Thursday, September 23, 2010

Do social moods predict financial markets, not vice versa?

The proverb "This too shall pass" , has multiple ancient sources. The version beginning with the Sufi poet Attar of Nishapur has the phrase inscribed on a ring given to great king, which therefore has the ability to make a happy man sad and a sad man happy. Consonant with this proverb, a recent book by John Casti ("Mood Matters - From Rising Skirt Lengths to the Collapse of World Powers", recently reviewed by Richard Taylor) suggests that swings in the public mood between optimism and pessimism occur in natural cycles, recognizable patterns as function of time. Casti suggest that it is these cycles that drive the peaks and troughs of financial waves, which recur at increasingly fine time scales, representing one of the earliest noted fractal patterns in a physical system. He presents a number of detailed cases that argue for mood changes preceding and influencing unfolding events, rather than vice versa. His argument is opinionated, meant to be a foil its conventional wisdom opposite, that mood is set by financial markets. He runs through a comprehensive set of examples which include the lack of long-term response of the financial markets (and therefore social mood) to dramatic events such as Pearl Harbor and John F. Kennedy's assassination. Casti suggest that the financial market serves as an optimal choice for a sociometer to measure public mood, since it is largely determined by it. (He also reviews other measures that might be used to measure optimism for the future, such as rising or falling birth rates, skyscraper construction, car color, rise and fall of skirt length, and music trends.)

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