Tuesday, 22 March 2011

Can Web 3.0 predict the Stock Market? Maybe, but not for long

We suspect that any profits made from a Twitter based program would be short lived, as other people would crowd the field with similar programs or crowd Twitter with post intended to confusion other players, but it is an interesting idea. Especially if it took in to account a deeper analysis of Web 3.0 data sources than just Twitter.

Hedge Fund Bets $40 Million That Twitter Can Predict The Stock Market:

"Last October, Johan Bollen and Huina Mao, professors of informatics and computing at Indiana University-Bloomington, caused a stir in the business world when they said Twitter could be used to predict the Dow Jones.

"Paul Hawtin, a 28-year-old hedge fund manager, liked the idea so much that he's now dedicating an entire hedge fund to it.

"The original paper, entitled 'Twitter mood predicts the stock market,' investigated whether 'collective mood states derived from large-scale Twitter feeds' like OpinionFinder and Google-Profile of Mood States correlated with the value of the Dow Jones Industrial Average. What they found was that their algorithm not only paralleled market changes, it predicted them, with startling 87.6 percent accuracy."


The problem is that Twitter, and almost all the api based systems, are perfect information. Perfect information leads to competitive markets where no one makes a significant profit. If one hedge fund follows Twitter a group will flood in with their own mathematics until there is no advantage to following Twitter. And as we said people will start trolling twitter to try and mislead other investors about sentiment.

Frankly the fact that there still are hedge funds is a bit confusing. If ever an idea to make money has failed as terribly as a hedge fund we would like to hear about it. Hedge funds are probably like drug dealing or robbing banks, for a while a few people do alright at it, but in the long run you end up dead or in jail.

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