Last week in class, we learned that Google’s mission is to “organize the world’s information and make it universally accessible and useful.” Google carries out this mission through various outlets, including its enormous search-engine, Gmail, Google docs, and Google Calendar—just to name a few. However, Professor Kane also mentioned that Google can actually do much more than that. Google’s data is so powerful that it can be used to predict flu outbreak even before the Center for Disease Control and Prevention. This week, economists published a paper stating that Google Trends data can do even more than predict flu trends; it can now predict the stock market.
According to three economists (Tobias Preis of Warwick Business School in the U.K., Helen Susannah Moat of University College London, and H. Eugene Stanley of Boston University), Google Trends data is a useful predictor of daily price moves in the Dow Industrial Jones average. Their research used broader search trends to predict the whole stock market’s movements. Using publicly available data on search terms from Google Trends, these economists tracked 98 terms, mostly related to finance and economics from 2004 to 2011. Then they compared the searches to the closing price of the Dow Jones Industrial Average. Utilizing this data, the researchers invented a pretend investing game and found eye-opening results. Their research showed that “an uptick in Google searches on finance terms reliably predicted a fall in stock prices. Debt was the most reliable term for predicting market ups and downs.” By adjusting their investment strategy according to search results, the researchers were able to increase their hypothetical portfolio by 326 percent.
Forbes article “Big Data Gets Bigger: Now Google Trends Can Predict The Market,” suggests that the answer might come from looking at changes in the nature of what’s reported on Google Trends. Data is getting bigger, by getting finer and faster. A comparison of two papers co-authored by Google’s chief economist Hal Varian shows exactly how Google’s data is getting faster, better, and bigger. When it comes to data for market prediction, size certainly matters, argues Varian.
Smart investors might see this as an opportunity for a stronger portfolio and alternative investment strategies; however, I personally would be skeptical relying too heavily on this data. Just last week, a tweet from a hacked Associated Press account declaring that there had been an explosion at the White House caused the Dow Jones to plummet 145 points within minutes. This incident shows how the Internet can falsely relay data and cause an instantaneous, unwarranted response. As we have learned, the Internet is a double-edged sword and while Google Trends might be able to predict what the stock market will do, there is a possibility for faulty data (and/or hacking). While it may be too risky to rely on Google Trends for investment decisions, the recent results are important because they have implications far beyond the stock market. The online spread of data is increasing and becoming more accurate across various sectors, and, if used wisely, can be used for myriad purposes. I’m curious as to where the proliferation of data will take us in the future and wonder: what type of data would make your life easier?