How Artificial Intelligence Plays a Huge Role in the Future of Investing
Artificial intelligence is not futuristic.
It is here now providing convenient solutions for us. It’s in self-driving cars, in Amazon’s Alexa, in Apple’s Siri, in chatbots, in Google Translate, in biometrics, and so many more.
It’s not perfect, but it’s improving fast. That’s why more and more industries are investing in artificial intelligence to improve business operations and maximize revenues. The financial market industry is one of them.
The Difference Between Automation and Artificial Intelligence
Automation is doing, while AI is thinking.
It seems like a long time ago when only high net worth individuals could own stock shares over back-and-forth calls with their personal stockbrokers. Nowadays, retail investors can own fractional shares locally and internationally online through stockbrokers’ apps.
All of these won’t be possible without automation — where machines help humans in doing repetitive tasks. No need to go to banks to talk to financial advisors or to set up an account. The process is fully automated. The next step, however, is artificial intelligence — where machines help humans think and make decisions.
How Artificial Intelligence Works
Artificial intelligence is using intelligent computers that mimic how humans think and act based on decisions.
Let’s talk Facebook. How does Facebook know you should be tagged in your friend’s photos? How does Facebook know which interesting ads you need to look at?
Let’s talk Google. How does Google know what you’re searching for with just a few words typed in? How does Gmail know the message should be in the spam folder rather than in your primary inbox? How does Google Translate detect the language just by hearing it?
There are 2 aspects of AI you should know about: machine learning and deep learning.
Machine Learning
Here’s an analogy. The human brain is like a powerful computer. For us to make decisions, we need to gather and process a lot of information first. Our decisions are not always right especially for beginners. We suck at first, obviously. But with deliberate practice, it gets easier and better.
Likewise, by feeding massive data over and over again to the model, it trains itself to think the way humans do. It recognizes trends and patterns, such that it begins to think like us.
This is what makes AI different from automation. In automation, programmers instruct the model what to do so it can repeatedly perform specific tasks. In AI, data scientists feed data to the algorithm continuously to train itself through a trial-and-error process. With more and more real-time data, it will create more accurate decisions.
Deep Learning
Deep learning is a subset of machine learning that involves computer vision and natural language processing. Rather than numbers and texts. information needed for deep learning are images, videos, and audio data.
Artificial Intelligence in Investing
What you’ll find at the core of artificial intelligence is big data. And when it comes to investing, there’s no shortage of data. Aside from the data from financial statements, there are also alternative data that investors have to consider. Some examples are market sentiments through social media, and ESG factors to consider in green investing.
Here are some examples of how artificial intelligence is already being used today to improve our investment returns and experience.
Portfolio Asset Management
Asset managers handle a large amount of pooled investments to beat the market. Each year, asset management companies want to impress their clients by showing high positive returns compared to the index market. With the help of AI, asset managers will make better investment decisions. This is especially true for ESG investing strategy.
One example of asset management companies that continuously innovate their portfolio management system is Amundi Asset Management. They are one of the largest investors in ethical investments. Matthieu Dartiguenave, Amundi’s Senior Project Manager, said: “…we have to come up with new rules as our portfolios grow and as the market changes, and it can be difficult to keep up. So we wanted to use machine learning so that the platform can come up with its own rules and create a more efficient matching process.”
Robo-advisors and Chatbots
Instead of human financial advisors, robo-advisors use AI to optimize their clients’ portfolios according to their needs and goals. Because of this, investors save a lot in commission fees.
One robo-advisor worth mentioning is TD Ameritrade. They are an American stock brokerage firm that has partnered with strong AI companies like Amazon, Apple, and Google. They aim to make digital investing even more convenient and personalized to their customers. Some of their AI tools are:
- Using deep learning to analyze the subject of concern and sentiment from calls between clients and human agents
- Send customized financial educational content through email or suggestions in clients’ dashboards based on their recent clicks and web navigation behavior
- Utilized Alexa, Google Assistant, and Apple CarPlay to help their clients manage their accounts or conduct research anytime and anywhere
AI Trading
Bloomberg, a business hub every investor knows, uses the Alpaca Forecast AI Prediction Matrix to figure out the price patterns in the market. It not only processes past data but also real-time data to make more accurate market predictions. Bloomberg has partnered with AlpacaJapan, a start-up fintech company, to make an app that “uses a cutting-edge deep learning engine to analyse tick data at a speed and volume beyond the ability of the human eye”.
Prices are fluctuating in any financial market because of human emotions, namely fear and greed. The use of AI eliminates this conflict of interest. Before, humans use technical analysis to find patterns in the price data. But through artificial intelligence, we have computers that’ll do the technical analysis for us. Traders can make quicker and more efficient decisions.
I’ve only mentioned the benefits of AI in investing. But there are even more brilliant innovations when it comes to banking, insurance, and cybersecurity. On another tech advancement, blockchain technology is also changing how the financial system works. The future has endless possibilities for the financial industry.
People are striving to perfect these technologies to make the world a better place. With artificial intelligence, humans will free themselves of simple routine tasks to do more creative innovations. AI will produce better products, improve customer experience, eliminate human errors, and generate better results.
Although some cynics say machines will rule over people, I think that’s too much influence from Hollywood sci-fi movies. If there’s one thing we can learn from the COVID-19 pandemic, it’s that human connection is what we will always look for. Machines are just tools to amplify human connection.
It’s not human versus machine. It’s human plus machine.
