Congratulations to this year’s Nobel Laureates Eugene Fama, Lars Peter Hansen and Robert Shiller. Their collective work in share price volatility over the short (irrationally high) and long term (surprisingly low) has directly led to the emergence of behavioral finance, helped bury the myth of the rational investor, and launched a thousand index funds. But if they were conducting their foundational research today rather than in the 1970s and 1980s, would they come to the same conclusions?
Over the last three years, market participants have gained access to vast quantities of market-shaping conversations through a variety of social media search methodologies. Some investors have built this into their modeling, some into their background research, the bravest into their algorithm trading. Regardless of how this data is used, it is now being used by everyone.
One outcome has been to increase share price volatility as investors incorporate new information swiftly but with a greater spread of interpretation than before. For example, natural gas stocks have experienced wild swings this year as the market has sought to interpret the future of the sector, with little consensus amongst investors. At the same time, the longer-term predictability of asset prices is becoming less pronounced. The random walk of stock prices has become more random over the last ten years as evidenced by the finding that only 24% of fund managers outperform the index over the last decade.
Where does all this leave today’s business leaders? Share price remains an essential benchmark of a business’s success so leaders must understand the key drivers of its fluctuations. Investors will always want to know where – and why – your share price is heading in the future. And employees owning stock will continue to measure their individual financial success by the quarterly trajectory of the share price.
Therefore, to implement the core insights from this year’s Nobel Laureates, consider the following in light of how social media analytics can help (marked in italics):
· Business leaders need to understand how their actions impact the conversation that impacts the market. This includes understanding timing, context, content, and audience of how their actions are reported by the business and received by the market
· Internal Business Strategists need to understand which messages resonate with which audiences, when and why, to get a line of sight from inside the business to the market in real time
· Investors need to understand what the social media conversation is telling them about businesses and what it is not
· Employees need to play their part in monitoring, correcting, and disseminating relevant conversations about the business across their social networks
Businesses that achieve this understanding are able to manage short term share price volatility and concentrate their value creation efforts on moving their long term asset price. And they get to stand on the shoulders of this year’s Nobel giants.