Professor’s Invention Predicts Stock Swings

The stock market is fickle.  Most people know that the value of a company’s stock is loosely based on how well the company is doing financially, and more closely based on consumer sentiment.  While any investor can go and read through a balance sheet and other financial documentation of any publicly traded company, they cannot go through and read how the consumer is feeling from one day to the next.  It seems that every time people start to feel good about the economy, some sort of bad news hits the media and the market dips again.  Until recently there has not been an accurate way to predict what people are feeling.

That is until Professor Johan Bollen entered the scene.  An associate professor of Informatics and Computation at Indiana University, Professor Bollen has worked closely with social networking and how the ideas and concepts being discussed correlate to the market.  He knows that companies already analyze Twitter and study the trends in order to gauge the public reaction to their product.  He had the idea that he could measure the mood of the public through their tweets in order to predict short-term movement of the stock market.

For the first test Bollen, along with his student Huino Mao, analyzed tweets to see how the Dow Jones Industrial Average and public sentiment were correlated.  He began to see a distinctive correlation between people’s moods and the movement of the index.  In fact, he and his student claim they could predict with 90% accuracy that when the overall mood was calm, the Dow would rise, and when the overall mood was anxious, the Dow would drop.

This is amazing news as until this time quantifying emotions and sentiment has been a struggle.  Especially difficult is quantifying emotions and sentiment before the market reacts.  But not everyone believes the invention will actually be able to predict long-term movement.  It can gauge some short-term market swings, but those swings can fluctuate wildly throughout the day.  The mood may be calm one minute, but a spurious news story arises and the market will be thrown into chaos.  Skeptics think some day traders and hedge fund operators will benefit, but the majority of investors will pass up this new method of analyzing stock movement.

Only time will tell.  The invention still needs several years of testing before it can be determined if the predictions are accurate, or simply a coincidence.   And it needs to be tested for individual stocks.  Analyzing mood and hypothesizing the overall movement of the market is one thing; analyzing mood and hypothesizing the overall movement of an individual issue is quite another.  What do you think?  Will this invention revolutionize the stock market?  Or will it be just another idea that never quite panned out?  For the time being, Professor Bollen is working on determining why people are unhappy.  He says, “It’s easy to see when people aren’t happy, but the big challenge is to explain why.”