“The most important general-purpose technology of our era is artificial intelligence, particularly machine learning (ML) — that is, the machine’s ability to keep improving its performance without humans having to explain exactly how to accomplish all the tasks it’s given. Within just the past few years machine learning has become far more effective and widely available. We can now build systems that learn how to perform tasks on their own.” – Brynjolfsson and McAfee (2017)
Personally, I am also fascinated by ML. Developments such as learning machines to beat the world’s best chess players, learning machines how to drive by themselves and learning machines to cook proper meals made me fantasize AI’s about possibilities.
If machines can be educated to become that smart, are they also able to invest money in the stock market? I am pretty certain they can, but can they earn better returns in contrast to professional managers? If they can, will they replace hedge fund managers in the future? In this blog post, I will evaluate how AI can be used in investments.
Tremendous amounts of research have been conducted in the area of investments. Some believe in technical analysis, some believe in company fundamentals and others analyse macro-environments. Analysing all this data requires great cognitive capabilities. Too great, even for the most cognitively gifted humans. This is where AI and ML can step in.
Machine learning involves deep-learning. Which makes machines able to handle enormous amounts of big data. Humans are simply unable to process such large amounts of data. Consequently, machines can use and handle significantly more data than a human investor can.
However, does this really mean that AI can outperform a human investor? The stock market is characterised by human greed, stupidity and emotion (Johnson, 2017). Therefore, using all available data in the world is no guarantee for good investment returns.
Then, is there no way for AI to be of use in investing? I think there is. The power of AI lies with the ability to learn everything and processing vast amounts of data (Dassori, 2017). AI in investments is a relatively new technique, and innovations can always provide a slight advantage over the competition. Professional investment firms also see this benefit, and invest rapidly in AI innovations.
In my opinion, having a machine advise you in trading, explaining you the rationale behind possible investments and help you to evaluate the effects of macro-economic events on your investments can be of serious aid. Nevertheless, for now, you should be in charge.
One last thought to take into consideration.. Even if robots that have been taught to invest can earn significantly higher risk adjusted returns compared against professional human investors, an ethical dilemma remains: would you fully trust a machine to invest your savings?
References
- Brynjolfsson, E. & McAfee, A, 2017. “The business of Artificial Intelligence”.
- Dassori, 2017. “Artificial intelligence for investing” Retrieved from: https://blogs.cfainstitute.org/investor/2017/05/31/artificial-intelligence-for-investing/
- Johnson, M, 2017. “When it comes to investing, human stupidity beats AI”. The Financial Times. Retrieved from: https://www.ft.com/content/244d8d60-1df9-11e7-b7d3-163f5a7f229c
Nice post you made. I definitely agree with you that AI is going to be an influence in the investment sector.
However, I would like to address your last question of the post “would you fully trust a machine to invest your savings?”
Banks offer packages where they will invest your money so you do not have to worry about it. In fact, they don’t really how their savings are invested and why their banker invests in specific funds. So do you think that the technology behind ‘I’m not sure what happens with my money’ is going to change that on an ethical side? What about people that are giving it more trust because the decisions are going to be based on larger amount of data then their banker is ever going to be able to understand, so the decisions should be even better?
Hey Fedde, thank you for your interesting post! I was just wondering how you see AI taking over the stock market. I mean what if all investors in the stock market were replaced by Ai? Wouldn’t that lead to (almost) zero profits since all traders (AI) can predict what the others do and therefore neutralize each others effects? What do you think?
Hi Isabelle,
Thanks for your comment!
Good point, if markets are efficient and everyone uses AI to invest in the stock market, then additional profits should approach zero, as there are no real competitive advantages to it anymore!
AI in wealth management is actually a very interesting topic due to the low costs it needs to manage a portfolio. Numerous companies are working with this idea by spreading out their investments, and just riding the market over a few diverse industries. I definitely think robo-wealth management will continue to grow, as it already has in the past few years due to the low fees it asks to manage money.
Interesting topic. Completely transiting the power to invest to a machine already happens (i.e. high-frequency trading). However, I agree with you, with the current technology humans should still be in control. I cannot see this change in the near future, as little as one trade can have disastrous consequences. However, in the current state AI can (and should) be used as an important determent in investments, as it is perfect to eliminate the human risk factors (i.e. disposition effect, familiarity bias etc.).
Overall, good article and great topic! Thank you!