Working Paper: NBER ID: w17298
Authors: Christopher Avery; Judith A. Chevalier; Richard J. Zeckhauser
Abstract: We study the predictive power of approximately 2.5 million stock picks submitted by individual users to the "CAPS" website run by the Motley Fool company (www.caps.fool.com). These picks prove to be surprisingly informative about future stock prices. Indeed, a strategy of shorting stocks with a disproportionate number of negative picks on the site and buying stocks with a disproportionate number of positive picks produces a return of over nine percent per annum over the sample period. These results are mostly driven by the fact that negative picks on the site strongly predict future stock price declines; positive picks on the site produce returns that are statistically indistinguishable from the market. A Fama French decomposition suggests that these results are largely due to stock-picking rather than style factors or market timing.
Keywords: stock market; predictions; crowdsourcing; individual investors
JEL Codes: G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative picks (G41) | future stock price declines (G17) |
| positive picks (G11) | returns statistically indistinguishable from the market (G19) |
| shorting negative picks and buying positive picks (G11) | annual return over nine percent (G12) |
| negative picks (G41) | excess returns attributed to stock-picking (G11) |
| market timing or style factors (G14) | excess returns from negative picks (G11) |