Want to Predict the Stock Market? Try Yahoo

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Looking for a little inside info on the stock market? Try checking Yahoo. No, searching “Which stocks will go up?” won’t work; we’re talking about using search data to predict behavior in real life.

The appropriately named Institute of Complex Systems in Rome went through Yahoo searches looking for mentions of companies in the NASDAQ-100. They found that the number of searches associated with a company correlated closely with trading activity in those same companies’ stocks over the next few days.

According to MIT’s Technology Review, using Internet searches to predict real-life phenomena isn’t unprecedented; for example, collecting data on Internet searches for the flu can give you a pretty good idea if a flu outbreak is beginning.

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The study found that most users searching for stocks on Yahoo aren’t financial experts, seeing as they only conduct one search per favored stock per month. A spike in searches for a particular stock went hand in hand with a spike in trading volume for that same stock that usually lasted for about three days.

The purpose of the research isn’t about getting rich quick; it’s about predicting epidemics or, in financial parlance, crashes, something that seems more important than ever these days. Ultimately, the researchers concede that predicting epidemics in financial systems isn’t the same as predicting the flu—when people get sick, the news media doesn’t cause additional psychological panic that results in more people getting sick. In the stock market, the opposite is true, as news reports depicting scary, downwards arrows can cause people to freak out and compound the initial problem.

Still, with the stock market as volatile and unpredictable as ever, research like this is at least a step in the right direction towards preventing—or at least preparing for—another financial meltdown.

[via Technology Review]

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