• Trading Strategies
  • Analyzing the AAII Sentiment Survey Without Hindsight

    by Charles Rotblut, CFA

    A common pitfall of examining historical data for clues of predictive value is hindsight bias.

    Hindsight bias occurs when a person believes the outcome of an event was predictable in the past. In the world of investing, we commonly see this when someone claims they knew they should have bought a certain stock while it was in the early stages of a big run or when they say they knew it was time to get out of the market before a big downturn occurred.

    Hindsight bias is related to the human tendency to see patterns in how events play out. Early man learned to identify various patterns as part of his survival instinct. Learning the migration habits of animals helped to hunt. Similarly, learning seasonal weather patterns allowed our ancestors to transition from being nomads to becoming farmers.

    The problem with our tendency to recognize patterns is its effect on how we view both random events and events whose outcomes were not so obvious at some prior point. We naturally default to assuming a known data point, statistic or outcome can be used to analyze historical data. This assumption ignores the possibility of the data point or statistic evolving over time. It also ignores the possibility of a different outcome having occurred if the data was viewed differently at some point in the past.

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    Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


    Jim from CO posted over 2 years ago:

    Sadly, Mr. Rotblut, your conclusion is that the AAII Sentiment Survey is useless. Therefore, I will stop casting my opinion and assume AAII will soon drop this opinion poll as well, so as not to falsely encourage anyone that may be using the results in their investment decision making process.

    Charles Rotblut from IL posted over 2 years ago:

    Hi Jim,

    Near the end of the article, I wrote: "The AAII Sentiment Survey may work better as a prompt to determine whether a buying, selling or rebalancing opportunity exists than as an actual market timing indicator."

    It's not that I think sentiment is a useless indicator, but rather I that don't think investors should buy or sell stocks merely because sentiment is high or low. If you the readings reaching unusually high or low levels, look at other indicators (fundamentals, technicals, allocations or a combination, depending on your investing style) to assess whether you want to alter your allocation to stocks.


    Nathan Busch from MN posted over 2 years ago:

    Jim from CO:

    Sentiment and market performance is not always black and white. I read Mr. Rotblut to say that nuances and subtleties exist that allow ferreting out the future performance of the market based upon the sentiment survey if one is patient enough to think through what the numbers mean.

    Nathan A. Busch

    George from WY posted over 2 years ago:

    In my experience over the past several years, it appears as though the survey sentiment is significantly influenced by market direction at the time the respondents are submitting their weekly surveys.
    If the markets are going up, the bullishness is stronger. If markets are declining, then bearishness is stronger. If the markets are trading in a narrow range neutral sentiment seems to increase.

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