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Twitter Trends Beat Analysts In Predicting Wall Street

| 9 Sep 2011 20:50
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Twitter isn't just a sublime social networking platform. According to one investment firm, it's also a brilliant tool for playing the stock market.

Traditional wisdom dictates that investment firms must listen to in-depth analysis by highly-educated, well-coifed Michael Douglas types before throwing cash into the churning pit of finance known as the stock market. Alternately, they could just have a look at the latest Twitter trends.

Using novel methods, London-based investment firm Derwent Capital Markets, has turned to the adorable social network for investment advice, and the results have no doubt left many economists tugging angrily at the patches of their houndstooth smoking jackets.

Following its first month of public trading, a new Derwent fund based on Twitter reported 1.85 percent return on investment. During this same time period, the S&P 500 index fell 2.2 percent, "and the average hedge fund made only 0.76 per cent."

How? New Scientist reports:

Derwent's system tracks emotions expressed across 10 per cent of the roughly 100 million daily tweets using algorithms devised by Johan Bollen, a computer scientist at Indiana University Bloomington. It then uses this information to predict changes in the stock market.

In a study published last year, Bollen's algorithms predicted the direction of the daily swing of the Dow Jones closing price with 87.6 per cent accuracy. The index consistently rose a few days after a period of "calm" tweets and dipped a few days after a period of "anxious" tweets.

Derwent is not alone in its approach. "Sentiment analysis makes a huge amount of sense to a lot of people - there are a lot of companies looking into this, including Reuters, Dow Jones and many start-ups," says Seth Grimes, an analyst who chairs the Sentiment Analysis Symposium.

Like Twitter itself, this approach to stock market prognostication is brilliant in its simplicity. After all, the market itself is a fluctuating mirror of overall public sentiment and stability. What better gauge for our collective mood could there be than a 'net destination designed to collate opinions from millions of people?

Then again, fiscal responsibility is not something you should trust my opinions on. Luckily, Sid Mohasseb, CEO of California-based social networking analysis firm WiseWindow seems to agree.

"What we're doing now could only have happened because of social media," said Mohasseb. "The fact that it works shouldn't be so astonishing to us - it's still just people. People are saying, 'I want this, I don't want that' and their choices drive revenue. We are just processing it much faster."

Before you all go rushing off to invest your allowance in pig iron futures just because you read a particularly convincing tweet, I should note that this method of gaming the system is still very much an unproven quantity. So far it looks solid, and the logic works if you think about it, but the stock market is a harsh mistress prone to flights of madness and despair.

Many a man has gone mad trying to court her, and legions more have been dragged down to the briny depths chasing that illusive dream of spearing the great white whale.

Boom! Melville reference out of nowhere! Didn't see that coming, did you?

Source: New Scientist

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