http://tabbforum.com/microsites/quantforum/articles/wall-street-fortune-f...

WallyStreetyFortuneyFavorsyMastersyofyCrowdyPsychology
James Crane-Baker, PsychSignal 06 May 2014

Fundamentalsedriveevaluations,ebuteperceptionedetermineseprices.eHigh-frequencyetraderseandequantitativeehedge fundseareeusingesocialemediaedataeanalyticsetoeobjectivelyeunderstandetheepsychologyeofetheeinvestmentecrowdeinereal timeeandestayeoneestepeaheadeofetheemasses.
A new source of data is emerging within the innovation labs of the investment world. High-frequency traders, quantitative hedge funds, and sophisticated investors are beginning to use social media data analytics as means to objectively understand the psychology of the investment crowd in real time and stay one step ahead of the masses. They say fortune favors the bold, but when it comes to investing, fortunes are made by the masters of psychology. Warren Buffet sagely and Times p d in ctober , A simple rule dictates my simply expressed this in words for the everyman, when he famously wrote in a buying Be fearful when others are greedy, and be greedy when others are fearful. For the discretionary trader, learning to effectively master emotional discipline goes hand in hand with the study of crowd behavior. However, quantitative traders need only concern themselves with crowd psychology, and today social media analytics offers a new and powerful data source of
nancial sentiment, perfectly suited for a quantitative understanding of crowd mood.

Financial sentiment data is incorrectly thought of as a nascent technology tool for traders and investors. The truth is, sentiment analysis technology has been evolving for more than 50 years, built on a long history of the study of crowd psychology and the understanding that fundamentals drive valuations, but perception determines prices. As far back as the 1600s, after witnessing Tulip-mania, crowd psychology was top of mind and front-page news to a majority of the European speculator community. t s even safe to assume some form of subjective sentiment observation was around for the very first trade under the famous buttonwood tree on Wall treet. But it s not just ancient history where this can be seen. The modern history of trading is full of examples and attempts at objective sentiment analysis. Since 1938 owry esearch has attempted to quantify the forces of supply versus demand with its unique buying and selling pressure indices. Direct financial sentiment surveys have 2 been around since the 1970s (NAAIM & AAII financial sentiment surveys), the VIX was described as early as 19 6, and the Arms index (T ) soon thereafter. And today, Bloomberg routinely and throughout the trading day puts out social velocity alerts on stocks being talked about in a noticeable volume in the social media space. In terms of experts, there has been no shortage of analysts calling market tops and bottoms based on one form of custom sentiment indicator or another. Mark Hulbert was an early adopter and evangelist, setting the stage for many analysts to follow the discipline. As an example, every night on  B, millions of viewers tune into im ramer and Mad Money to help make sense of their own sentiments. What s different about today s big data sentiment from the sentiment analysis of the past is that today we have the technology to directly, instantaneously, and perpetually poll the opinion of a statistically significant sample set of the investing public. Simply put, we now have massive amounts of accurate real-time data, whereas before we simply had limited survey results. et s think about this for a moment. The idea that we can poll a statistically significant sample set to extrapolate crowd opinion is really nothing new. Accurate polling of the populous has been going on since George Gallup introduced his popular opinion polls way back in 1935. As a country, the U.S. is now well accustomed to the fact that Gallup Surveys regularly project U.S. Presidential election outcomes. Financial surveys have taken a similar tack  consider the consumer confidence index, the AA & AA M.

1 of 3

07/05/2014 14:56

http://tabbforum.com/microsites/quantforum/articles/wall-street-fortune-f...

These surveys all contact a few thousand individuals and report sentiment or crowd opinion in one form or another, and have been relied on for decades as a source of crowd opinion of the nation. However, today advances in technology allow companies to collect and analyze millions of messages expressed online, and deliver that analysis in real time The technology, called natural language processing or P, has been around since the 195 s, beginning with the work of Alan Turing and his test of intelligence dubbed The Turing Test. P work progressed rapidly over the years and branched out into many directions. pinion mining, as a subset branch, often called sentiment analysis, began in earnest not long after Alan Turing s seminal work and continued on through the mid-1990s, when a group of researchers led by Dr. James Pennebaker developed one of the first pieces of software able to extract emotions from text called the inguistic nquiry and Word ount. till in use today the software was used most notably during the 1 U Presidential election by the joint Facebook- Politico team, calling it a well- validated software tool used frequently in social psychological research to identify positive and negative emotion in text. o the proposition that crowd psychology can be accurately measured doesn t seem so farfetched  or even advanced  given the long history of various methods employed over literally hundreds of years in this space. The only thing missing to really put this measuring of crowd psychology to the test was real-time data, and lots of it. Social media has solved that problem. Grasp the notion that the data and technology now exist to accurately measure the sentiment of the investing public on a minute-by-minute basis and you soon realize we re in a fascinating time. At one time, analysis of social media was widely dismissed by many on Wall Street. However, several notable events occurred in 2013, including the SEC allowance of public companies to use social media outlets to announce key information in compliance with Regulation Fair Disclosure (the most publicized of these being arl cahn s famous tweet about Apple). Another notable event took place on April 3 with the now infamous Hash rash, when a false AP news tweet sent the market down sharply and woke the wider investment community to the realization that social media is beginning to have a profound influence on the markets. By taking into account these events, along with others that have occurred, we in the investment community are now beginning a strong uptake in the use of social media, which is sure to accelerate as the belief spreads that the social media crowd is not so dumb after all, and the notion that there is crowd wisdom locked within social media chatter. 




Psychologists in their study of the wisdom of the crowds will look to four factors in order to determine if a crowd is wise: diversity of opinion, independence, decentralization, and aggregation. t s hard to argue that today s social media community doesn t fit those criteria in spades. Detractors may continue to view financial social media as dumb money and not a serious enough source of conversation to warrant attention. But who can deny that the crowd moves the markets? Whether correct or not, can we discount the value of knowing what the crowd thinks, even if only from time to time  to take the other side? The question now is: How do we use it to profit? The answer is coming in Part 2. Social

 ¡¢£¤ ¥¤¦¤ §¨¤©
¦£ §¢ ¦£ ¨

adoption, then a period of rapid adoption, concluding with a slowing of adoption as the market becomes mature and the incremental b b   b 

2 of 3

07/05/2014 14:56

http://tabbforum.com/microsites/quantforum/articles/wall-street-fortune-f...

Source: Gnip white paper

© 2009-2014 by The TABB Group, LLC and contributors | info@tabbgroup.com | +1-646-722-7800

3 of 3

07/05/2014 14:56