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www.elliottwave.com
The socionomic theory of finance (STF) proposes that economic and financial markets are fundamentally different from each other. The differences manifest at both the individual and aggregate levels and arise from the opposing contexts of relative certainty in the economic marketplace vs. pervasive uncertainty in the financial marketplace. In economic markets, producers and consumers, due to knowledge of their own values, consciously apply reason to decision making. This results in exogenously motivated objective pricing. In financial markets, speculators, due to ignorance of others’ future actions, unconsciously apply herding impulses to decision-making. This results in endogenously motivated subjective pricing.
The opposing motivations of producers and consumers cause economic markets to tend toward equilibrium, mean reversion and price stability, in a process regulated at the individual level by utility maximization and at the aggregate level by the laws of supply and demand. The unopposed motivations of speculators cause financial markets to tend toward dynamism in a process regulated at the individual level by spontaneous commands and at the aggregate level by the law of patterned herding. The pricing model for economic markets is the random walk. The pricing model for financial markets is a hierarchical fractal called the Wave Principle, described in the Elliott wave model. Neoclassical economic theory and, in finance, the efficient market hypothesis fail to discern all of these distinctions and inappropriately apply laws of economic causality to finance.
