Prediction is very difficult, especially about the future.
~ Neils Bohr (1885-1962), Danish physicist
The purpose of any business intelligence tool or data analysis exercise is to adequately understand the past in order to give some level of understanding of the future. The success rate of predictions based on such data can typically be pretty low, because as the mutual fund industry likes to say, "Past performance is no guarantee of future results." Circumstances change, and the past performance was dependent on the circumstances in effect at that time.
However, if your analysis is on very recent data, it may actually start showing how circumstances are beginning to change and you may have time to react before they change again. Timeliness of data and of analysis becomes key.
The internet has created the possibility of much faster delivery of data on consumer behaviour than traditional company data warehouses permit. Google makes its search engine statistics available for free under the Google Insights For Search banner. A recent study by the Bank of England looks at using Google search volumes to monitor unemployment rates and housing prices. The authors found that both could be inferred quite well by monitoring certain search phrases, providing a much more timely measurement of the economic situation than current indicators do. The difficult part is discovering which phrases to monitor. For instance, searches on the word "unemployed" or on the UK unemployment benefits program ("JSA") tracked the official unemployment rate remarkably well, but searches on "jobs" alone did not correlate. The only way to discover those search terms that are predictive is by trial and error. Further, once you find a phrase that works, there is no way to know how long it will remain predictive, as new terms could emerge in the future that supersede it. While this method of near-real-time economic tracking looks promising, it is not without its challenges.
Another fascinating approach to using the internet to predict the future in near-real-time is www.recordedfuture.com. Like Biff in Back To The Future II, this company seems to admit the true motivation for predicting the future: getting rich! In the movie, Biff finds a record of horse race results from the future and cashes in by betting big. Recorded Future monitors news feeds, databases, publications, and websites and summarizes events on the topic you want (such as a particular company). Based on historic behaviour, its analytic engine tries to predict where the trends are going. The main customers seem to be stock investors who want to know the direction a company's stock will be heading in the coming days and weeks.
For instance, if the analytic engine sees an increase in discussions about a possible dividend increase, it will interpret it as positive sentiment and predict an upward trend. If it sees more talk about missing revenue targets, it will interpret it as negative sentiment and trend things downward. Sometimes lack of activity is also predictive. If two companies in the same industry stop issuing press releases for a couple weeks, could it mean they are in merger talks? It's a fascinating use of the internet and analytics.
The whole thing leads me to ask a couple questions:
1) If Recorded Future's analytic engine is so good, why didn't they keep it to themselves and get rich, like Biff did? If they felt they could make more money selling the IDEA of predicting the future, it suggests the engine is not as precise as one might hope.
2) If many people have access to this predictive power, doesn't it defeat the purpose? Biff got rich because he was the only person with the future horse race results. If everyone had those future results, no one would get rich because they'd all bet on the same horse and reduce the payout odds to nothing. If everyone in the stock market knows at the same time that a stock is going up, it's too late to make money on it. The ability to get rich depends on knowing a stock will go up when everyone else in the market thinks it's going down.
Despite all our progress in the internet age, I still think Neils Bohr's quote at the beginning of this article remains true: Predicting the future is still very difficult.
And if I invent an amazing algorithm to predict the future, you can be sure I'm not telling anybody about it! And if I stop posting on this blog, you can assume I've succeeded with my invention and I'm busy getting rich!
You can just call me Biff.
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