Interest in this area really gained traction in 2009 when senior Google economists published a paper titled ‘Predicting the present with Google Trends’. Broadly speaking this paper illustrated how search volumes preceded specific trends. Other studies have since added weight to this and even shown how they can predict a political candidates success.
Not convinced? Well our very own Bank of England are. They now study social media as a barometer in several sectors and the wider economy. Some of their economists even believe that social media is providing a better indication of the health of the housing market than the established reports from RICS and the like.
So can social media predict the stock market?
Three economists from Indiana and Manchester University have published a paper titled ‘Twitter Mood Predicts the Stock Market’. They have attempted to see if societies as a whole can experience states of mind that effect their decision making. Using mood tracking tools they have analysed the sentiment of the language on Twitter and delivered some amazing results.
They predicted the outcome of the Dow Jones correctly 88% of the time! That’s a success rate Buffet would be proud of.
I see the real value in all of this as the immediate nowcasting rather than reports that take six months to put together and tell us about the past. Real time sentiment analysis is a critical lead indicator and one we are not harnessing enough.