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Economists Use Twitter To Beat The Stock Market

“Ever wonder why fund managers can’t beat the S&P 500?” mused Gordon Gecko in 1987′s Wall Street. “‘Cause they’re sheep, and sheep get slaughtered.”

Sound advice at the time, perhaps, but new research suggests that tapping into that same herd mentality on Twitter might pay off handsomely for savvy investors.

A team of economists at the Technische Universitaet Muenchen (TUM, the Technical University of Munich) have developed a website that can be used to predict individual stock trends and patterns using information generated by Twitter.

How? By polling real-time sentiment.

The team analysed over 250,000 tweets sent over a 6-month period, discovered a “striking co-ordination” between what Twitter was saying about stock against that of other investors and analysts, and determined that investors following stock market tweets could achieve an average return rate of some 15%.

Reports Scienceblog.com:

The share price of a stock reflects investor and analyst opinions about its prospects and indicates whether positive or negative developments are on the horizon. The micoblogging platform Twitter has become an important medium for the exchange of such viewpoints. Thousands of stock-related messages are broadcasted every day via Twitter. Twittering investors mark tweets according to company stock symbols, for example, “$AAPL” for the U.S. computer company Apple.

In a study, TUM economists showed that the sentiment from Twitter messages develops similar to the stock market and even leads by a day. The Munich-based economists analyzed 250,000 Twitter messages written in a six-month period and related to S&P 500 listed companies. The result: If an investor had oriented his share purchases according to the Twitter sentiment in the first half of 2010, he would have achieved an average rate of return of up to 15 percent.

“If a Twitter user often gives good stock recommendations, he will, as a rule, have more followers and will be retweeted more often by other users. Hereby, tweets with good recommendations are affirmed and receive greater weight in the overall analysis,” explains TUM economist Timm Sprenger.

Last year, Sprenger successfully used sentiment on Twitter to predict the outcome for each political party in the German federal elections to within 2% of the final results.

“We got as close as the research institutions that spent hundreds of thousands of pounds,” he said.

As for Twitter’s future in stock analysis, Sprenger predicts that the company will increasingly specialised versions of its service, perhaps through variations of its (currently criminally underused and essentially useless) trending topics feature.

“I don’t think it is the Holy Grail to make millions but it is a very credible and legitimate source.”

(Sources: BBC, Scienceblog.com, TweetTrader.net)

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