“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
