Bridge over ocean
1 September 1988 Financial Analysts Journal Volume 44, Issue 5

How Useful is the Sentiment Index?

  1. Michael E. Solt
  2. Meir Statman, PhD

The Bearish Sentiment Index—the ratio of the number of investment advisers who are bearish to the total number of advisers who are either bearish or bullish—is promoted as a contrary indicator. That is, one should buy when investment advisers are bearish and sell when they are bullish. But is the Bearish Sentiment Index useful?

Examination of the data from January 1963 (when the index was first compiled) to September 1985 indicates that the index is useless as an indicator of forthcoming stock price changes. The number of correct forecasts by the index is equaled by the number of incorrect forecasts.

If the Bearish Sentiment Index is useless, why do people continue to usè it? The persistence of the belief in the usefulness of the index results from errors in cognition that lead people to see patterns in random data and to neglect evidence that runs counter to their beliefs.

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