Social Mood Conference  |  Socionomics Foundation

A fresh orange doesn’t have much in common with a rotten apple

By Robert Folsom

Time magazine’s website this week posted an article about Professor Johan Bollen’s research into millions of Twitter messages. This research had already been much in the news earlier this year because of its mind-blowing findings.

How mind-blowing? Enough so that a London-based hedge fund now employs a trading strategy based upon the results.

The Time article correctly said that Bollen’s findings reveal “a strong correlation between the mood on twitter and the stock market.”

But, unfortunately, the Time article also associated Bollen’s research into collective mood with “a market theory called the Wisdom of Crowds.” That’s a serious mistake, given that Bollen’s work makes no such association. The Time article doesn’t just fail to distinguish between apples vs. oranges — it associates a fresh orange with a rotten apple.

The June 2011 issue of The Socionomist speaks directly to this issue, in Alan Hall’s “Are Crowds Wise — or Mad?” Here’s an excerpt.

“The wisdom of crowd effect describes the tendency for the average of the independent estimates of all group members to be more accurate than any group member’s individual estimate.

“In 1907, Francis Galton’s observation of what author James Surowiecki would eventually call The Wisdom of Crowds involved 787 people at a county fair who each paid to guess the weight of an ox. In what amounted to a secret ballot, individual participants handed in their estimates on stamped and numbered cards. The average of the estimates proved far more accurate than any individual guess — within one pound of the correct weight of 1,198 pounds. What Galton observed were independent, individual assessments; not dependent, collective assessments. He wrote, ‘The judgments were unbiased by passion and uninfluenced by oratory and the like.’

“The wisdom of crowd effect is real, but it is a misnomer because it implies that the crowd’s members are interacting. A less catchy but more precise name would be the ‘accuracy of aggregated independent estimates’ effect”…

“A new study, ‘How social influence can undermine the wisdom of crowd effect’…. confirms that social interaction and resulting herding severely undermine the utility of the wisdom of crowd effect (WCE). The experiments show that WCE is reliable only when it derives from the aggregated knowledge of independent individuals.

“In other words, it is useful only when crowds are not acting like crowds at all.

“The study shows that ‘even mild social influence’ is sufficient to undermine the utility of WCE. It also provides the important new finding that social interaction produces convergent opinions and undue increases in confidence in those opinions. The results support the socionomic case that herding is a major factor behind asset pricing.”

The “wisdom” Galton observed was exactly that. But when individuals participate in “social interaction” and “herding,” wisdom vanishes — what’s left is collective mood.

These issues are at the cutting edge of behavioral research, and so is The Socionomist. You can read Alan Hall’s complete study within moments — take advantage of the outstanding offer below.

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