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Monday, 6 August 2012

Stand and Deliver, Cashtags and Highwaymen

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In the olden days, when men were real men and deodorant was unknown, highwaymen roamed the roads, holding up coaches and relieving victims of their wealth.  In those days the felons had to take real risks in order to run off with their booty but today the process is generally a lot simpler and involves a lot less horse power.

Such is the experience of the StockTwits platform which has just seen its $ stocktag idea pinched by Twitter in the form of cashtags, as the ubiquitous social network seeks to find new ways of justifying its eyewatering investment funding.  Of course, many highwaymen ended up swinging from a roadside gibbet, although perhaps being hoist by their own petards might be a better, albeit mixed, metaphor.

Hashtag Swag

Howard Lindzon’s StockTwits was way ahead of its time in spotting the real-time opportunity that Twitter offered investors.  As we saw in Noise, Sentiment and StockTwits the sentiment of the mass of twittering tweeters does seem to be predictive of stock movements, if that’s your kind of thing.  Lindzon is, unsurprisingly, not amused by Twitter's stand and deliver moment.

However, the probability of Twitter saddling up Black Bess, re-cloaking itself as Dick Turpin and attempting to ride off with the swag was always likely. Most hashtags originated with the user community and Twitter is less a highwayman than a magpie, avidly collecting anything shiny and bright in order to feather its own nest. They did something similar to photo-sharing sites last year – and the effect has been chilling on the third-party providers.  On the other hand the impact of the introduction of Twitter’s own service was to see an explosion of photo-sharing, up over 400% over 2011.  Bigger pie, smaller pieces = opportunity, if you know where to look.

Social Knowledge

Twitter will no doubt do the same thing to other applications in the future and the net effect of this will be to reduce innovation around the platform overall.  Whether this turns out to be ultimately self-harming is hard to tell, but there’s an awfully big difference between a basic social networking service like photo-sharing and a knowledge based activity like stockmarket investing. 

Herb Simon, who pretty much invented the idea of behavioral economics, noted that there are two criteria necessary for the implementation of bounded rationality – search and satisficing:
“We do know how the information processing system called Man, faced with complexity beyond his ken, uses his information processing capacities to seek out alternatives, to calculate consequences, to resolve uncertainties, and thereby - sometimes, not always - to find ways of action that are sufficient unto the day, that satisfice.”
In essence the rationality of any decision is bounded by the information that the mind can hold and process. However, we're not constrained by limitations in brainpower because we can use technology advances, developments in knowledge based systems, to extend our cognitive reach. As William Hall has recorded in this paper we’ve seen this reach extended by at least four major historical shifts in the technology of knowledge transfer: the acquisition of language around 100,000 years ago, the invention of writing around 5,000 BC, the development of printing in the 1400s and the development of computer based information systems in the latter part of the twentieth century.

Search and Destroy

So the internet itself, and particularly the world wide web, is just such a tool, but the critical thing is how we use it to improve our decision making – aspects of search and processing.  Google’s great leap forward was the ability to help us find things on the web, but no one thinks that Google on its own can make decisions for us.  I can look up a million articles on Apple, but that doesn’t directly help me make a decision.  I can also look up a similar number of opinions, which shouldn’t help me make a decision either. 

So while the development of technology is vastly extending the capability of human memory, it is at the same time making unassisted decision making ever harder.  More information does not necessarily improve decision making, especially for investors, as we saw in The Curse of Seven and Idiot Noise Traders.  The alternative, automated processing, exposes us to the risks of technology failures such as that experienced by Knight Capital recently.

Friendly Diagnosis

Social networking sites solve the search problem in a different way – by personal recommendation.  They, by definition, rely on word-of-mouth (well, word-of-tweet) to push information to people: it’s a trust network and where trust is important, such as whether or not you should go to a particular hotel, eat in a particular network or see a particular movie then that's a satisficing mechanism that works quite well.  But what about situations where personal recommendations aren’t so useful – would you rely on your friends to diagnose an illness or would you rather go see a doctor? 

Investing is exactly such a situation, where the critical things are search – finding the right information – and satisficing – making the optimal decisions based on that information.  I honestly don’t care that my daughter’s boyfriend is tweeting about how Facebook is the best investment opportunity since Webvan, it’s not relevant to my decision making.  In fact I don’t care how many people are tweeting about Facebook, I want to be able to quickly find detailed information on the stock and access the opinions of people who are actually able to process that information properly.

Structured Knowledge

To manage this properly you need expert domain knowledge, properly organized, linked to the ability to quickly and accurately drill down into detailed stock related information.  You need structure, because without structure what you have is not a cognitive tool, but … well, the random witterings of a hundred thousand lunatic microbloggers.  Try making sense out of that.  You might as well rely on Big Brother for relationship advice.

Investing is a knowledge based business.  You can build it on top of social networking but it’s not a social networking service.  Linking these two domains together – social networking and expert knowledge based repositories is a hard problem anyway, but trying to do it out of unstructured information using a simple hashtag isn’t a challenge, it’s a nightmare.

Follow the Magpie

Of course, interest in stocks is a social phenomena as well, so the use of Twitter and other social networks is a natural extension of the platform. There are a world of maven wannabe investors out there whose only selection criteria is social conformity, aka herding.  Twitter's cashtags are as good a way as any of helping them lose money.

The real opportunity for StockTwits is find and convert a percentage of these uninformed investors. Fortunately Twitter is providing cashtags to help in the search for them. The thing about magpies, you see, is if you follow them back to the nest then they may lead you straight to the highwayman’s booty. 



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4 comments:

  1. "Google’s great leap forward was the ability to help us find things on the web"

    FTFY

    "Google’s great leap forward was to suspect that helping us find things on the web was worthy of serious money and to pay for a massive advertising campaign on the basis of that suspicion"

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  2. "Lindzon is, unsurprisingly, not amused"

    Good. Maybe stocktwits.com will actually innovate a bit. Currently they're just a content aggregator with a few moderately silly tools.

    Defining a proper international standard for stocktags and a standard for concisely expressing sentiment would be a good start. Would only require a couple of days thought and a couple of days documenting. Providing extra tools against tweets adopting the standard would be more work but would drive adoption.

    As well as making them more useful, it would provide an easy to use, real-time sentiment data stream that I, at least, would pay for.

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  3. "satisficing – making the optimal decisions based on that information"
    Satisficing is a decision-making strategy that attempts to meet an acceptability threshold. It's defining objective acceptance criteria and looking at options only until you find one that meets the criteria. Optimality (with or without perfect information) is basically the opposite of that.

    Also this whole piece seems to miss the point of wisdom of crowds - and the corollary, so often explored on this site, that so-called experts in the market are no better at understanding it than the rest of us.

    ReplyDelete
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