humit - The social music sharing and discovery app | Product Hunt

We all like to think our decisions are based on rationale and facts, but we know they are often driven by feelings, too. When we splurge on nice food, clothes, or electronic gadgets, are we really thinking in terms of cost and advantage, or are we retorting to stress, frustration, happiness, or excitement? But do these emotions affect the stock market?

In an attempt to study a variable, emotions, that cannot be measured, Dr. Alex Edmans of London Business School and three co-authors, instead of studying a variable that affects mood, sought one that reflects the mood. “While emotions are unobservable, they translate into observable actions. But most actions (e.g. aggressive behavior/language) aren’t captured in any dataset. We thus use music streaming as a proxy for mood.”

Music is chosen based on prior research and evidence that prove people’s streaming choices reflect their emotional state, rather than neutralize their emotions (such as sad songs at funerals and happy songs at parties). Music choices capture people’s moods, regardless of what caused the mood.

In the age of streaming giants like Spotify, measuring people’s moods and linking them to the financial market has become more than possible. Spotify provides aggregated listening data across a country, as well as an algorithm that classifies the positivity or negativity of each song. Using these inputs, a “music sentiment” was calculated — a measure of a country’s sentiment as expressed by the positivity of the songs its citizens listen to. The researchers then compared that data with the performance of each country’s national stock market over the same period. They wanted to see if there was a correlation between mood, as reflected by the music played, and financial returns. 500 billion streams of over 58000 songs were analyzed, and it was discovered that more positive-sounding music led to stock price gains in all the 40 countries covered in the study. When people listened to happy music, the market outperformed.

Linking the sentiment measure with the stock markets, it was found that higher music sentiment is associated with higher returns to a country’s stock market during the same week. It also leads to lower returns the next week, suggesting the initial reaction was a temporary one driven by sentiment. we also find high music sentiment is associated with greater purchases of equity mutual funds. High music sentiment is also correlated with lower returns to government bonds, indicating that investors switch out of safe bonds into risky stocks.

These findings infer that the stock market is affected by emotions, rather than fundamentals. It provides evidence that your frame of mind influences your choice of investment and hence returns. Moreover, this study demonstrates the power of big data to reveal the global average ongoing sentiment. Unlike sporting events, which are sporadic, music is enjoyed around the globe all the time. Music enables us to construct a relative measure of people’s sentiments, in real-time, around the world, and is, indeed, a universal language.