# Using Social Media & Sentiment Analysis to Make Investment Decisions
## 2 Literature Review
### Public Sentiment and Stock Market Performance  
Firstly, to understand how investment decisions can be calculated using SM sentiment, this paper will investigate the relationship between public sentiment and stock market performance. As previous psychological research has shown, human emotions do effect decision making [7; 8]. Furthermore, this can be seen specifically in financial decision making [9] where psychologically enigmatic concepts such as the \"gut feeling\" have been better understood using neurobiology.  
Previous research has proven the correlation between public mood and stock market performance. Interestingly, [PERSON] [7] demonstrates that the relationship between stock market and public sentiment can be weaker when you do not take inflation into account.  
This is further explained in Figure 1, which compares a nominal measurement of the S&P 500 (depicted in blue) and the Bloomberg Consumer Comfort Index (depicted in red). In this illustration the two measurements start to differ around 2003 and are very different by 2012. However, further research by [PERSON]--as depicted in Figure 2--shows that if we deflate the value of the S&P 500 by the price of gold, we end up with a very similar result for each measurement. It's important to note that by dividing the nominal market value by the price of gold you are negating the \"extreme actions of monetary policymakers\" [7] which gives us a more accurate representation of the actual market price. Once applying this rule, we can clearly see that public sentiment closely maps the performance of the stock market.  
As it is evident that there appears to be a strong relationship between the value of the stock market and public sentiment, it is not so far-fetched to suggest that public mood could potentially influence the performance of it. This is reinforced by [PERSON] et al. [10], who argues that investor confidence is one of the main motives behind an individual's decision to buy or sell a stock, and this confidence is determined from the views and emotions of other people. [PERSON] et al., [11] agrees saying, \"we find that the change of stock prices can be predicted by the public opinion\". Figure 2 also illustrates that the consumer comfort measurement predicted rises in the S&P 500 in certain years such as 1994 to 1997. However, it's important to understand that public sentiment is not the only driving factor behind market performance and other implications such as politics, natural disasters and economics also play a role [10]. In contrast, [PERSON]. [6] quotes [PERSON]--a historic stock market investor--who stated, \"Facts only account for 10% of the reactions on the stock market; everything else is psychology\". So, although research suggests that public sentiment may not be the only factor affecting stock market performance, there's certainly enough evidence to support a strong relationship between the two. Therefore, we can justify further investigation into the concept of using public sentiment to help make investment decisions.  
Figure 1: The Bloomberg Consumer Comfort Index versus the S&P 500 (in nominal terms), 1992–2012, [7].  
Figure 2: The Bloomberg Consumer Comfort Index versus the S&P 500 (deflated by gold), 1992–2012, [7].