth, and the stock market.  Phi is the one underlying constant throughout all of nature and governs all the laws within nature. In fact, the greatest minds of history, such as Pathagorus, Plato, and Kepler, all felt that Phi was the key to the secrets of the universe.

Phi Governs Man’s Decisions

In recent times, we have seen evidence that Phi even governs man’s decision making.  Social experiments have been conducted which resulted in price patterns, based upon a mathematical standard, that mirror those found in the stock market. In 1997, the Europhysics Letters published a study conducted by Caldarelli, Marsili and Zhang, in which subjects simulated trading currencies, however, there were no exogenous factors that were involved in potentially affecting the trading pattern. Their specific goal was to observe financial market psychology “in the absence of external factors.”

One of the noted findings was that the trading behavior of the participants were “very similar to that observed in the real economy,“ wherein the price distributions were based on Phi.

In a different study conducted by psychologist Vladimir Lefebvre of the School of Social Sciences at the University of California, Dr. Lefebvre came to the conclusion that “We may suppose that in a human being, there is a special algorithm for working with codes independent of particular objects.”  Specifically, when his subjects were asked to sort indistinguishable objects into two piles, their decision making within that process divided the objects into a 62/38 ratio.  In other words, these individuals exhibited a Fibonacci tendency in their personal decision making.

Therefore, there is significant evidence that behavior and decision making within a herd and on an individual basis displays mathematically driven distributions based on Phi . This basically means that mass decision making will move forward and move backward based upon mathematical relationships within their movements.  This is the same mathematical basis with which nature is governed.  The same laws that were set in place for nature also govern man’s decision making en masse, and on an individual basis.

Bifurcation of “Free Will” Between Societal Trend and Individualism

Based upon much recent research, it seems that, as a society, we are moved by our limbic system, which controls the impulsive actions of living creatures (including the “herding” impulse), and which will, subconsciously, often override the neo-cortex of our brain, which controls our reason.  As Eric Hoffer aptly noted, “When people are free to do as they please, they usually imitate each other.”  Therefore, as a society, we seem to be hard-wired so as to move in a unified direction.

However, it has also been proven that the extent of this effect will vary on an individual basis. Therefore, as individuals within the overall society, we are not necessarily completely bound by the decisions made by society at large, so we are then able to make choices which can, to some extent, protect us from the mistakes repeated by the masses throughout history.  This, my friends, is probably the most powerful tool available to Elliotticians in our time.  It is our ability to understand the overall trend of the masses, which potentially gives us the opportunity to act in contravention to the negative, harmful trends.  This assists us in maximizing our individual “free will.”

Moreover, while we, as individuals, have the ability, or “free will,” to make decisions that are contrary to the public sentiment trend, it does seem that the larger overall trend is somewhat pre-destined and directs the members of society in unison towards a common destiny.  Based upon the most recent research, it does seem that man and nature have been built with a certain “hard-wired” predisposition, and such predisposition seems to guide the overall social mood and direction of history. 

So, in conclusion, it seems to me that while individuals truly have free will, society at large has been infused with a predisposition towards a common destiny.