Crowd Behavior - following the fork enmass?

We spend much of our time in our work at KnovaWave and therefore trading gauging the effect of crowd behavior—we use sentiment indicators, wave counts and Gann and Murrey indicators for example. Sometimes one needs a degree in psychology to get a handle on what is going on. Crowd behavior is something I believe is paramount in moving markets—resultantly understanding and being able to use that in your trading plan is essential to your success. This is nothing new, Aristotle knew this thousands of years ago and Gann and Elliott amongst others put into market analysis. Something Alfred Hitchcock exposed fantastically on film.

We began this series with a discussion of the cognitive dissonance theory, all this is an example to trade with a view towards Global interaction—this is the purpose of the KnovaWave Weekly Review to put in step with all the markets to give a heads up on what is affecting your particular trading instrument. Familiarize yourself with the different markets and the significant levels. We learnt how cognitive dissonance can be reduced by adding new cognitions, or by changing existing cognitions.

Changing existing cognitions reduces dissonance if (a) the new content makes them less contradictory to others or (b) their importance is reduced. If new cognitions cannot be added or the existing ones changed, behaviors that have cognitive consequences favoring consonance will be recruited. This series is aimed at helping you understand why this is so.

Through KnovaWave we utilize much of R.N. Elliott’s and W.D. Gann work in our market theorems and trading methodology. Like those two men we are constantly fascinated by the human mind, both individually and collectively. If we were to take Elliott’s most basic theorem that market movement is five waves in the direction of the trend and three moves against the direction of the trend repeating in perpetuity and followed it ONLY on that basis we would be met with disaster.

Firstly this is not his theory but what many believe it is limited too – as silly as that sounds, that is the perception among the majority. To the novice Elliott Wave is obvious after the event and nearly all Elliott propitiators get it wrong before the event – the main reason is the individual using the theory is merely using it to justify his or her preconceived notion of where the market is headed which in turn is influenced by crowd pressure.

In KnovaWave we look inside-out in our methodology – that is we implicitly recognize that long-term moves are made of many short-term moves that are constantly evolving and reflecting off one another. We also within our theories of reflexability and nature’s design acknowledge that chaos can manifest itself both in financial market systems and in quantum and classical systems. In both systems instability and unpredictability are fundamental and underlying properties. With this is acknowledgment we adhere to two overriding rules of logic;

  1. Expect the unexpected
  2. Nothing is as it seems

One of the things that makes financial markets an exciting avenue for so many to spend their time is the constant changing environ that it is. We have seen how crowds constantly change and in many ways are constant in their sameness. The consciousness of man faces a nature of which he is a part and which it leaves through different levels of emulsion in the crowd. Further to the crowd’s reaching equilibrium and the state of flux appears we must ask what unravels that point of equilibrium. This is what happens in nature just when everything is predictive random perturbations direct the crowds to choose a particular direction of development, which we know is done unwittingly. Thus using probability laws one is able to predict certain outcomes and alternatives. With this we understand that other fluctuations may have taken place but as nature works randomness has chosen this course. Indeed but for a minor event the crowd, the markets or an event might have turned out entirely different – this occurs constantly. This is the pure mathematical approach, but what of the psychological aspect?

A key element that runs rampant through crowds is chaos – with chaos eventually comes equilibrium. Whilst we now have a wide understanding about crowd behavior, of definite and indefinites how do we apply that more directly to financial markets? After all this is where the crowd behavior seems to portray the most extreme outcomes and seemingly illogical turns in the modern age. Why is this – further from the work of Didier Sornette and our recognition of the role nature plays in crowd behavior we have utilized the works of Ilya Prigogine. In understanding his work and its relevance to crowd behavior and specifically the effect and timing of that behavior it is best to understand why we studied his work. Very simply in utilizing Elliott Wave Theory it is most difficult is determining the corrective nature of waves; there are eleven outcomes and further variations thereto in Elliott Wave. Ok – this is a clear problem in determining the future moves. Within KnovaWave methodology much of our proprietary work revolves around identifying these wave structures and the market crowd’s behavior. It is Prigogine’s work on bifurcations that is critical in understanding this aspect of crowd behavior.

Ilya Prigogine was awarded the Nobel Prize in chemistry in 1977 for his contributions to non-equilibrium thermodynamics, particularly the theory of dissipative structures. He was born in Moscow, Russia on January 25, 1917. Of particular interest in our work is what Ilya Prigogine saw as the role of time in the physical sciences and in biology. In analyzing market crowd behavior his understanding of irreversible processes, particularly in systems far from equilibrium – applicable to our theories of reflexability are essential.

The fundamental significance of chaos and unpredictability in nature gives grounds for considering the present state of the Universe to be the result of the play of random fluctuations – with this we learn to be surprised by nothing as we always expect the unexpected.

Given the randomness of nature’s events we are brought back to the age old sage advice by our forbearers when we approach a fork in the road where is destiny is determined by the road we go by. Let us apply this to the market – very simply the market can head either of two ways – well I guess it could remain flat but that is a very time limiting occurrence. This is where we have worked with Ilya Prigogine’s discoveries, specifically that events are points of “branching”. Prigogine called these bifurcations of the system’s trajectory at which it is not possible to predict with precision what trajectory it will choose in the immediate future. Thus we learn to predict possible outcomes and not possible certainties. What we do know through our methodology is where we should be at a specific time or price and how the crowd will react at that bifurcation.

Let us take this a step further, presume we acknowledge the bifurcation and the two paths it can go by we must be then flexible as to our approach in reacting correctly to each bifurcation and it’s outcomes – thus we label all reactions as “spits’ or “spits of spits” in our methodology. Thus each non-directional movement resolves itself in a point, which Prigogine called a bifurcation. Here in lies the very question in the problem of prediction. Let us apply this understanding to the corrective waves of markets, such as seen in the latter stages of this equity market rally (November 28, 2003) where the trajectory becomes less and less stable and disintegrates into a multitude of new trajectories. This is also indicative of a tired, confused crowd or herd. In the final analysis, even the history of mankind can be viewed as a series of bifurcations.

From 2004... let us take just the past few years and list a few events that may have been different;

  • In the US the Supreme Court decision in the election of the president of the United States which led to the confirmation of George W. Bush as president over Al Gore.
  • The acceptance of tarnished intelligence documents in making a declaration of war on Iraq.
  • Arthur Anderson signing off on Enron offshore entities.
  • The FDA approving Erbitrux three years ago,(ImClone).
  • The US and UK agreeing to French and German time requests on Iraq.
  • The Oil workers strike in Venezuela.

Fast forward to 2016 - only the names have changed - see the pattern?

The list is endless and you can just see from these few examples how much the trajectory could differ at each bifurcation. Have some fun; make a list of events in your own life or the world that may have been different. What is the result of seeking self-order? With this you will see that markets, and therefore market crowd behavior is little more than mechanisms seeking self-order.

Ilya Prigogine suggested that all natural systems rotate between order and chaos and move from one plateau to the next. The moves between the plateaus are fast and is directional giving us the order component. The plateau component is non-directional, thus chaos is bubbling beneath from here comes the impulsive or explosive reactions that the majority fail to react to.

Ilya Prigogine cited Henri Bergson through "L’évolution créatrice" (Creative Evolution - 1907), who was considered the main challenge to the mechanistic view of nature as having a major impact in his theories. Bergson in Matter and Memory (1896) also attempted to integrate the findings of biological science with a theory of consciousness. Indeed Prigogine was moved to write in his autobiography; “More specifically, I felt that some essential message was embedded, still to be made explicit, in Bergson’s remark;

"The more deeply we study the nature of time, the better we understand that duration means invention, creation of forms, continuous elaboration of the absolutely new."

For those wanting to further understand the effect of time and how Bergson argued that the intuition is deeper than the intellect read the book; Inventing Bergson: Cultural Politics and the Parisian Avant-Garde by Mark Antliff (1993). Through what we know as a series of bifurcations Bergson claimed to have anticipated features of relativity theory and modern scientific theories of the mind.

Prigogine wrote that in the case of far-from-equilibrium chemical reactions all the inherent problems have a common element of time. He was able to find the junction in physical science on one hand, and in biology and human science on the other. Along with others working more directly with financial markets such as Gann and Elliott that we are familiar with Prigogine wrote;

In addition, the research conducted with my friend R. Herman on the theory of car traffic gave me confirmation of the supposition that even human behavior, with all its complexity, would eventually be susceptible of a mathematical formulation. In this way the dichotomy of the "two cultures" could and should be removed. There would correspond to the breakthrough of biologists and anthropologists towards the molecular description or the "elementary structures", if we are to use the formulation by Lévi-Strauss, a complementary move by the physico-chemist towards complexity. Time and complexity are concepts that present intrinsic mutual relations.

Further in his inaugural lecture, De Donder said;

"Mathematical physics represents the purest image that the view of nature may generate in the human mind; this image presents all the character of the product of art; it begets some unity, it is true and has the quality of sublimity; this image is to physical nature what music is to the thousand noises of which the air is full..."

In our travails of understanding a market’s psychology Ilya Prigogine’s discovery that time-orientation is a fundamental property of all natural systems, physical, chemical, biological and social further acknowledges what we have discovered throughout developing KnovaWave methodology. As we have learnt through nature’s design and the works of people such as Fibonacci the natural tendency towards chaos by no means entails loss of harmony. Indeed, as with Gann’s work Prigogine through mathematics enables us to utilize chaos constructively.

The Law of Thermodynamics, discovered more than a hundred years ago, created some confusion in the minds of scholars by proclaiming that, left to itself, a system will tend from order towards chaos, this process being irreversible or “time-oriented”. This is the belief of the masses as we have come to see, in markets best evidenced by capitulation prior to and culminating in equilibrium. This is despite the concept of chaos being incorporated in both natural and social sciences these days – this in itself helps explain why people are always overwhelmingly bullish at the top and overwhelmingly bearish at the bottom. It is nature’s way to enable the crowd to be submitted without learning from the series of change.

To quote Ilya Prigogine;

“The illiterate of the future will not be the person who cannot read. It will be the person who does not know how to learn."

People are predictable in an unpredictable way!


Le Bon, Gustave (1878) The Crowd - A Study of the Popular Mind
Sornette, Didier (2002) Why Stock Markets Crash: Critical Events in Complex Financial Systems
Sornette, Didier (2002) Critical Phenomena in Natural Sciences
De Donder (1968) Florilège (pedant le XIXe siècle et le début du XXe),Acad.Royale.Belg.Bull, Cl.Sc., Bergson, Henri (1907) L’EVOLUTION CRÉATRICE - Creative Evolution - suom. Henkinen tarmo
Poulet, G. (1949) Etudes sur le temps humain, Tone 4, Edition 10/18, Paris. 
Prigogine I. and R. Defay (1944-1946) Thermodynamique Chimique conformément aux méthodes de Gibbs et De Donder (2 Tomes), Liège, Desoer. 
Glansdorff, P. and Prigogine, I. (1971) Structure, Stabilité et Fluctuations, Masson, Paris. 
Prigogine, I. and Grecos, A.P. (1976) The Dynamical Theory of Irreversible Processes, Proc. Intern. Conf. on Frontiers of Theor. Phys., New Delhi. 
Antliff, Mark (1993) Inventing Bergson: Cultural Politics and the Parisian Avant-Garde