Tuesday, April 8, 2008

Sticky Sentiment

Back in February I received a lot of positive feedback for a post titled Intrade Prediction Markets as a Sentiment Indicator which discussed the usefulness of prediction markets as a gauge of investor sentiment. This is a theme I will come back to in due course, but for now I wanted to highlight some excellent complementary work in this area.

Expanding on prediction markets as sentiment indicator theme and drawing an interesting parallel in the sports world, Jeff Miller at A Dash of Insight has a superb post up today in which he looks at the ebb and flow of the North Carolina vs. Kansas game as a case study in investor sentiment. In Sentiment Is Slow to Change: A Basketball Lesson, Part One, Jeff uses a real-time chart of the price of the futures contract for the game from Intrade’s sister site, TradeSports.com and provides a thought-provoking analysis of the changing fortunes during the game and the betting response in the futures contract. I highly recommend that readers click over for the full story, but I have taken the liberty of posting Jeff's conclusion below:

“The lesson here is that market sentiment is very ‘sticky.’ Those investing in UNC futures were not just fans. Most were regular players of many sporting events, seeking a profit on this one. They began with an opinion, and the opinion was slow to shift.

The value of looking at an example like this is that the entire picture of sentiment and reality can be captured in the space of a few hours.

In the stock market, a similar process may take many months or even years. We shall explore this further.”

I am certainly looking forward to the next installment in this series.

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