Social media has become such a huge part of our lives – even in the stock market.

Johan Bollen, Informatics and Computing professor at the Indiana University discussed his findings on the connection between social media and the Dow Jones Industrial Average recently on CNNMoney.com. He explained that:

• The public’s collective mood on Twitter correlates to fluctuations in the stock market
• The public’s overall anxiety and mood seems to predict the Dow closing values three to four days in advance with 80% accuracy

Although financial services are slow to adopt social media, and especially hesitant to get involved with something they don’t quite understand, there are still a few hedge funds and investment firms embarking on this new idea of predicting the Dow through tweets.

Richard Peterson, managing director of Santa Monica-based MarketPsych, a leader in behavioral finance research and consulting, has tapped into this idea as well. Two days ago, in an interview with The Financial Post he explained that Twitter has become so popular that analysts are able to grab a real-time reflection of popular sentiment. They can see moods around the globe moving up and down.

What does this all really mean? Social media cannot be ignored any longer. We use it to connect with friends and family, find love and friendship, to learn and share, find employment and opportunities, to recruit and hire, for market research and customer service, and now, to predict the stock market.

Do you think it’s possible to predict the Dow through monitoring the public’s sentiment through their tweets? Do you think this idea will catch on?

Tags: finance, Financial Services, Hedge Funds, Investment Banking, Social Media, Social Media Monitoring, Stock Market