U.S. patent application number 13/646449 was filed with the patent office on 2013-01-31 for stock market prediction using natural language processing.
The applicant listed for this patent is Jason M. Eisner, Frederick S.M. Herz, Walter Paul Labys, Lyle H. Ungar. Invention is credited to Jason M. Eisner, Frederick S.M. Herz, Walter Paul Labys, Lyle H. Ungar.
Application Number | 20130030981 13/646449 |
Document ID | / |
Family ID | 26732570 |
Filed Date | 2013-01-31 |
United States Patent
Application |
20130030981 |
Kind Code |
A1 |
Herz; Frederick S.M. ; et
al. |
January 31, 2013 |
Stock Market Prediction Using Natural Language Processing
Abstract
A method of using natural language processing (NLP) techniques
to extract information from online news feeds and then using the
information so extracted to predict changes in stock prices or
volatilities. These predictions can be used to make profitable
trading strategies. Company names can be recognized and simple
templates describing company actions can be automatically filled
using parsing or pattern matching on words in or near the sentence
containing the company name. These templates can be clustered into
groups which are statistically correlated with changes in the stock
prices. The system is composed of two parts: message understanding
component that automatically fills in simple templates and a
statistical correlation component that tests the correlation of
these patterns to increases or decreases in the stock price. The
methods can be applied to a broad range of text, including articles
in online newspapers such as the Wall Street Journal, financial
newsletters, radio & TV transcripts and annual reports. In an
enhanced embodiment of the system statistical patterns in Internet
usage data and Internet data such as newly released textual
information on Web pages are further leveraged.
Inventors: |
Herz; Frederick S.M.;
(Milton, WV) ; Ungar; Lyle H.; (Philadelphia,
PA) ; Eisner; Jason M.; (Baltimore, MD) ;
Labys; Walter Paul; (Fairfax, VA) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
Herz; Frederick S.M.
Ungar; Lyle H.
Eisner; Jason M.
Labys; Walter Paul |
Milton
Philadelphia
Baltimore
Fairfax |
WV
PA
MD
VA |
US
US
US
US |
|
|
Family ID: |
26732570 |
Appl. No.: |
13/646449 |
Filed: |
October 5, 2012 |
Related U.S. Patent Documents
|
|
|
|
|
|
Application
Number |
Filing Date |
Patent Number |
|
|
10054057 |
Jan 22, 2002 |
8285619 |
|
|
13646449 |
|
|
|
|
60263556 |
Jan 22, 2001 |
|
|
|
Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101;
G06Q 40/06 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/04 20120101
G06Q040/04 |
Claims
1. A method of predicting investment behavior using trading
software having a data analysis tool implementing natural language
processing and an investment predictor implementing an investment
prediction model, said trading software being executed by a
processor so as to cause said processor to implement the steps of:
said processor extracting information from news media relating to a
particular investment using said natural language processing to
parse or pattern match on words in said news media to identify
natural language text describing activities or announcements of
said particular investment that is in or near sentences containing
a name of said particular investment and to automatically fill
templates with said natural language text; said processor using a
clustering algorithm to cluster at least some of said templates
into groups that are statistically correlated with changes in
investment price of said particular investment; determining a
statistical significance of said changes in investment price of
said particular investment based on information in said clustered
templates; and predicting changes in price of said particular
investment based on new information about said particular
investment if information of the type included in the new
information has in the past caused a statistically significant
change in the investment price in said particular investment.
2. A method as in claim 1, said processor further using said
clustering algorithm to cluster templates containing the extracted
information of said particular investment with templates containing
extracted information of another investment whose investment price
has been shown to be similarly affected by information of the type
included in said new information.
3. A method as in claim 1, said processor further standardizing
different references to the particular investment by different
proper names, co-referencing when the particular investment is
referred to by a pronoun, adding said new information to said
template, and adding additional information about said particular
investment to said template using databases and/or derived
values.
4. A method as in claim 1, said clustering algorithm further
clustering templates containing information about different
publicly traded companies into similar cluster groups, and said
processor determining changes in investment price at different
intervals for different companies in a cluster group in response to
comparable information and estimating the statistical probability
of a change in the investment price of said particular investment
in response to certain new information statistically correlated to
that in said comparable information.
5. A method as in claim 1, comprising the further step of
conducting a trade based on said predicted changes in investment
price.
6. A method as in claim 1, comprising the further steps of
weighting textual attributes of said news media and of said natural
language processing pattern matching said weighted textual
attributes for current and previous news media to provide
statistical feedback comparing current news media to previous new
media to determine similarities between said current news media and
said previous news media.
7. A method as in claim 1, comprising the further step of weighting
written advice from market experts in accordance with the
historical behavior of the market with respect to that written
advice.
8. A method as in claim 1, wherein the investment is a stock.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] The present application claims priority to U.S. patent
application Ser. No. 10/054,057, filed Jan. 22, 2002, now U.S. Pat.
No. 8,285,619, which, in turn, claims priority to U.S. Provisional
Patent Application Ser. No. 60/263,556, filed Jan. 22, 2001, the
contents of both of which are incorporated herein by reference.
FIELD OF THE INVENTION
[0002] The field of the invention relates to financial trading
systems and more particularly the analysis of dynamically changing
information sources such as on-line news feeds (using natural
language processing), and user trading behavior in order to predict
changes in stock price or volatilities.
BACKGROUND OF THE INVENTION
[0003] In the present field of art, stock market trading systems
are based upon a variety of automated methods, formulas and
algorithms with which to predict the dynamics and trends in market
behavior. However, prior art stock trading systems fail to
recognize the value of automating stock trading decisions based
upon statistical correlations which are historically proven to
exist between certain company events, actions and metrics (which
are extracted through natural language processing via associated
templates and changes and dynamics in stock prices). The present
invention uses such correlations to develop a stock market
prediction model.
SUMMARY OF THE INVENTION
[0004] A method of using natural language processing (NLP)
techniques to extract information from online news feeds and then
using the information so extracted to predict changes in stock
prices or volatilities is provided. These predictions can be used
to make profitable trading strategies. More specifically, company
names can be recognized and simple templates describing company
actions can be automatically filled using parsing or pattern
matching on words in or near the sentence containing the company
name. These templates can be clustered into groups which are
statistically correlated with changes in the stock prices.
BRIEF DESCRIPTION OF THE DRAWINGS
[0005] FIG. 1 illustrates a sequence of actions for template
filling in accordance with the invention.
[0006] FIG. 2 illustrates a sequence of actions for building a
stock predictor in accordance with the invention.
[0007] FIG. 3 illustrates a sequence of actions for using the stock
predictor of the invention to predict the movement in a stock and
to act on that prediction.
DETAILED DESCRIPTION OF THE INVENTION
[0008] The system of the invention is composed of two parts: a
message understanding component that automatically fills in simple
templates such as:
[0009] COMPANY-NAME: ______
[0010] ACTION: ______
[0011] CHANGE: ______
[0012] in ITEM: ______
[0013] where each of the capitalized words can take on many values
(e.g. COMPANY NAME: IBM, Microsoft, Apple or . . . CHANGE:
increase, decrease, or "no change", ITEM: expenses, prices, sales,
employees . . . ANNOUNCED: announced, reported . . . ), and a
statistical correlation component that tests the correlation of
these patterns to increases or decreases in the stock price.
[0014] The methods described below can be applied to a broad range
of text, including articles in online newspapers such as the Wall
Street Journal, financial newsletters, radio & TV transcripts
and annual reports. The inventors envision it being used first for
newswires such as Bloomberg, or perhaps the AP Newswire. In an
enhanced embodiment of the system the inventors further leverage
statistical patterns in Internet usage data and Internet data such
as newly released textual information on Web pages.
[0015] Template Filling
[0016] For filling in the templates, standard techniques can be
used such as those presented in the Message Understanding
Competitions (See e.g. the MUC-6 Proceedings). The basic idea is to
use specialized "named entity recognizers" to determine which words
refer to companies, places and people, and to standardize these
(i.e., to recognize that "IBM", "I.B.M.", and "International
Business Machines" all refer to the same company). Groups of
equivalent words (e.g., "announced", "reported", "released a
report" . . . ) can be initially determined using online
thesauruses such as WordNet, and then refined using statistical
co-occurrence data (e.g. words that tend to show up in the same
environment belong in the same group). Other important word groups
include different actions (hiring, firing, buying, selling . . . )
and types and directions of change (increase, decrease, improve,
worsen.) More descriptive words such as "breathtaking," "shabby,"
"askance," "improprieties," "titan," etc., may also prove useful.
To the extent that the press influences investors' decisions, one
can potentially make use of data on what subjective terms were
used, about whom, and in what publication they appeared.
[0017] With regards to this last attribute, one could add further
attributes, which attempt to account for "impact" upon market
awareness. Such attributes may include degree of prominence in the
publication (e.g., as to a headline or a back article), whether the
release was made before, in what other publication(s), if so what
was the market response, how long between publications including
the present one (was the release completely new news, was it a
follow up article to a continuing story, or was the news event
previously suggested in a previous article as a potential future
event or not). Or alternatively, was the event part of a developing
or unfolding story (i.e., which the market had already been aware
of the most significant event(s) which led up to the present one)
and is it likely that the new event could have been at least
somewhat anticipated as a potential future event based upon the
present status of pre-existing releases on the subject. If the
publication was released at least twice before, what was the
difference in relative change in price following each sequential
release (also distribution/readership is considered as part of the
identity of the publication).
[0018] Each news release is used to fill one or more standardized
templates. The templates will each include one or more companies
whose stocks are publicly traded (e.g. as the company making the
announcement or the company being acquired). For concreteness
consider the following example:
[0019] ORIGINAL NEWSWIRE (Apr. 14, 1997 10:14)
[0020] XYZ company announced that profits were off by 15% and that
20 employees would be laid off.
[0021] TEMPLATES FILLED:
TABLE-US-00001 COMPANY: XYZ ITEM: profit RELATIVE_CHANGE: -15%
COMPANY: XYZ ITEM: employees ABSOLUTE_CHANGE: -20
[0022] A number of different attributes are important. A given
article will often give only one attribute and one has to determine
others either by a calculation from other information in the
article, or by lookup in a database. Consider "CHANGE". In addition
to the qualitative direction of change, one may know either
absolute change or percent change. Percent change may be more
significant than absolute change particularly since the
significance of absolute change is often subject to the original
quantitative number.
[0023] Profiles can be augmented from a database such as those
maintained by Dow Jones or Lexis/Nexis, so that as soon one knows
COMPANY-NAME: MBI, one is able to fill in additional attributes
such as STOCK VOLATILITY (BETA): 0.62, or associative attributes
indicating how much revenue the company derives from various
markets, the company's share of each of these markets, the number
of R & D dollars spent in each, etc. Likewise, if one company
is thinking of buying another, one should fill in attributes such
as relative size.
[0024] The following template illustrates some of the above
points.
TABLE-US-00002 COMPANY-NAME: MBI read ACTION: announced read
CHANGE: decreases read PERCENT_CHANGE: -10% derived
ABSOLUTE_CHANGE: -$375,000 read in ITEM: first quarter 1997 profits
read STOCK VOLATILITY: 0.62 looked up SALES (1996): 620,000,000
looked up PROFITS (Q1, 1997): $3,750,000 looked up SIC_CODE: 1367
looked up
[0025] Standard NLP techniques for determining sentence structure
will be used to determine the relationships between different
entities (e.g., which company is doing the buying and which is
doing the selling or being sold).
[0026] In filling the templates it is important to use co-reference
chains for determining what phrases like "he" and "the company"
refer to, e.g., "BMI held a major briefing. They announced that
profits were off by $375,000".
[0027] The above sequence of actions is summarized in FIG. 1.
[0028] Using Templates to Predict Stock Prices
[0029] Given the templates, standard statistical techniques can be
used to determine which announcements drive stock prices up or
down. This requires several nontrivial "tricks". The basic idea is
to start with a rough estimate of how long the change should occur
after the press release and then to look for stock price changes at
that time. The inventors expect most announcements to affect the
market almost instantly, but one must account for the fluctuations
in stock price.
[0030] When trying to explain which announcements were responsible
for a given change (e.g. IBM's $2 fall), one should factor out
effects that applied more broadly to high-tech companies (or
blue-chip companies, or the market as a whole), whether one has
explanations for those broader effects or not. Predictions are for
changes in stock price relative to the appropriate index. As will
be explained below, this can be used in the trading strategy.
Nonetheless, the present techniques may use cluster to template
features as presently described to predict stock movement patterns
of a particular company as they relate statistically
(historically), with that particular stock as well as clustering of
the companies themselves as they tend to share or not share similar
stock movement patterns in response to similar news information
released. A more comprehensive approach to feature extraction using
NLP in addition to the template approach may be useful in this
particular model. Text-based and case-based matching techniques
using statistical feedback (for weighting of the term attributes)
as well as clustering of the articles based upon their lists of
readers are useful in determining similarity of present news
releases to those previous ones. Co-pending patent application
entitled "System for Customized Electronic Identification of
Desirable Objects", describes a novel technique for predicting the
future price of a stock based upon the trading actions of
particular individuals who have successfully anticipated movement
patterns of certain stocks through their trading decisions. The
"success" of these "experts" across various stocks can be used to
determine which stocks (and/or features thereof) are similar in
terms of the probability of their movement patterns to be
accurately anticipated by those experts (and those who may be
metrically similar to them in being predictively likely to also be
able to provide advice regarding stocks as well). This description
further suggests that these individuals may also post advice and
other information explaining their individual analysis and
rationale relating to the stocks and/or supporting their actions or
predictions. It is also reasonable that particularly because much
of this information may be based upon recent news and events
surrounding the stock, one could apply the above suggested general
NLP approach to finding correlations with subsequent stock movement
patterns (extracting these correlations may be more efficient if
the same individuals posting are analyzed due to inherent
similarities in the meanings and significance/impact of descriptive
use of their use of language such as words and syntax). It may even
be possible to identify groupings of similar writing styles within
large enough corpi of sample messages in order to adjust via
further customization of templates certain word correlations which
are unique to each type of writing style. Very large test samples
would however be a key requirement.
[0031] Another interesting source of feedback information may be
what particular articles (or more particularly text segments) such
"experts" tend to access and/or spend time reading as a potential
means of establishing additional relevance in the form of
weightings of the term attributes found within these stock movement
correlations. Some of these investors trading activities may, for
example, immediately follow their review of certain articles and
the direct response of the investor to have made certain investment
decisions in response to certain articles with a resulting
successful outcome, (i.e., more successful than the general
market's analogous behaviors may be indicative of similar imminent
market activity following the release of similar articles in the
future even if not directly read by those experts). Of course a
strong indicator of initiating real-time trading would occur if
such an article(s) were read AND the expert initiates an
appropriate active trade(s). One may apply similar techniques to
automatically adjudging weighting of feedback for advice which is
provided by an expert, as provided via Internet chat (text or
voice) or even telephony, i.e., the highest weightings would be
provided to advice which an expert provides in response to reading
investment related news if the expert also made corresponding
investments on his/her behalf (higher weightings may also be
statistically proven to be justified if such advice were provided
to business associates or friends). In these cases associated
immediate trades could be performed if the statistical prediction
of success for that investment domain(s) is high enough. In this
regard, certain types of advice may further be weighted in
accordance with the historical behavior of the market with respect
to that advice. In this case, the associated relevant actions of
the expert (e.g., making a direct personal investment on that
advice, the quantity of such an investment and/or advice given to
colleagues, friends, etc.) can become additional useful attributes
in predicting the quality of the predictions (i.e., probability and
magnitude of the prediction with respect to the market). Of course,
these market predictions regarding advice of experts need not be
limited to the context of their appearance in response to news
releases exclusively. And long-term predictions may of course, be
considered in accordance with the short-term trading model
accordingly.
[0032] In a very similar extension one may view "experts" as
advisors who are publishing their advice, e.g., columnists who are
market analysts or analysts of analyst advice. The following
technique may be useful for enhancing general relevance feedback,
but is particularly intriguing for applying to experts with regards
to stocks they are expert in. More finely granular relevance
feedback may be achieved through automatically observing visually,
e.g., vis a vie the user's computer camera. The particular text
segments and even words observed by the expert and the associated
moment by moment degree of corresponding "excitement" or
"sympathetic response" by dynamically measuring the degree of
pupillary dilation and the degree of change thereof. Like other
forms of relevance feedback, these measurements may be normalized
across a large number of users by determining the relative
comparative values across a number of different sites and adjusting
the interpretation of the degree of response towards a value which
is appropriate to the relative degree of response for that site in
particular. This technique can be applied to measurements of
absolute value and degree of change in response to an identifiable
target object (in this context also sentence or even associated
keyword). This general approach to relevance feedback in general
was suggested in U.S. Pat. No. 5,754,939, "System for Generation of
User Profiles for a System for Customized Electronic Identification
of Desirable Objects". The present method may provide further
insight into the nature and particular degree of the anticipated
stock movement pattern. Such articles, which are metrically similar
for the very reason of the predictive value of their content, would
accordingly be of considerable value to experts who may be
hand-crafting trading rules (as will be described further below) as
well as, of course, users who wish to make manual trading decisions
based upon new releases which are particularly relevant to the most
opportune real time tracking conditions (as in a fully
non-automated manual version of the present system). For example,
users who are automatically notified of a condition, e.g.,
information and/or behavioral actions and/or advice of experts in
which such condition reaches a predictive threshold of a particular
market change. In this case, that individual may be automatically
notified and appraised of variable(s) constituting that
condition.
[0033] In a further elaboration of this concept, it is even
conceivable that one could perhaps pick up certain additional
"hidden meanings" or higher level conceptual elements in the
opinion or analysis which may not have been properly detected by
the system, not clearly conveyed by the human expert (or perhaps
conceptualized in response without being conveyed at all). As such
one may thus further attempt to cluster templates from a response
of these experts in combination with templates which come (and are
characterized as such) from an article(s) recently read by the
expert just prior to releasing the associated responses. The
present approach could, of course, be further extended to
professional "experts" (i.e. stock analysts).
[0034] The present methodology could also be extended to press
releases as well as more general information as it is posted on
corporate web sites. Again, as suggested above, the behavior of
"investment experts" may be usefully leveraged and the possibility
exists that other types of individual's behavior (e.g., corporate
"insiders") may portend certain significant market perceptions and
associated changes relating to that company as manifested through
documentation and correspondences. Indeed documentation,
correspondences and trading behavior of such individuals may be
both implicitly predictive for the present automatic triggering of
trading actions and may contain valuable insights which could
enable humans knowledgeable in markets and investing to devise
hand-crafted customized rules to "trigger" such actions (described
below).
[0035] One could also look at such relationships as the total
number of the general public which represent the typical investor
within that investment sector of stock to read a given article,
visit the corporate site of certain relevant pages thereon, the
percentage of those which subsequently (or immediately) search the
Web (e.g., present key words which relate to that company or
event), read additional articles or visit that company's corporate
Web site. One could also provide a similar analysis for "experts"
or insiders (although the model would likely need to accommodate
the fact that typical investor behavior patterns tend to correlate
with more immediate market changes while "experts' " or "insiders'"
behavior may even pre-anticipate movements resulting from
correlations with typical investor behavior to the extent that
general perception modifying events can themselves be better
anticipated through the use of their knowledge, e.g., more
prespicious knowledge and/or access to additional useful
information sources). In other cases, it is likely that
knowledgeable individuals are likely to anticipate longer term
positive or negative trends better than the typical investor which
could be factored into the overall automated trading decision
model. This is typically also true if these "insiders" are privy to
certain information before it is picked up by the press and are
able, through their behavior, to manifest discernably significant
clues, through their behavior, which anticipates a news article
contributing significant information. Whether and to what extent
informationally privy individuals pre-anticipate short term vs.
long-term market behavior compared to the general investor
community (and to what extent) is a matter of further investigation
using real data. It is, however, reasonable to expect that for the
most part, the value of knowledgeable experts is likely to provide
advantages for long term trading decisions.
[0036] The model should be designed within its short-term trading
model to account for such long-term factors (such as that suggested
or actions, clues and advice picked up from internally proven
investment specific domain experts) i.e., both long and short term
price predictions (relating to the present release and all other
relevant, past and present inputs) should be considered in a short
term trading strategy, though the relative influence of the long
term effects in this regard are likely to be small for any given
trade but could become significant over time. At this point it is
perhaps worth suggesting leveraging the value of the reactions of
these individuals whose behaviors are deemed to be of predictive
value. For example the time spent looking at a new announcement (in
absolute and particularly relative measurements) as well as any
other data which could be captured, e.g., associated verbal, facial
or gestural responses, pupillary dilation, correspondences made,
content of pages read on-line, etc, immediately following the
release, etc. ("emotional" response clues of the users) are
particularly likely to be more significant factors for the
"average" investor population as its perception of the release is
the prevailing influence of the market's short-term fluctuations.
Emotional response of a true investment expert may also likely be a
better predictor of long-term activity. Of course, such predictive
correlations could be extrapolated at the level of individuals
relative to individual investments and (given sufficient historical
data) even become particular to that individual's specific behavior
or overall "user profile", e.g., content profiles accessed, pages
hit, communications (of various formats and contents) conducted,
including some behavioral features, which correlate with other
important variables such as investment news tracking, including
pages read about details of industry, sites within a particular
investment domain (including associated underlying technology), The
domain expert's inferred intelligence, intuitive capacity, or
business sense, prudence in making "wise" buying decisions (in the
investment domain or in general) as well as more purely emotionally
indicative signs (such as papillary dilation and other measurable
behaviors associated with the reading of the specific piece of key
content), etc. More sophisticated analyses are possible.
[0037] The order of announcements may be significant, as well as
their timing. For example, a stock swing two days after an
announcement might be the result of the announcement, but that is
less likely if another announcement intervened. Other combinations
can be considered (e.g., layoffs can be interpreted differently
depending on the company's financial health), but given the
sparsity of the data (in spite of the vast quantities available),
care must be taken not to over-fit (i.e., to fit models to random
fluctuations). Standard statistical methods of significance testing
are useful here.
[0038] Consider the XYZ Corp example with templates above and stock
prices below.
[0039] XYZ Corp
TABLE-US-00003 time stock price 10:12 141/4 10:11 14 10:12 141/4
10:13 141/4 10:14 141/4 10:15 14 10:16 133/4 10:17 14 10:18 14
[0040] One could in theory take each template instance and count
how often the stock price went up vs. how often it went down. This
provides an estimate of the probability of the stock going up or
down the next time the template is seen. Unfortunately, a given
template instance will rarely appear. (XYZ won't often announce a
15% decrease in profits.) One must, of course, appropriately
generalize across template instances. E.g., check to see how much,
on the average, stock prices decrease when any company (not just
XYZ) announces a 15% decrease in profits. The matter is complicated
because one wishes to also generalize to different amounts of
decrease (e.g. a 10% decrease). It also might be the case that such
announcements have different effects in different industries.
[0041] Thus, it is useful to have a taxonomy of what companies are
in what industries (e.g., by high level SIC codes) and to calculate
statistics for templates grouped by industry. It may also be is
reasonable to assume that some of the announcements known to affect
a given company similar to another company (e.g. IBM) will affect
IBM while others affecting other similar companies will also affect
IBM, e.g., large computer company (of approximate size) correlated
to expansion of global operations resulting from investments to
introduce and expand in new Internet companies or (for example) a
hardware company correlated to expansion of global expanding
investments in manufacturing operations in the third world.
Regarding the taxonomy (of determining which companies are in which
industries and to calculate statistics for templates grouped by
industry), more precisely, the preferred method is to use Stein
shrinkage to produce a weighted average:
[0042] p (increase of XYZ for template A) is estimated by
[0043] c1 p (increase of XYZ for template A) observed+
[0044] c2 p (increase of all firms in XYZ's industry for template
A) observed+
[0045] c3 p (increase of all firms for template A) observed
[0046] where c1, c2 and c3 are constants that sum to one, template
A is something like:
[0047] COMPANY:
[0048] ITEM: profit
[0049] RELATIVE_CHANGE: -15%
[0050] and the "p (increase for firms in set S for template A)
observed" is the fraction of time the stock price increased after
template A was observed, averaged over all companies in the set S
being considered.
[0051] More generally, one can predict not just the direction of
change, but also its magnitude. To do this requires finding
templates which represent similar situations. For example, the
inventors define a metric measuring distance between different
templates (e.g. a 15% decrease in profit is close to a 10% decrease
in profit, but unrelated to a 15% decrease in number of employees).
For templates with small numbers of attributes, a standard
Euclidean metric works well:
distance between template 1 and template 2 = sqrt ( w 1 (
profit_change _ 1 - profit_change _ 2 ) 2 + w 2 ( company_size _ 1
- company_size _ 2 ) 2 + ) ##EQU00001##
[0052] If there are very large numbers of attributes then a cosine
metric is more effective.
[0053] Once a metric has been established, templates can be
clustered together into groups using e.g. a k-means clustering
algorithm. Groups can then be automatically examined to see which
ones have predictive power.
[0054] The above sequence of actions is summarized in FIG. 2.
[0055] Given sufficiently large statistics, it may also be useful
to include as part of the clusters' associative attributes
representing the individual company identities, thus the accuracy
of the model may be further improved by determining what kinds of
announcements tend to correlate with which stocks and from this
data predict with greater precision which other announcements are
likely to apply (or not apply) between different companies and to
what degree.
[0056] The estimated probabilities of stock price increase or
decrease are used to construct a trading strategy. A simple
strategy is to simply buy stocks that are predicted to increase and
sell (or short) stocks that are expected to decrease. This is
reasonable if the movements are expected to be rapid, as described
above. In practice, the decision to make a trade is determined by
using the estimated probability of the stock (say) increasing, the
magnitude of the increase, and the uncertainty of that prediction
with the transaction costs and exposure risk. This will be obvious
to anyone with a background in finance.
[0057] The above sequence of actions is summarized in FIG. 3.
[0058] If the above method is used on longer term changes (e.g.
using newspaper stories to predict stock price changes over days or
weeks), then it is best to learn to predict how each stock will
change relative to the market and, similarly, to hedge against
possible market changes by simultaneously buying the stock and
shorting the general market (or better, the specific industry the
stock is in). Owning a stock but shorting a proportional amount of
the market (scaled by the relative volatilities as measured by the
beta) will, as is well known, reduce exposure to general market
fluctuations.
[0059] This idea can be extended to making bets on implicational
statements: now that I've seen this announcement about Nabisco
buying De Beers Diamond Company, I predict that if the price of
gold tanks then Nabisco's stock will go down." Or, "I predict that
if this stock price falls by more than $3 then it will climb on the
following day." As mentioned above, care must be taken in searching
for such correlations, since given the enormous number of possible
correlations one might find, it is easy to locate spurious
correlations. Again, complexity penalization methods (which
increase the threshold for believing a proposed correlation based
on how many correlations are examined) or cross-validation
techniques (which check whether a correlation found in one time
period also holds over other time periods) are needed to avoid
over-fitting. Of course if an implicational statement is also
supported by a human e.g., a proven successful investor, is in a
particular cluster(s) of stock, e.g., an on-line posting (or other
communication) this may add to its validity. Implicational
statements and other complex rules may be automatically
extrapolated from these natural language communications of these
experts using techniques of statistical NLP and/or customized
templating techniques.
[0060] As indicated above, of course, these correlations may
suggest short-term changes or long-term changes in price. It is
perhaps worth mentioning the possible effect upon market perception
at multiple correlations. For example, one must be somewhat aware
of how market perception may react to multiple simultaneous
effects. E.g. the release of a new advance home entertainment and
video/audio recording system by Microsoft may be somewhat eclipsed
by news concerning the company's government enforced breakup or
(for example), if during the period of the Microsoft break-up other
news is released about Microsoft being suspected of flagrant
violations and abuses of consumer privacy. This could result in a
compounding negative effect in the predicted correlation of that
news release with the price of Microsoft stock. Or for less
dramatic news releases, e.g. the release of three closely timed
news articles each containing additional new information regarding
a revolutionary new technology associated with a hot Internet
start-up all of which is of a positive nature, the degree of impact
upon stock price of each subsequent article (following the first)
may be diminished by the recent release of the previous article(s).
This effect may be due primarily to the justifiable) belief of the
market that each subsequent positive event (among multiple positive
events) may each have a positive albeit diminishingly positive
effect upon total value of the company's stock. Of course, the
significance (degree) of the positive news may be important. In
each above case, volatility may also be an important factor to
consider.
[0061] Also the timing (period between each announced event) should
be considered as well as whether a particular announcement was made
in another (or other) publication(s) and if so what was the
readership of other publications carrying the release. Also, was
the announcement a headline presented in a back section? What was
its estimated on-line distribution?
[0062] Conversely, there may be factors which would likely have
significant effects upon a stock. However, the actual surrounding
events may be uncertain. Also, the market's awareness of the
possibility of such an event may impact the price of that stock
very substantially either positively or (particularly) negatively,
depending upon the volatility of the stock (e.g., the impact that
the event would have upon the stock may be largely determined by
how large or diversified if the event is relevant specifically to a
particular division). If the potential impact of the event is
significant, the company (particularly if negative) and the market
perceives the associated likelihood to be significant the effects
on price may be almost as significant as if the event occurred. If
no resolution occurs for an extended period of time (e.g., a
criminal allegation against the company) the stock's value may
remain unfluctuated. If it resolves quickly and does not come to
pass, the rebound effect may also be very significant. The main
point in these examples is that when predicting stock price
resulting from a news release the primary factor to be considered
is the market's perception (as gauged by the market's response to
prior news releases which relate to the present release) compared
to expected market response to the present new release
independently (again with the caveat that one that one must factor
in the effect that multiple releases on the subject may have given
the present specific circumstances of the release and the context
of the companies' overall surrounding circumstances).
[0063] Overall the presence of multiple correlations which may be
affecting a given stock simultaneously which may be positive and/or
negative may itself add an additional level of complexity for
analysis and correlation; however, this problem is likely to be
somewhat tricky.
[0064] For this reason it is definitely preferable if historical
statistics (such as the most exemplary cases in which market
behavior did follow these complex patterns (and preferably the
exemplary cases in which it did not) and allow the human to apply
subjective judgment to validate the correlation on a case by case
basis (or modify it or create a novel one accordingly). For
example, in the above case, perhaps the price of gold has gone down
for a very specific reason (relevant articles for which can be
automatically retrieved for the user) and is expected to rebound,
the diamond division is small compared to the rest of the company,
and its relative percentage sale of gold-containing products is
very small, a recent announcement suggests that profits in the main
division or another division are escalating or that a major
set-back has occurred to sales of Nabisco's largest competitor.
[0065] Other variables may conceivably influence certain
correlations such as economic variables, which may have more
macro-level effects upon certain stocks, the price of commodities
within certain industries which may be indirectly influenced at
least perceptually, etc. (although news regarding the present
economic stability may indirectly affect other variables such as
the overall market and volatility by influencing level of risk
taking investors and sensitivity to market or investment specific
down turns.
[0066] For certain stocks (e.g., particularly in rapidly changing
or high growth markets like technology stocks), competing companies
may be affected inversely by positive or negative news about their
competitors than they are to an indirect rebound from investor
speculation.
[0067] Given the efficiency of the market, the inventors do not
expect the above suggested methods of complexity penalization
techniques or cross validation techniques (to avoid over-fitting)
to produce superior returns for longer term price prediction. The
same method can, however, be used to predict changes in the
volatility (or variance) of stock prices. The method works exactly
the same, except that instead of using price as the variable to be
predicted one used a local (e.g. daily) volatility. One then buys
and sells volatility (or, more precisely, derivatives which serve a
proxies for volatility), rather than trading on price.
[0068] There are also instances in which the primary objective is
to identify (immediately upon announcement) certain particular
events for which custom templates can be constructed and for which
the significance of such event (and thus anticipated effect on
overall price) can be estimated by a human vis-a-vie a customized
manually constructed trading rule which is triggered if/when a
particular event actually happens. For example, the formal
announcement of the Justice Department's decision to breakup
Microsoft or the announcement of the outcome of the bidding war
between AT & T and Comcast to purchase Media One; e.g.,
involving a pre-ascribed rule which could trade a significant
amount of Comcast for AT & T stock if/when AT & T won the
bidding war or vice versa, if Comcast becomes the eventual victor.
Of course, a human may be notified if the bidding war is further
complicated or settled by the unexpected announcement of a third
company. The information contained in such announcements could even
be reasonably complex. For example, case-based techniques a
particular method of statistical NLP often used to determine if a
particular sample text (effectively a query) is in fact very
similar (or not) to another piece of text (the newly released
announcement). In the use of this method the sample (query) text is
stated very simply and plainly and ideally different ways of
stating the prospective event are presented. E.g., Comcast loses
(or AT & T wins) the bidding war for Media One or Media One is
acquired by AT & T. These case based methods could be also
useful in enabling a human expert constructing the trading rule
(which is influenced largely by the nature and degree of the effect
of the prospective event upon one or more of the companies
involved), to identify other at least somewhat similar situations
and events in previous announcements from which the human expert
may analyze and assess particularly the immediate effects upon
price of the companies involved and with this historical data
perhaps better construct trading rules which are appropriate with
the effects on price of the relevant companies. Because such
announced events are so subjective in nature particularly within
such a dynamic market, it is unlikely that construction of such
trading rules could be fully automated with reasonable predictive
accuracy based upon this historical data without the intervening
assistance of a human in the loop. It is possible that in such
case-based methods, the statistical confidence that a present
announcement, in fact, shares the same meaning as a sample (query)
text provided by the expert falls below a reasonable (desirable)
confidence threshold. In such cases a human may possibly be
automatically and immediately contacted in order to confirm the
similarity in the meaning of such announcement and/or if it is, in
fact, slightly different in another instance automatically
determined likely to be a very important announcement, e.g.,
contains certain predetermined stop words/phrases such as
"Microsoft acquires", etc., it may be desirable for the human
expert to be contacted in order to refine or modify the trading
rule based upon his/her direct analysis. In those instances, in
which it is in the company's best interest to provide no advanced
indication or warning of a certain event to the press, (which does
occur on a reasonably frequent basis) as well as for first time
announcements of proposed or likely future events, the present
technique could be quite useful. In fact, human experts and market
analysts could even construct a plethora of different (albeit
reasonable, at least remotely possible) potential future event
scenarios and for each one, ascribe a trading rule which is
appropriate with their estimated stock price effects upon the
associated relevant companies. This plethora of scenarios, may for
example, consist of very remote possibilities, however, if/when
they were to occur, the effects upon stock price could be very
significant. For example, "Intel Corporation acquires GE" or X
corporation acquires GE (where X corporation's preexisting stock
value relative to that of GE could be one of the relationships upon
which the trading rule is based, "Microsoft Corporation declares
bankruptcy for reorganization in wake of lost profits due to
Justice Department break-up", or "Windows 2001 contains a virus
which results in n range of negative likely scenarios each with an
associated "negative impact" and associated price rule.
[0069] Two important benefits which a human in the loop can provide
are:
[0070] 1. In determining whether the present announcement which the
system identifies as being relevant to the trading rule is in fact
appropriate to it (i.e., employing human interpretation to
establish or confirm the relevance of the trading rule to the
announcement such as identifying any caveats or complicating
factors suggested in the announcements which could reasonably
affect the prudence of triggering the trading action). If the
statistical confidence for such a trading action is very high,
typically, however, it is significantly more important to pre-empt
the market's (only slightly) slower response to the announcement
than apply human reasoning to interpret and disambiguate more
subtle aspects of the associated meaning and risk losing this time
edge on the market. Determination of this threshold can be
performed statistically; however, it also depends upon how quickly
the human responds to the relevant notification. One approach could
be to determine the time threshold after which incorporating a
human response element is typically not worth the impact of the
delay upon anticipating the market's response (e.g., based upon the
marginal value that a human ultimately adds to the same trades had
they been fully automated and perhaps the degree of market change
compared to anticipated ultimate change which may already be
beginning to occur at that time and attempt to urgently notify the
user indicating the time) threshold at which the advantages of the
human intervention become outweighed by the time consequences (at
which time presumably the automated trade action would occur). By
the same token, the degree of urgency of the notification to the
human could be proportional to:
[0071] a. The significance of the announcement (i.e. suggesting
that if the trade is in fact as prudent as it appears a
significantly larger trade could be made if confirmed by a
human).
[0072] b. The degree of "uncertainty" in the system's understanding
of the announcement, ie., that it in fact means the same as the
conditions of the trading rule and/or the probability of the
existence of other caveats in the announcement which may require
further interpretation of a human (e.g. "Microsoft resolves
antitrust case with U.S. government," which is a positive
influencing factor and a match for a trading rule); however"
penalties include "Windows operating system can only be used on
certain hardware platforms".
[0073] Because of the deficiencies in capturing the conceptual
meaning of natural language outside of the scope of specific
example scenarios (using case based matching techniques), as well
as statistical deficiencies in adequate historical data to predict
the market response to the particular news event scenarios, the
measure of this degree of uncertainty may often be difficult to
accurately determine. Thus, more general estimates may need to be
automatically arrived at in many cases.
[0074] 2. In constructing a rule (or approving one which has been
automatically suggested) using data analysis tools which can be
used to analyze and correlate statistics of textual information in
accordance with at the market's responses. I.e., there are likely
to be on the surface of an announcement the very subtle factors
(some interrelated) which may be complex and unique to the present
context and thus not readily detectable by statistics alone (for
use in a fully automatic analysis and trading system). Some of
these factors may actually be even stated in the announcement, and
may be available in previous news releases, or combination thereof.
All of this data should be included into the statistical model and
(as above suggested) complexity penalization techniques may be
incorporated For example, as to the case cited above in which
similar announcements previously affecting IBM in the past are
likely to also affect companies like IBM (based upon a company
"taxonomy"), it is possible that such factors as the company's
overall financial health, the market's valuation (in that sector or
relatively speaking for that stock), other recent news (which could
for example be significantly negative so as to eclipse market
perception or the positive effects of expanding global
manufacturing operations). The surrounding context of the
announcement may also be significantly important, e.g., did the
company in the SAME release also announce that substantial losses
are predicted due to a failure to previously launch a substantial
overseas hardware development initiative compared to the aggressive
strategies of competitors? Did the previous "similar" situations
occur in approximately the same time period as that of the present
announcements? Cross-validation techniques may accordingly confirm
the relevance of the underlying correlation in view of potential
effects on the validity of the correlation due to time).
[0075] Below described is a suggested technique to identify through
user specific analysis of behavioral actions and associated user
profiles, identification of specific variables in certain users
which are "telling" of overall market trends. These variables may
be based upon a user profile specific basis and (or specific
actions which are associated with training decisions which are
exemplary of the overall dynamics of the market at an investment
specific level). As suggested, it is also important to consider all
perception influencing factors as well including such factors as
whether the intervening factor was part of the same article, part
of the same publication (as well as relative degree of prominence
in that same publication compared to the primary relevant
announcement), the textual style such as over sophistication or
clarity to extent that it affects comprehension or interpretation
of significance to the average of the market audience, etc.
[0076] Because of such complexities in the surrounding context it
may be most desirable to empower humans with the proper tools to be
able to analyze all relevant information and history relating to
the surrounding context of the announcement and company as well as
(most critically) the market's statistical correlations relating to
similar situations to the announcement.
[0077] These tools may also mine correlations in stock movement
patterns in response to comments, advice or observations made by
knowledgeable experts regarding a particular stock or group of
stocks. It is important in many cases to perform this analysis and
perform the appropriate trades very quickly after the content is
provided. However, it may not be the case if it is provided in
response to a type of announcement which may potentially possess
deeper implications which only a knowledgeable expert would be able
to extrapolate, such as the acquisition of another company (which
may hold some key IP, know-how or personnel within that industry
sector) or which is relevant to the future technology direction of
the company or losses of some key people or sale of a division
which had previously been instrumental in promoting a new
technology initiative for the company, which some believe may be
strategic to the company, e.g., capturing the "window" of time
between when an announcement is made and when analysts themselves
physically state their interpretations of announcements containing
these similar insights. There may even be a few cases in which a
knowledgeable expert may, based upon certain available facts,
predict well ahead of the market the likely possibility of a
forthcoming event, which has significant impact upon stock value.
In this case, if this possible eventuality has distinctly negative
implications on price, it may be worth shorting the stock in
advance and in anticipation of the possible eventuality or if its
implications are positive, a purchase of options may be worthwhile
(in lieu of gambling on the actual outcome) and/or, in this case,
the expert may introduce a trading rule which anticipates this
eventuality (or other possible alternative scenarios). On the other
hand, knowledgeable domain experts may state hypothetically such as
if X,Y,Z occurs then Stock A will be a good buy for the following
reasons. This information, in turn, could be used to write a custom
rule to anticipate a potential opportunity such that an immediate
trade could be triggered upon such announcement. This rationale as
provided (as well as considering the identity of the provided of
the argument) may itself contain useful predictive indicators as to
the predicted degree of soundness of the rationale.
[0078] It is worth analyzing also the ideal timing for performing a
trade in response to an announcement. There is, for example, often
a "wait and see" element in some investor's behavior in which an
anticipated action is triggered by a subsequent or more detailed
announcement, e.g., coming out in print following an initial
announcement on radio or TV (or the Internet), or investors may
simply respond more quickly to certain types of announcements and
perhaps investment sectors than others. The aforementioned
attributes relating to "emotional response" particularly that of
the "average" investor and their correlations relating to the
announcement may provide some predictive clues as to whether, under
what conditions (and possibly to what degree) actionable behavior
by the market will follow and when relative to that stock.
[0079] One trigger could actually be the initialization of a price
fluctuation wherein a price fluctuation is predicted, however, the
timing of the fluctuation is difficult to predict. This approach
may also provide a means to optimize the timing of trades in
general. It is however important to not exceed a threshold of risk
of performing the trade, which could be estimated statistically
only after the fluctuation has substantially occurred.
[0080] In any event, it is quite important to provide the human
developing the rules to be presented with all of the surrounding
and historical data (and times of release) and market statistics,
which relate (via content matching techniques) to the announcement.
Statistical models usefully incorporate some human intuition in
refining the models which take into consideration some of the more
typical kinds of caveats, exceptions and context influencing
factors which may prove to most significantly skew correlations
based exclusively on statistical models developed without human
input. This approach would be useful in this preferred case of
humans constructing (or approving) the particular rules or in the
case where they are generated automatically.
[0081] A couple of other inputs, which are perhaps worth
mentioning, are:
[0082] 1. The activities of companies' marketing efforts and/or
sales thereof as extrapolated from either news releases or from
capturing advertising data relating thereto from the Internet
(Web-page advertising, e-mail advertising), radio and TV
(electronic media commercials) e.g., using speech-to-text
techniques to extract text or closed-captioning (for TV).
[0083] 2. Product or services reviews, e.g., from such services as
consumer reports or customer driven quality ratings such as Open
Ratings.
[0084] 3. Price of products or services (as publicized from news,
on-line brochures/Web sites). The variables of quality and pricing
may be important if correlated together (as they may be a
determinator of value provided to the customer).
[0085] In light of the recent rise in popularity of day trading,
certainly a legitimate and reasonable business model to
commercializing the present system would be the sale of day trading
software to the consumer market (based upon a straight sale or
revenue sharing approach). One reason that this approach is
particularly compelling from the commercialization perspective is
that if used in a brokerage usage context, once word gets out as to
the methods used (e.g., through publication of a patent) and once
the approach becomes adopted widely by other brokers which emulate
the present methods, the market will adjust itself and the effects
of trend anticipation will be reduced. On the other hand even if
this occurs there will always be a market to improve the efficiency
of day trading software in light of the associated high value
potential of consumer software.
[0086] Additional Applications
[0087] 1. Incorporating User Profiling into the Predictive
Models
[0088] In issued U.S. Pat. No. 5,754,939, "System for Generation of
User Profiles for a System for Customized Electronic Identification
of Desirable Objects", techniques are disclosed by which user
profiles are automatically generated based upon a comprehensive
automated analysis of user behavior interacting with (on-line and
off-line) media such as the Internet. There may be certain ways in
which users profiled according to preferences degree of investor
success, as on-line investors and/or consumers of certain types of
investment related news may be statistically identified as being
"exemplary" users whose investment related activity exemplifies
over-all market behavior with regards to certain stocks and even
particular market phenomena which is statistically identifiable
regarding certain market fluctuations (in general) and/or their
associated responses to particular stimuli such as
news/informational stimuli or initial movements which are catalysts
to a fluctuation or trend. These individuals could perhaps even
possess certain seemingly unrelated attributes perhaps
psycho-graphic demographics (including geographic region) or other
content attributes which indirectly correlate with certain market
exemplary behavior characteristics based upon (e.g., similarities
in perceptual interpretative similarities and/or behavioral
response patterns). The key point of this idea is that once these
individuals are clearly identified, close monitoring of their
behavior (at a sufficient level of statistical confidence) may be
an indicator of larger scale market fluctuations. Identifying those
individuals in particular whose behavioral response tends to
pre-empt the corresponding general market movement as much as
possible is, of course, most valuable. Some of these fluctuations
may be, of course, in response to newly released information, e.g.,
they are domain "experts" or perhaps they have a proven track
record for certain types of announcements (perhaps in combination
with the specific type of stock) of displaying very similar trading
patterns to that of the market based upon the present context of
variables. Once analysis is performed as to the particular types of
news (or other informational) releases tends to elicit which types
of fluctuations for an investment or category thereof, it is
conceivable that in a novel extension of this approach, these
exemplary individuals upon their individual consent could be
delivered certain hypothetical news releases which fall within the
general grouping of representative types of releases which tend to
elicit fluctuations, however, suggest certain potentially likely
future events which have, in fact, not yet occurred. In one
variation, these users are surveyed to describe in detail what
kinds of trading activities they would perform following such news
release.
[0089] In a most preferred variation, users are unaware of the
difference between the hypothetical and actual news release and
perform their trading activities accordingly. (The releases may be
e-mail or Web based). Of course, some of these market responses may
not only affect an individual company but, depending on the type of
release, may also affect a cluster of "similar companies" or
commercial sector of companies. It is, of course, optimal in this
case to mimic the delivery of the editorial style and positioning
within the electronic news site and in every way mimic the exact
course, position, format/style, etc., to what could be most likely
anticipated in the event of an actual release of that
information.
[0090] In a potentially interesting variation, it would be possible
to analyze a plethora of "most likely" potential scenarios of news
events. It may be possible to determine statistically the
particular scenarios for which the system could anticipate the
market response with the least amount of statistical confidence.
Also considering the relative probability of these scenarios, it
may be possible to further determine, through the use of a decision
tree, those particular announcements, which are the most "telling"
of the most probabilistically likely yet least statistically
confidence event scenarios and present these automatically selected
revealing exemplars to the subset of market constituents whose
profiles and behavioral patterns are predicted to be most exemplary
of the market's response to those particular hypothetical exemplary
event scenarios. The statistical confidence in these sparse data
areas of the multidimensional space are improved. In additional
(like the technique of rapid profiling as described in U.S. Pat.
No. 5,754,939, entitled System for Generation of Object Profiles
for a System for Customized Electronic Identification of Desirable
Objects") the selection of the exemplars may dynamically change in
accordance to the market's response (i.e., present statistical
confidence) resulting from the previous exemplars as presented.
[0091] 3. Investment Advice Barter Exchange
[0092] Because the market by nature discourages the sharing of
truly valuable advice (by diluting the effects of future trends of
the market which are presently substantially concealed from the
market as a whole), investors who have good advice to give are
likely not to share that advice unless it is to other investors who
are likely to have equally good advice to provide in return, as
well. Because most investors who have a truly proven track record
of preempting market trends demonstrate this advantage within very
specific domains and sub-domains of investments, there may be
significant opportunity for different "classes" of investors to be
established upon their proven degree of success in investing. Based
upon their degree of success they can then join a particular class
of investor and benefit from the sharing of advice which is
demonstrated to be of similar value to that which they are able
themselves to provide. The caveat is to insure that sufficient
advice is provided to approximately match the amount of advice
consumed and that deliberately misleading advice is not provided.
For example, to be sure the advice they provide corresponds to the
type of investment activity, which they themselves engage.
Certainly their investment activity can be a very useful form of
"advice". In one variation, these advisors either maintain their
class privileges by providing a minimal amount of advice which is
later proven to be valuable or actual barter points could be credit
and debit based upon the amount of valuable amount of advice
provided and consumed respectively. Of course, bad advice would
also be penalized in some fashion. In addition to the use of this
general approach to facilitate the sharing of advice from a broad
variety of domain experts, it could also provide an "open forum"
for domain specific experts to be able to express and debate their
opinions, as well as exchange information so as to refine the value
of their own advice as well as provide a more informationally rich
forum for the consumers of that advice. The generally preferred
method for predicting regarding which investments is likely to
result in which degree of success for a given individual (or
conversely which individual's advice is likely to have the highest
likelihood of success for a given investment) may be determined by
clustering the companies and their associated attributes (as
predicted metrics of the companies for which certain types of
investor's advice has a demonstrated history of success). This
technique is explained in detail in issued U.S. Pat. No. 6,029,195,
"System for Customized Electronic Identification of Desirable
Objects".
[0093] 4. A Market for Useful Advice
[0094] Another approach for rewarding and incentivizing users, who
are predicted to be able to provide valuable advice for particular
investments, could be achieved by compensating the advisors for
their advice. This could be achieved by a simple sale of the advice
based upon a market model in which the statistics of past success
of the investor's advice and investment behavior is known and
considered as well as (generally, for the benefits of the consumers
of the advice) the predicted confidence (risk) of the advice given
the context of the advisor and type of investment(s) and relative
predicted degree of success (based on his/her history) and
investment return if the advice from that advisor is in fact
correct. Accordingly, potential consumers of that advice may bid on
access to that advice.
[0095] There are potential conditions to the sale of the data,
which may be applied, which are designed to maximize overall profit
to the advisor. For example, a statistical model could be developed
(based upon various scenarios) in which varying degrees of
dissemination of advice to other users is provided, and the
associated reduction in market value is determined (estimated as
accurately as possible) as a result of the dissemination of that
advice. This impact is, of course, going to have at least some
effect upon the value of future similar advice. As such the idea is
to determine the optimal threshold of the number of users for which
advice can be sold such that there is a viable established market
for that advice and the associated price for that advice to the
market is optimized. This value is likely to be relatively similar
irrespective of the particular circumstance with the exception of
the fact that the market may possibly "perceive" the value of the
advice to be greater (or less) than it actually is, statistically
speaking (e.g., the stock tends to be a bit unpredictable. For
example, there have been a few isolated wild successes in the
advisor's history). In addition this optimization varies according
to the amount of personally invested funds which the advisor has
made in his/her own advice.
[0096] The terms of the associated buyer-seller transaction may be
either based upon a direct sale, a percentage of the resulting
increase in valuation and/or percentage of the investment made by
the consumer of the advice. The second means of compensation would
likely, of course, provide the greatest incentive to the advisor to
provide valuable advice.
* * * * *