A major tenet of socionomics is that social mood is the primary driver of the stock market and other collective activities. One of the research challenges is trying to find a long-term quantitative data series that reflects social mood. Such data can be compared with the pattern of stock prices over time in order to determine if the stock market actually does rise during periods of positive social mood and fall during negative social mood.
A fascinating study published in March, 2013 by British anthropologists addresses this challenge by analyzing the emotional content of almost a billion words published in books over the entire 20th century (1). The Google Ngram database of digitally scanned books was used.
The yearly frequencies of emotion words related to categories of fear, anger, joy, sadness, surprise and disgust were tabulated by a computer program. The words were from standardized lists used in linguistic research.
In a National Public Radio interview, researcher Alex Bentley said, "We didn't really expect to find anything. We were just curious. We really expected the use of emotion words to be constant through time."
Instead, they were surprised to find very distinct peaks and valleys in the distribution of the words. Even more intriguing is what I found when comparing their data with stock prices: the frequencies of positive and negative mood words in the 20th century correspond with peaks and valleys in the stock market.
Of particular interest here are mood words for joy (224 words) and sadness (115 words). The researchers used the relative frequency of these words in each year to create an index of positive and negative mood.
Figure 1. Higher scores indicate more positive mood; lower scores indicate more negative mood.
A graph of this linguistic mood index showed three major peaks of positive mood in the 20th century: the Roaring 20s (which produced the highest number of happy words), the 1960s, and the 1990s. Consistent with socionomic theory, each of these peaks were at a zenith of major waves of stock market advances. In Elliott Wave terminology, these peaks were the culmination of the three major Cycle-degree stock market waves of the 20th century (the peak years of the rising stock market waves were 1929, 1966, and 2000).
Similarly, the two peaks in negative mood word frequency occurred in 1942, which was also a major bottom in stock prices, and in the early 1980s, when another major bottom in stock prices occurred (1982).
In addition, the direction of the trend of mood word frequencies paralleled that of the stock market. For example, as the number of positive mood words dropped dramatically from their highest levels of the century in the 1920s to their lowest levels in 1942, the Dow Jones Industrial stocks dropped 75% from their 1929 peak to 1942. Then as the market turned around and rose more than ten-fold from 1942 to 1966, the number of positive mood words rose dramatically.
In the 16 years following 1966, the Dow had an overall loss of 22% while the number of negative mood words significantly increased. Then the number of positive mood words increased sharply from the early 1980s to 2000 as the stock market had its biggest bull market in history, with a 14-fold rise in the Dow and a huge bubble in technology stocks.
Socionomic theory holds that social mood is endogenously regulated and independent of eternal events. The mood words in this study did not primarily result from authors writing about current events. The diverse types of fiction and nonfiction books in the Google database included an extremely wide range of topics. "Many were books without clear emotional content--technical manuals about plants and animals, for example, or automotive repair guides. 'It's not like the change in emotion is because people are writing about the Depression and people are writing about the war," says Bentley. (2)
The stock market is a good measure of social mood because, put simply, when people are in a positive mood they tend to buy stocks and the market rises; when they are in a negative mood they sell stocks and the market falls. Stock market participants comprise a large sample of tens of thousands individuals. Their stock transactions quickly respond to social mood because traders and investors can buy or sell with the click of a mouse or a phone call.
Similarly, frequencies of mood-related words in a massive number of published books reflects the overall mood of authors and the emotional tenor of a culture at a particular time. The fact that the temporal pattern of mood word frequencies parallels that of the stock market indicates that both emotional word usage and the stock market respond to, and are shaped by, the larger force of social mood.
The foregoing data indicate that social mood is encoded in language and becomes part of the written record of a culture. And social mood is also behaviorally enacted in innumerable ways, including through the buying and selling of stocks.
1. Alberto Acerbi, Vasileios Lampos, Philip Garnett, R. Alexander Bentley. The Expression of Emotions in 20th Century Books. PLOS ONE, March 20, 2013.
2. National Public Radio interview, April 1, 2013.