Posts Tagged ‘Twitter’

Poor old Rupert Murdoch – his purchase of Myspace was not exactly one of his best moments and maybe he is still puzzling why. At least that may explain his tweet last week.

He tweeted: “Look out Facebook. Hours spent participating per member seriously dropped. It was the first really bad sign seen by MySpace years ago.”

Now Mr Murdoch has voiced doubts about Facebook, it may be worth asking: why and why not?

As for why, we have two reasons. Firstly, it kind of fits with the Myspace experience. After all, the social media site once seemed unbeatable. Is it not logical that Facebook, after flying too close to the sun will find the wax holding its feathers together will melt and it will crash, just like Myspace did? Secondly, data out last week revealed that Facebook is losing users.

As for why not, firstly, yes, it is true that Facebook is losing users from its website, but it is gaining them on its apps. Secondly, Facebook is not Myspace in a profound way. The Internet is all about cooperation, about different services dovetailing with others. Facebook is good at this dovetailing and Myspace wasn’t. Then again, Mr Murdoch’s media empire is not one for dovetailing either.

Mr Murdoch was late to embrace the Internet and when he did, he only half did. For example, the ‘Times’ isn’t really on Google. The ‘Financial Times’ charges for its content too, but at least it is fully immersed into search engines. It is perhaps a subtle point but one that seems at odds with the Murdoch ethos.

Facebook has locked its users in in a way that Myspace never did, meaning that it benefits from high barriers to exit. Oh, and one more thing, it is learning how to monetise its massive user base too.

© Investment & Business News 2013

Debt, stocks, restaurant, economics, portfolio, religion, cancer. You can sort of see the link between some of those words, but not all. But there is a link apparently, and the link is with stock market performance.

Take the word debt. If there is a decrease in search engine traffic using this word, it would appear it is a good time to buy into stocks.

If there is an increase in the amount of times users type the word debt into Google, it is a good time to sell – or so suggests a new report published in ‘Nature’s’ scientific reports, by Tobias Preis, (Professor at Warwick Business School) and Helen Susannah Moa and H. Eugene Stanley from Boston University.

Now take the word ring. It appears the relationship is the other way round. If search traffic rises, then it may be better to bail into stocks. Of course this is not proven, and there are reasons to question the findings, but let’s run with the story for a bit longer.

The three academics looked at 98 search terms. They first concluded that rises and falls in search engine traffic of certain words were correlated with stock market performance. This is no big deal. After all, knowing that more people type the word debt into Google when stocks are falling doesn’t help that much.

What investors want is to be able to predict changes in the stock market, not have a new way of describing them.

But the academics also found that certain key words did rise and fall in popularity before changes in stock prices. They found the model worked better when applied to local stock markets. So, for example, tracking search terms used in the US as a way of predicting changes in US stocks was more reliable than using global search traffic to predict global stocks.

This is not the first example of a study appearing to correlate Internet traffic with stock market performance. For example MIT academics Sandy Pentland and Yaniv Altshuler found that investors who are plugged into a diverse range of investment groups enjoy better returns.

Last year Johan Bollen and Huina Mao of Indiana University and Xiao-Jun Zeng of the University of Manchester found that investors who tap into the public mood often enjoy superior performances. They also found that Twitter is a good gauge of such mood. See: A tip for investors: embrace social media – but know when to bail-out

So does the study stack up? Does it make sense?

There has been no shortage of critics. But, from one point of view it does surely make sense. Crowds are complicated things. Psychologists have shown we all tend to comply with the crowd, but – and this is a subtle point – maybe it goes further than that.

Different people often tend to react in the same way in the same circumstances. Who knows why certain type of clothes or child names go in and out of fashion, but they do.

The mood of the crowd can surely relate to stock prices. It can show when the crowd is in the mood for buying, and can surely predict when it is getting nervous.

Can such models warn of one of the black swan events – that is to say rare, but highly significant events? Well, the finance crisis of 2008 was a black swan event if ever there was one, and yet the study by Preis, Moa and Stanley covered data from 2004 to 2011. In short, the occurrence of black swan event did not validate their findings.

And yet, sometimes the mood of the crowd can create problems it is unaware of until the moment the problem becomes irreversible. That is the essence of the book ‘The Blindfolded Masochist’ by yours truly. Intuitively, this aspect of crowd behaviour should mean that on occasions Google will fail to predict changes in stock prices.

The other drawback is that such systems can break down when they are commonly used. So if all big investors incorporated Google analysis into their investment strategy, then such a strategy would surely back-fire.

For the report in full, see: Quantifying Trading Behavior in Financial Markets Using Google Trends 

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You may or may not think Twitter and Facebook are worth your investment bucks, pennies and cents, but it does appear that investors plugged into certain social media services often enjoy better returns.

Gillian Tett at the ‘FT’ broke the story, but actually, it should not come as a surprise. Ms Tett focused on the work of two MIT academics: Sandy Pentland and Yaniv Altshuler. After analysing a mountain of data, they found that investors who are plugged into a diverse range of investment groups enjoy the better returns.

They found that investors who work on their own often perform least well. Those who follow one or two investment gurus do better, but not as well as those who follow several such gurus. But the best performing group are those that just follow a diverse and large range of other investors covering a wide range of specialities and interests.

Pentland and Altshuler focused on a trading platform called eToro. The service itself describes itself in these terms: “Social Trading is about opening the markets to everyone. At eToro we encourage people to connect with one another to discuss, trade, invest, learn and share knowledge across the network. From now on, you don’t need to be a pro to trade like one.”

But this is not the first research of this ilk. Last year Johan Bollen and Huina Mao of Indiana University and Xiao-Jun Zeng of the University of Manchester found that investors who tap into the public mood often enjoy superior performances. They also found that Twitter is a good gauge of such mood. See: Can Twitter predict the stock market? 

Fashion: it is not a concept many investors like to admit to, particularly those who suggest that investment is a science, but truth be told stocks rise and fall with fashion. Sometimes shares rise because the crowd has decided they are going to. On the back of crowd behaviour we got the dotcom bubble, gold rising and falling and bitcoins – for example.

There is a flaw with the idea of wisdom of crowds. Studies show that crowds can be very smart, BUT when and only when the individuals who make up the crowd work in isolation. The classic study was carried out by Francis Galton in 1906, when he surveyed visitors who entered a competition for guessing the weight of an ox at a livestock fair. Galton found that the average guess was very accurate, and so the concept of the wisdom of the crowd was born.

But the crowd in the Galton study had one characteristic that we rarely see in practice. Each guess was made in isolation and was not subjected to the influences of what others thought. Psychological studies provide overwhelming evidence that we all tend to comply with the crowd.

Ten million.

How tall do you think the author of this article is? Take a guess, go on.

Studies show that if the number ‘ten million’ quoted above had been lower, say four, instead of ten million, your guess as to the writer’s height would have been much lower. It sounds ridiculous, but it is true.

That is the point; we are all influenced by each other in surprising and often quite unintuitive ways.

If you can gauge the mood of the crowd, you would indeed have an advantage in predicting stock market changes. By plugging into social media we become a part of the crowd, but maybe we can understand it better too.

There is a snag. Crowds can get it horrendously wrong. The individuals who make up a crowd copy each other. But there is always a limit. A crowd can persuade itself to back an idea beyond that point when its support is rational.

By plugging into the crowd you may be able to second guess fashion in investment, but you may also get swept along, and when the bubble bursts you will find little comfort in the fact that you share one thing in common with the crowd – a lost fortune.