Twitter Mood And The Dow

It’s well-known that the market isn’t random: there is some sort of friction in the world that stops neo-classical market perfection from working. And it is somewhere inside the heads of people. A group of researchers have drilled into the mood of the world via Twitter, and discovered that calmness is a predictor of larger than average market swings:

Technology Review: Blogs: arXiv blog: Twitter Mood Predicts The Stock Market

Today, Johan Bollen at Indiana University and a couple of pals say they’ve found just such a predictor [of market swings] buried in the seemingly mindless stream of words that emanates from the Twitterverse.

For some time now, researchers have attempted to extract useful information from this firehose. One idea is that the stream of thought is representative of the mental state of humankind at any instant. Various groups have devised algorithms to analyse this datastream hoping to use it to take the temperature of various human states.

One algorithm, called the Google-Profile of Mood States (GPOMS), records the level of six states: happiness, kindness, alertness, sureness, vitality and calmness.

The question that Bollen and co ask is whether any of these states correlates with stock market prices. After all, they say, it is not entirely beyond credence that the rise and fall of stock market prices is influenced by the public mood.

So these guys took 9.7 million tweets posted by 2.7 million tweeters between March and December 2008 and looked for correlations between the GPOMS indices and whether Dow Jones Industrial Average rose of fell each day.

Their extraordinary conclusion is that there really is a correlation between the Dow Jones Industrial Average and one of the GPOMS indices—calmness.

In fact, the calmness index appears to be a good predictor of whether the Dow Jones Industrial Average goes up or down between 2 and 6 days later. “We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the Dow Jones Industrial Average,” say Bollen and co.

The calm before the storm?