In today’s times, Machine Learning is a technology which is being used in more industrial domains than ever before. One of the primary uses of Machine Learning is to predict the future using the existing data. The biggest industry involving predicting the future is the Stock Market Industry and naturally, Stock Market Brokers are incorporating Machine Learning into their decision making the process. Organisations like Goldman Sachs, JPMorgan Chase, and Barclays Investment Bank are already using Machine Learning to make a significant part of their of their decisions.
But this automation of decision making may have given birth to an interesting and possibly problematic new correlation effect which is being called as the ‘Hathaway effect’.
The concept was coined by blogger Dan Mirivish when he first spotted a rather strange pattern between Warren Buffet’s conglomerate Berkshire Hathaway’s(BRK) share prices and Hollywood actress Anne Hathaway’s career milestones. This is a strange correlation because apart from their nationalities and a subset of their names, These two ‘entities’ do not have anything in common.
Here is the observed pattern:-
September 26, 2008 – ‘Passengers’ opens: BRK up 1.43%
October 3, 2008 – ‘Rachel Getting Married Opens’: BRK up 0.44%
January 5, 2009 – ‘Bride Wars opens’: BRK up 2.61%
February 8, 2010 – ‘Valentine’s Day’ opens: BRK up 1.01%
March 5, 2010 – ‘Alice in Wonderland’ opens: BRK up 0.74%
November 24, 2010 – ‘Love and Other Drugs’ opens: BRK up 1.62%
November 29, 2010 – Anne Hathaway announced as co-host of the 83rd Academy Awards: BRK up 0.25%
February 28, 2011 – Anne Hathaway co-hosts the 83rd Academy Awards: BRK up 2.94%
According to the blogger, this is no coincidence. According to him, there is an underlying limitation to automated analysis and decision making. He explains that today, many investment companies use Machine Learning for the process of analyzing the current stock market. Their main source of information is the online news articles about their subject of study. The software then applies Sentiment Analysis on the news to determine whether the news is positive or negative and accordingly estimates the future of the share prices of the subject company.
Dan believes that while estimating the share prices for Berkshire Hathaway, the web crawler accidentally also picks up news articles about Anne Hathaway and thus predicted a rise in the share prices of Berkshire Hathaway. Since the information is about the future, people tried to buy the shares expecting a rise in the share prices. This led to an increased demand for the shares and thus increasing the share prices in reality.
This theory, though logical and believable has been debated upon for quite a while now with the primary speakers being Stock market experts, Statisticians and Computer Engineers.
1. Stock Market Experts: They believe that since the market has been on the rise since 2009, such a statement could be said for practically any company in the market and the main reasons behind the rise are Economic.
2. Statisticians: They believe that above-presented observations are merely some statistical anomalies and going by such an approach, one can find a correlation between two logically independent entities.
3. Computer Engineers: They believe that the theory could be true because there have been many instances where the web crawler has picked up some irrelevant news and the predictions based on that have still come to be true.
The above theory has not yet been fully proved or disproved and if more instances like this keep on happening, the debate will only grow larger and louder.