Artificial Intelligence and Investing

Artificial Intelligence (AI) is invading our lives everyday.  Often you aren’t aware of it but its there all around us.  Computers making decisions isn’t anything new.  The basics of “if then else” logic among programming constructs allows a computer to make a decision based on inputs.

When it becomes “magical” is when the complexity of that decision making begins to go beyond the simple algorithm or software application and begins to “think” in certain ways.  Gamers will be very familiar with this concept as they play against the “AI” in their games.

AI is now invading the world of investing.  A recent article in Bloomberg details the work of Junsuke Senoguchi who has built an AI that predicts the direction of the Nikkei 225.  His AI has been scary right about 70% of the time.

The article also points out the growing use of AI in finance including robo-advice:

Algorithms have invaded global share markets, used by everyone from high-frequency traders closing bets in fractions of a second, to specialist asset managers whose strategies are determined by complex quantitative analysis. Medallion, the fund created by James Simons at quant-trading pioneer Renaissance Technologies, averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014. There’s also the growing field known as robo-advice, which uses algorithms to suggest investments based on clients’ goals and risk tolerances.

These AI are able to analyze and process large amounts of data and apply decision making logic on the impact on markets and funds.  Leading the way is Vanguard’s Personal Advisor Services which manages billions in investments.

Another venture funded advisor service is Betterment which also has billions being managed and was started with the focus of AI guiding the investor.   You can read The Street’s ranking of top 10 robo-advisors to find out about others.

So why the push and interest in AI for investing?  Certainly the idea of having better returns is attractive.  If you can get 70% returns using a robo-advisor which is outperforming a human, why not – right?  The other benefit is robo-advisors don’t have to be paid.  Fund management fees can be up to 1%.  With AI those fees can come down – the humans are replaced and the quality is improved.

The conundrum of automation through AI and robotics is its a double edged sword.  You can lower costs and improve quality and increase productivity but typically at the cost of displacing a worker.  In this case you need the worker who is making money to invest.

For investing you have to wonder if all these AIs doing analysis at some point don’t start to have their predictions become self fulfilling prophecies.  Its not hard to imagine somewhere down the road where there are perhaps a dozen heavily invested robo-advisors that are making market calls that then actually impact the market directly versus just predicting it.

Interesting times are coming…

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