Can machine learning take over the role of investors?
As we dive deeper into the Fourth Industrial Revolution, there is no disputing how technology serves as a catalyst for growth and innovation for many businesses across a range of functions and industries.
But one technology that is steadily gaining prominence across organizations includes machine learning (ML).
In the simplest terms, ML is the science of getting computers to learn and act like humans do without being programmed. It is a form of artificial intelligence (AI) and entails feeding machine data, enabling the computer program to learn autonomously and enhance its accuracy in analyzing data.
The proliferation of technology means AI is now commonplace in our daily lives, with its presence in a panoply of things, such as driverless vehicles, facial recognition devices, and in the customer service industry.
Currently, asset managers are exploring the potential that AI/ML systems can bring to the finance industry; close to 60 percent of managers predict that ML will have a medium-to-large impact across businesses.
ML in finance
ML’s ability to analyze large data sets and continuously ‘self-develop’ through trial and error translates to increased speed and better performance in data analysis for financial firms.
For instance, according to the Harvard Business Review, ML can spot potentially outperforming equities by identifying new patterns in existing data sets and examine the collected responses of CEOs in quarterly earnings calls of the S&P 500 companies for the past 20 years.
Following this, ML can then formulate a review of good and bad stocks, thus providing organizations with valuable insights to drive important business decisions. This data also paves the way for the system to assess the trustworthiness of forecasts from specific company leaders and compare the performance of competitors in the industry.
Besides that, ML also has the capacity to analyze various forms of data, including sound and images. In the past, such formats of information were challenging for computers to analyze, but today’s ML algorithms can process images faster and better than humans.
For example, analysts use GPS locations from mobile devices to pattern foot traffic at retail hubs or refer to the point of sale data to trace revenues during major holiday seasons. Hence, data analysts can leverage on this technological advancement to identify trends and new areas for investment.
It is evident that ML is full of potential, but it still has some big shoes to fil if it were to replace the role of an investor.
Nishant Kumar aptly explained this in Bloomberg, “Financial data is very noisy, markets are not stationary and powerful tools require deep understanding and talent that’s hard to get. One quantitative analyst, or quant, estimates the failure rate in live tests at about 90 percent. Man AHL, a quant unit of Man Group, needed three years of work to gain enough confidence in a machine-learning strategy to devote client money to it. It later extended its use to four of its main money pools.”
In other words, human talent and supervision are still essential to developing the right algorithm and in exercising sound investment judgment. After all, the purpose of a machine is to automate repetitive tasks. In this context, ML may seek out correlations of data without understanding their underlying rationale.
One ML expert said, his team spends days evaluating if patterns by ML are sensible, predictive, consistent, and additive. Even if a pattern falls in line with all four criteria, it may not bear much significance in supporting profitable investment decisions.
The bottom line is ML can streamline data analysis steps, but it cannot replace human judgment. Thus, active equity managers should invest in ML systems to remain competitive in this ‘innovate or die‘ era. Financial firms that successfully recruit professionals with the right data skills and sharp investment judgment stands to be at the forefront of the digital economy.
2 December 2022
1 December 2022