Ambiguity bias – Avoiding the unknown. We all exhibit biased behavior – even when we think otherwise. Growing up, most of us are conditioned to distrust the unfamiliar. Think back to a time when you’ve bought a brand name product instead of its generic brand counterpart. It’s highly likely that you paid substantially more for the brand name product. The surprising fact is that many generic brand products are manufactured in the same facility, using the same raw materials, as the brand name product - the only difference is the packaging and the price.
In the finance and capital markets fields, M&A analysts have traditionally relied on vetted sources, such as the Wall Street Journal, to identify potential M&A market chatter. Traditional paradigms, however, have become ineffective in the modern digital age, when unstructured data has grown exponentially. Today, the number of rumors published by low-popularity M&A news sources, such as Twitter, greatly outnumbers that of high-popularity sources. Therefore, it’s possible that M&A analysts’ ambiguity bias is preventing them from ingesting a majority of the informational alpha in M&A market chatter.
The reason why high-popularity sources are believed to have high informational alpha is because of their reach and vetting process. In order to explore the relationship between the popularity of a source and the alpha content of the rumors they disseminate, we will analyze 3,000 M&A rumors that Rumor Hound has captured by crawling 100,000 unique sources. Our analysis will focus on answering the following questions:
If our research findings positively affirm these questions, we can conclude that low-popularity sources contain enough informational alpha to tip the scales in their favor.
Some rumors do not seem to exhibit a significant impact on general market sentiment. These rumors are typically ones that are disseminated by just one or two sources and then fade out. Conversely, some rumors are disseminated by numerous sources, some of which are highly—popular, widespread, and credible. So, before we start our comparative analysis, it is necessary that we define a “significant event.” A significant event is defined as:
The initial step in our research will be to filter our dataset for significant events.
Our aim is to expose some descriptive statistics regarding significant rumor events. Our analysis will include:
We will use these findings to compare the informational alpha content of low and high-popularity sources.
-Randy Pausch, The Last Lecture
The quality of a strategy is only as effective as the factual information and assumptions upon which it is built. In order to devise effective strategies, M&A analysts, bankers, and traders need to be armed with factually-reliable content, at the right time. Given the explosion of unstructured data, it’s becoming increasingly difficult and time-consuming to find reliable data at early timeframes. If low-popularity sources do, in fact, contain informational alpha at earlier timeframes, then M&A professionals can leverage this information to generate alpha more effectively, make smarter adjustments on short positions, mitigate risk exposure, etc. Stay tuned for our research findings and discover if unpopular and inconspicuous M&A news sources contain alpha that you may be missing out on.