You wake up to your morning Joe, which your coffee machine brews just the way you like it because it has learned your tastes, even when they change. Alexa greets you and before you can even ask about the weather, she says her parent company Amazon.com (Nasdaq: AMZN) is going to release its quarterly earnings report. “Based on your investment style and market trends, I would suggest allocating $10,000 to a stock purchase,” Alexa says. “Would you like me to make that transaction?”
Far-fetched? It may sound that way but experts maintain it isn’t. That’s because artificial intelligence — also known by its initials, AI — promises to be the financial sector’s runaway hot topic for 2018. Already, early AI has a secure foothold among investors that’s beyond debate.
“In five years, AI will revolutionize all aspects of our financial lives,” says Larry Miles, principal at AdvicePeriod, a web-based wealth management platform. “For example, AI will advise us not only how to invest our money, but when and how to save our money versus paying down debt such as student loans.”
How does AI work in investment? Two of its most crucial elements rest on data. The first is big data, which is composed of reams and reams of numerical information that would take a human years to collect and organize.
[See: Artificial Intelligence Stocks: 10 Companies Betting on AI.]
The second element, data analytics, takes the organized numbers (sometimes referred to a “clean” data) and generates meaningful insights that can guide current and future actions. AI also incorporates an attribute known as machine learning, where the computer can improve its performance over time as it corrects and refines its previous actions — often based on external factors such as changes in market conditions.
This also incorporates the likes of Alexa and Apple’s ( AAPL) Siri, which are known as “chatbots” — literally, computer programs you can chat with. As AI progresses, interactive conversations with chatbots could help guide investment decisions, even as computers “learn” how we think, act and best succeed.
Here’s what that looks like so far: “Merrill Lynch is experimenting with an AI stock-picking tool to help it identify value in small-cap stocks that conventional analysts might have missed,” says Bill Studebaker, president & CIO of ROBO Global, creator of a benchmark index to track the global robotics and automation industry.
And here’s why the machine learning aspect matters: “Quant investment ideas are starting to have shorter expiration dates as trading signals get arbitraged away,” Studebaker says. In light of this, “BlackRock ( BLK) is steering its quant research toward machine learning and exploiting social media and web search information.”
But not everyone in the investment and trading sector sees AI as a portfolio panacea.
Following the financial crisis of 2008, “mathematicians and computer science people told the finance people that mathematics and computers could do what the financial professionals were looking for, and the finance industry bought it,” says Darren M. Fischer, head recruiter with Maverick Trading and lead author of the book “Maverick Trading: Professional Techniques to Create Generational Wealth.”
Fischer sees today’s AI as a natural progression from algorithms and trading bots. Still he believes the practice of AI does not make perfect.
[See: Are Quant ETFs Worth Buying?]
“Algorithms work, and work well — until they don’t,” he says. “When they blow up, they blow up spectacularly.”
Then there arises the question of when intelligent machines that learn will decide they’re smarter than their human creators. On a more benign level, it’s been posited that computers will get cocky and tweak or even ignore your investment portfolio plans. Then it will do what it thinks or “knows” is best — though for out-of-control market timing junkies, this could be a very good thing.
As for the billionaires in the crowd, two very smart ones imagine AI scenarios that go a step further — much further. Mark Cuban predicts that, on the one hand, the AI sector will produce the world’s first trillionaire. On the other, he’s said that AI’s mastery of humans, or the prospect of such, “scares the [daylights] out of me.” And Tesla ( TSLA) co-founder Elon Musk, a font of futuristic plans, believes AI represents “our biggest existential threat” and that we are “summoning a demon.”
But a third billionaire, Mark Zuckerberg of Facebook ( F), has a much sunnier disposition. He’s called Musk’s forecasts “pretty irresponsible” and sees a future of good in AI that will make people’s lives easier. Musk has responded, in essence, that Zuck doesn’t know what he’s talking about. Perhaps an AI-activated referee needs to mediate their public debate.
Meanwhile, hold off on any premature oaths of allegiance to our machine masters. In the end — and it’s not the end of the world by any stretch — AI can only do what its human programmers and users design it to do. We can decide in advance to mold investment tech into our very best helpers: faithful digital marvels that shun coffee breaks, don’t whine by the water cooler or push for promotions, while flesh-and-blood investment professionals call the shots.
“Active management will have a resurgence, because of AI,” says Steven Miyao, head of DST Research, Analytics and Consulting.
“We will see a tremendous amount of innovation in acquiring and processing large data sets that will help portfolio managers get a competitive advantage over traditional portfolio managers,” Miyao says. “Every active portfolio, defined as dynamic and not static investment model, will utilize AI to at least help them make more informed decisions.”
[See: 7 Stocks That Will Ruin Your Portfolio.]
And if Alexa dares to disagree, ask her to stick with checking the weather.
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How AI and Investing Are Merging originally appeared on usnews.com
