A new academic study lends credence to the idea that the “wisdom of crowds” phenomenon applies not just to encyclopedia entries and restaurant reviews, but also to stock market predictions
Researchers from City University of Hong Kong, Purdue University and Georgia Institute of Technology found that the tone of stock market opinion blogs published on investor forum SeekingAlpha.com predicted stock returns, as well as earnings surprises, above and beyond what was evident from Wall Street analyst reports and financial news articles.
SeekingAlpha.com, run by venture-backed Seeking Alpha Ltd., based in Ra’Anana, Israel, is a forum for investors who write opinion pieces about stocks for the site. An editorial board vets the quality of the blogs and posts up to 250 articles every day.
Researchers analyzed about 100,000 Seeking Alpha articles and commentary published between 2005 and 2012 for the paper “Wisdom of Crowds: The Value of Stock Opinions Transmitted Through Social Media,” which is forthcoming in the Review of Financial Studies.
The potential to discover market-predicting information in social media has been tantalizing to investors big and small. Several startups, including companies like Dataminr, Gnip and DataSift, have talked about providing feeds of Twitter and other social-media outlets to hedge funds and other money managers to inform their investment strategies…
…“Seeking Alpha is the only platform to date that we have shown can predict individual stock returns,” said Yu Jeffrey Hu, associate professor at Georgia Tech’s Scheller College of Business and one of the authors of the study. Other authors of the study are Hailiang Chen, Prabuddha De, and Byoung-Hyoun Hwang.
Dr. Hu said that research was in no way sponsored or facilitated by Seeking Alpha. The company did provide a proprietary data stream for one portion of the research, he said.
…Does this mean sell-side financial analysts are useless? “I wouldn’t say [Seeking Alpha blog writers] are absolutely better than the highly paid Wall Street analysts,” Dr. Hu said. But “Seeking Alpha sentiment has additional insight above and beyond financial Wall Street analysts,” Dr. Hu said.
The researchers also noted that Seeking Alpha predicted stock returns above what was evident from news articles. The report used news stories published on Dow Jones News Service, which is a part of Dow Jones & Co., publisher of The Wall Street Journal. Dow Jones declined to comment.
Overall, the findings fit with prior analysis in other fields on the way crowds can outsmart, or at least be just as smart, as professionals. Studies have shown, for example, that Wikipedia accuracy is similar to that of Encyclopedia Britannica.
Crowd platforms have other advantages over professionals, besides accuracy — Seeking Alpha, for example, covers a greater stock universe than stock analysts, and Wikipedia has more subject entries than Encyclopedia Britannica. Plus, both get updated and revised as things change more quickly than their professional counterparts, Dr. Hu said.