Can web traffic predict the behavior of trading markets? Yes, says Investopedia CEO David Siegel, who says his team's "Investopedia Anxiety Index" can actually predict impending spikes in market volatility.
The index, based on data from nearly 1 billion page views, gauges investor anxiety based on the number of Investopedia readers searching for 12 specific fear-based terms, such as "default," "bankruptcy," "short selling" and "inflation." Siegel and his team have found that when the number of searches on Investopedia for these terms grows, the VIX index tends to increase, several days later.
With more than 30 million monthly readers, Investopedia's readership encompasses a significant proportion of people participating in the global markets—so it's not too much of a stretch to assume what Investopedia readers care about might also be what the market cares about.
Recently, ETF.com sat down with Siegel at the Collision conference in New Orleans to learn more about how the Investopedia Anxiety Index works. A lightly edited transcript of the conversation follows.
ETF.com: When did you first notice that there was a connection between market volatility and your web traffic?
David Siegel: It was on Aug. 24, 2015, when the market went down about 1,000 points, the “flash crash.” I'm sitting in my office, thinking, "Oooooh, ****; this is terrible." Then our head of marketing runs into my office. He says, "The craziest thing's happening right now: Our short-selling tutorial is up, like, 1,000%. Tons of people are reading about short selling at the exact moment the market is down." I thought, "Wow, that's cool."
So we had our data scientists look into what kind of content would be indicative of having an "anxious" market: search terms like "short selling" or "correction" or "bankruptcy." We figured, with 30 million people on our site a month, if suddenly hundreds of thousands of people start looking up "bankruptcy," then weird stuff is happening, generally.
We plotted this anxiety index and found huge spikes around the Lehman Brothers collapse, the Greek bailout and so on. Then we looked at the VIX. We found that whenever the anxiety index peaks, the VIX peaked a few days later.
ETF.com: But why would it lead the VIX, specifically?
Siegel: When there was a big peak in the anxiety index, that meant people were educating themselves, doing research—and as you know, research and education happen before taking action. And if people are looking things up on Investopedia, they're more serious about taking action than if they're just Googling.
ETF.com: To what extent does Investopedia being a crowd-sourced publication influence your capability to track this kind of market anxiety?
Siegel: Completely. So, you've heard the study about people predicting the number of jelly beans in a jar, right? They asked 1,000 people how many jelly beans were in this jar, and they repeated the test multiple times. The study found that if you took the average answer, it would consistently come to within 5% of the actual number of jelly beans.
Well, our content isn’t crowdsourced (we have a large editorial team with finance and investing expertise), but you could say our data is crowdsourced, because ultimately it’s our users seeking and reading our content that creates our data points.
I think that speaks to the power of crowdsourcing. Crowdsourcing gives you a very high "N" [number of data points]. And that high N takes out the extremes, if you use a median.
ETF.com: So you can start applying statistics to people's opinions.
Siegel: Yes. We also believe people's opinions in finance generally result in them taking some type of an action. The whole purpose of finance is to make money or to save money; it's a very action-oriented type field we're all in.
There's also this herd mentality in finance, meaning once certain people or influencers start taking an action, it feeds on itself. You'll see an even longer tail to those actions, because people look at what other people are doing and start copying them.
The reason it works so well here is because, at Investopedia, the action you're taking is one of education; and we have a highly intent-driven audience. They're not just browsing. It's like, "My intent is to learn about how to trade bonds," or "My intent is to learn how to trade options."
ETF.com: At what point, though, does measuring this change the outcome? Your readers are aware of this index, after all.
Siege: Well, to what extent would knowing there’s some kind of an anxiety index change your level of interest in looking up something about, say, "bankruptcy"? Personally I don't think the average American is thinking to themselves, "Oh, I want to play games with this thing."
ETF.com: No, but being able to see a chart that says investor anxiety is going up around "bonds" might make you think, "Well, maybe I should be worried about bonds, too."
Siegel: I just thought of a great way to improve the anxiety index based on what you just said. We should exclude any visits to terms that come after visiting the anxiety index.
ETF.com: Are these anxiety-related terms the most sought-after terms on your site?
Siegel: No. The No. 1 term on our site is P/E ratio [price-earnings]. Think about it! It's on every single quote page and no one knows what it means.
CAPM [capital asset pricing model] is the next one, because we have lots of students who want to understand what the capital pricing model is. But Nos. 3, 4 and 5 tend to change dramatically, depending on the states and the cities you're in.
ETF.com: How so?
Siegel: Well, "401(k)" is extremely low in Canada; they don't have 401(k)s. They have RRSPs. And "options" are super high in Chicago.
Every year, we publish something on the top-most-looked-up terms on Investopedia; not a surprise, the top 2017 term was "bitcoin." Big shocker there. Two? "FANG"; that makes sense, too. Next was "ICO" [initial coin offer]. "Trumpcare." "Artificial Intelligence."
ETF.com: Doesn't knowing too much about finance just make investors, well, anxious?
Siegel: No. I'm a huge believer in solving the problems around financial literacy. The U.S. is ranked 14th out of 20 in financial literacy. We're the wealthiest country and one of the least financially literate. In fact, recently, we took a bus all around America just to teach people about financial literacy.
ETF.com: Tell me more about that.
Siegel: It was actually Justin Bieber's former bus! We went to the Chicago Marathon in our giant Investopedia bus. "After taking care of your health," we said, "take care of your wealth."
We had all these certified financial advisors on hand to meet with people and to give them advice on how to take care of their wealth. We met with about 10,000 people. And we went to Indianapolis, Bloomington, Indiana, Kansas City and Chicago.
Our core mission is to empower people to make smarter financial decisions. It's something I care really passionately about, and that's why I love being the CEO of Investopedia. We're not curing cancer at Investopedia. But I really do want to make the world a better place.
ETF.com: How does financial literacy do that?
Siegel: For example, the No. 2 cause for divorce after infidelity is money. And students have $1.4 trillion in debt, which causes them to pursue careers that don't necessarily optimize their personal happiness. So if greater financial knowledge can cause better marriages, if it can help people make better decisions about their professions, then yes, I wake up in the morning like a lion jumping out of bed, because we can actually do great things for people. That's very meaningful for me. I really do think it can change the world.
Contact Lara Crigger at [email protected]