Can Praxeology Tweet?

What if Twitter could accurately predict the stock market?

Well, apparently it can.

Derwent Capital Markets, a London based hedge fund, recently used data from Twitter to anticipate the rise and fall of stocks. The project ended up with a 1.86% return, beating out the overall market. According to the study “Twitter mood predicts the stock market,” the social media service can be utilized for an 87% accuracy in stock predictions.

Shit. That’s pretty cool. Now, stop thinking about how you’ll now become rich by reading all your friends’ tweets (could be me, but I don’t think it’s that easy); perhaps more importantly, this study and its implications offer insight into the greatest struggle of Austrian Economists like Ludwig Von Mises or Fredrich Hayek: empirical data.

Austrian Economics, unlike most modern economic theories, rejects the principles of empirical induction, preferring, instead, to logically deduce the “laws” of economics from human action. All of this rests on praxeology, nicely defined by a recent article from the Ludwig von Mises institute:

Praxeology rests on the fundamental axiom that individual human beings act, that is, on the primordial fact that individuals engage in conscious actions toward chosen goals. This concept of action contrasts to purely reflexive, or knee-jerk, behavior, which is not directed toward goals. The praxeological method spins out by verbal deduction the logical implications of that primordial fact. In short, praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good.

Essentially, man is a rational actor, his actions matter, but such actions are too subjective to quantify with any supposed insight.

Here’s where Twitter comes in–

Twitter is a platform that allows individuals to express themselves succinctly and, hopefully, accurately. That’s why it can predict the stock market–a twitter update is fundamentally an expression of an individual’s will-what he or she wants to do, will do, or thinks others should. When that data is compiled and properly analyzed it should give a picture of real trends (more than just a hash-tag) that reveal how people are acting en mass.

If we can predict how individuals will most likely act then we might be able to predict fluctuations in the overall economy based on those rational decisions at the individual level. Each individual matters, but when we look at an aggregate of mankind’s thoughts, motivations, and actions we can begin to see how data can serve many purposes. If we earnestly believe that the greatest predictor of economic trends is the actions of one individual then we have affirmed praxeology and Austrian Economics more generally.

The realities of predicting the stock market with Twitter show that markets are directed by the actions of rational individuals throughout society (expressing their will via social media) , not the planned or directed actions produced by governments. From here it’s fairly simple to conclude that centrally planned economies will never work. If the individual is the vital cornerstone of an economy then by allowing economic liberties that promote free market capitalism you are allowing individuals to have true agency in rationalizing their economic choices, a freedom every individual should enjoy.

Thanks Twitter.

Love,

The Free Market