Monday, February 28, 2011

Social Media Collective Wisdom Predicts Tech Stock Performance

"What Keynes recognized is that ... investors are concerned not only just with what the average investor thinks but with what the average investor thinks the average investor thinks. And the truth is: Why stop there? Maybe what you need to think about is what the average person thinks the average person thinks the average person’s view is."
-- James Surowiecki : The Wisdom of Crowds, p484.


At MarketPsych Data we've begun to analyze longer term predictive patterns in our social media data.  We've created indices that aggregate the perceptions of investors about companies and stocks expressed in their conversations, discussions, and (of course) rants in social media such as Facebook, Twitter, chat rooms, and blogs.

The index I'd like to discuss today is called "Innovation Perceptions" and it is self-explanatory.  Investors' perceptions of a company's innovativeness are measured using our proprietary linguistic analysis tools and then smoothed over time.  You can see the innovation perceptions of eight randomly selected (my personal brainstorm) tech stocks for the past decade (mid-1998 through Feb 1, 2011).  It's pretty fascinating on its own:



What's even better is when you run our backtesting software (developed for our hegde fund) on the data, and we see that the top one standard deviation of high-innovation tech stocks outperforms the rest of the tech stocks in our sample over 37,000+ stock-days. 

In behavioral finance terms, this may be a sign of investor underreaction to the level of perceived innovation at a company.

The next step is to expand the sample size.  We'll continue to examine this effect and keep you posted.

Happy Investing!
Richard  Peterson M.D.
+1.310.573.8523
http://www.marketpsychdata.com/

Friday, February 18, 2011

MarketPsych Short Films: The Confirmation Bias - The Case of Green-Nano-Cyber-Tech Corporation


Hello, Fellow Investors.

When MarketPsych is not writing books, developing models for measuring Market Emotions, or delivering cutting edge presentations to financial professionals... we're indulging our sense of whimsy by making digital shorts - like the one HERE (or just click video at top of page).
.
In this one, Jim and Fast Eddie discuss Eddie's latest foray into speculation. But short term plays can quickly turn into long term anchors in portfolios. The main culprit is a lack of discipline and failure to institute a plan. But it's evil partner is called, The Confirmation Bias.
.
The Confirmation Bias is the tendency to seek out and interpret all information as supporting what you WANT to be right.

We all do it.

The key is to combatting the Confirmation Bias is awareness, and a method for reality-testing that ensures investors are serving rational, financial needs - not emotional ones.
.
Visit http://www.marketpsych.com/ for more information on the Confirmation Bias... and what you can do about it.

Happy investing.

-Dr. Frankenstocks

Frank Murtha, Ph.D.

Thursday, February 10, 2011

Mind Muscles(tm) in Minutes: Experience Building New Neural Networks

Introduction to Mind Musclestm

The markets are the markets. There is nothing most of us can do to change them. It is difficult to change the behaviors of people we know well, let alone the masses of people who affect the market daily. But there is one thing we can change, and that is our financial decision process. This series of blogs will look at new behaviors we can create that give us additional investing and trading choices that impact our risk and profitability. The foundation for these Mind Muscles tm is an earlier blog that can be read at: http://blog.marketpsych.com/2009/11/golden-thread-across-canyon.html. Each blog will look at a new mind skill that will give you a new positive process.

Mind Muscles tm could save your life

Imagine you are mid flight on a business trip. You hear a loud bang, the plane shudders and changes attitude. The pilot announces with a tight voice that we have lost an engine but not to worry. "I have the manual that gives me instructions on how to land with an engine out. I will be reading the manual prior to landing." Notice how this feels.

Now imagine the same loud bang. This time the pilot announces in a relaxed southern drawl that the airplane has lost an engine but not to worry. "I have landed in this situation successfully over 100 times in a simulator and have practiced this procedure during flight training multiple times. We will be safely on the ground in 17 minutes." Notice how this feels.

Which scenario wil
l give you the most comfort? There is a reason! You know intuitively that the second pilot has built in a strong "muscle memory" (or what we call Mind Muscles tm) with his repetitive behavior.

Mind Muscles tm is the equivalent of the flight simulator for traders and investo
rs.

Recent neur
oscience research validates the model that the adult brain is being continually modified by experience. We now know that we can intentionally make new neural patterns that can profoundly alter our reactions to our experiences. Even artificial experiences (like the Mind Muscle tm simulator), according to the new models of neuroplasticity, can change both the brain's physical structure and functional organization at all levels.

Because of our existing complex patterns of neural connections, changing habits feels painful. Neural messages travel the path of least resistance, and these are the connections that have been used the most. New behaviors requires creating new neural pathways. We literally have to consciously think through new behaviors to make them happen. It feels like swimming in molasses which takes a tremendous amount of effort. Mind Muscless tm) training reframes this traditional internal struggle by creating successful experiences that are integrated with who we are, achieve our goals and are emotionally satisfying in the moment of the new experience.

Mind Muscles tm creates simulated experiences that isolate our hardwired responses at the moment of execution, expand it (as in slow motion) to give us awareness of our process in real time and give us new behavioral options. This way our clients are able, in real time, to be aware of their own impulses as distinct from market activity. Our clients create new productive responses to market activity rather than the primitive hard wired automated reactions.

With our new models of neuroscience and our Mind Muscle
s tm simulator training experience, there is hope. We can build new effective behaviors that support consistent profitability. Now, let's create some new Mind Muscles tm.

The point of this exercise is to teach the experience of creating new neural pathways. If we can do it in the Mind Muscle tm simulator, isolated from other patterns, then we are more likely to complete more complex where creating new behaviors feels hard.

Mind Muscle tm Exercise: Experience Building New Neural Networks

Take out a sheet of paper and pen and get ready to write. Now, instead of writing with you writing hand, switch the pen to your nonwriting hand. Right handed people will write with their left hand, and us lefthanders will write with our right hand.

Write the following sentence:

I am making new Mind Muscles tm

It is very important to experience this, not just read the blog. Notice how it feels. You have to consciously tell you hand to write a straight line, make a curve, etc. Keep writing and notice how this feels. Once completed, shift the pen to your normal writing hand and make a note of the experience and how it felt, what you thought and any physical sensations.

This is the important part. That challenge is the same challenge you feel when you want to improve your trading or investing behaviors or change ANY behavior in your life. This same experience of building new neural networks will be there. Only, they will be buried out of your awareness. Do you procrastinate about a task that needs to be done? It is likely that doing the task will require the same creation of new neural networks, but we don't experience it AS creating new Mind Muscles tm we experience it as a vague unpleasant feeling.

The goal of this exercise is to reframe the vague unpleasantness of new behaviors into a positive feeling of building new Mind Muscles tm. Like going to the gym and feeling the sore muscles, you know that you are getting stronger, healthier and looking better. In building new Mind Muscles tm you know that you are building new behaviors that translate into more profitable trading and investing decisions.

In later blogs, we will start building specific Mind Muscles tm for trading and investing. This foundational experience will translate into a positive attitude to making these new neural networks as you improve your trading decision process.

Richard Friesen
RFriesen@MarketPsych.com
415.488.6505