Last year, for the first time ever, more Americans used social media than purchased stocks. An odd comparison, I admit, until I read this in the paper this morning:
Most share trading is now conducted between big banks and hedge funds by high-speed computer programs, and is thus an imperfect guide to market sentiment.
And contrasted it with this research:
The emotional roller coaster captured on Twitter can predict the ups and downs of the stock market, a new study finds. Measuring how calm the Twitterverse is on a given day can foretell the direction of changes to the Dow Jones Industrial Average three days later with an accuracy of 86.7 percent.
It used to be that the market was used as a predictor of consumer sentiment, particularly after the boom of retail brokers with eTrade. Anywhere from 51% to 64% of Americans have owned stock in the past decade. When a stock declined in price, it was assumed shareholders had dimmed their outlook of a security. But high speed trading has changed that – the majority of traded shares are done by computers and are held for fractions of a second. Stock movements now represent the conclusions of trading programs, and over-represent the views of hedge funds and institutional traders.
As a result, social media mining has become, in my view, incredibly important – it’s the only census driven report of American sentiment on any issue that reacts to the news in real time. In 2011, 63% of Americans used social media – more than those who purchased stock. And social media mining for political, economic and market research insight will inexorably increase.
I know the signal exists. I’ve seen its applications first hand. At Google, we increased revenue on social networks by greater than 10x using social media data to inform ad targeting. We see the same results in understanding the effectiveness of TV advertising at Bluefin Labs.
Over the next few years, I’m certain there are many founders who will succeed by (i) leveraging social media to understand their market better (ii) developing products based on the needs of social media users or (iii) transforming insights from social media into concrete actions for their customers to take to improve their businesses. And I’ll be looking for them.