Organized crowds have always played an important role in human society. It’s how we come together in a marketplace—a diverse group of individuals going about our business, yet all subject to a degree of predictable behaviour and certain rules of group dynamics.
Naturally, crowd behaviour has been widely studied in fields such as psychology, statistics, and economics. Much of this research shows that the collective wisdom of a diverse group of people is more accurate than a single opinion (even from an expert) in forecasting an outcome.
For stock market investors, sentiment can be an important factor in determining stock prices. Now our ability to harness the collective wisdom of millions of investors on social media means that we can measure sentiment in a predictive manner. In real time.
Social media platforms fit all the criteria of a wise crowd. Channels like Twitter have become viable sources of breaking news and even move markets. They’re a moment-by-moment measure of public sentiment, which can affect stock prices. And they can help make the market more efficient by uncovering other information relevant to the value of a stock.
The deeper the level of conversation about a stock and the more types of people talking about it, the greater the chance that it reflects their intentions and, by correlation, the stock price.
To create the Buzz Social Media Insights Index (which is licensed to an exchange-traded fund) we crowd-source insights from massive volumes of social media chatter—more than 50 million unique stock-specific comments, news articles and blog posts. We use sophisticated natural language processing, Artificial Intelligence, and Big Data analytics to aggregate bullish sentiment on the top 75 US stocks.
Our algorithm analyzes the tone of conversations to determine if it’s bullish, bearish, or neutral. It considers who initiates the conversation and how much influence they have, as well as how accurate they’ve been in their forecasting.
It’s how we rebalance our ETF portfolio each month to ensure our investors get the smartest smart beta.
Learn more about social media’s impact on investing and financial markets by downloading our whitepaper, “Investing just got social”.
Collective wisdom and stock picks
You need the “right” crowd for collective wisdom to exist. Author James Surowiecki writes in his book, Wisdom of Crowds, that a crowd must meet four key criteria in order to act wisely:
- Diversity of opinion—each person in the crowd should have their own ideas based on personal thinking
- Independence—individual opinions are not influenced by others
- Decentralized—people are widely distributed and can access distinctive local knowledge that informs their opinions
- Aggregation—an ability to turn individual opinions into a collective decision
Social media provides the first three criteria for a wise crowd. At Buzz Indexes, we provide the fourth.