AI is already widely used in investment markets,and we’ve now seen all forms of ‘algorithmic trading’ used by large-scale hedge funds and specialist fund managers. In fact, there are estimates that algorithmic trading accounts for more than 60 per cent of trading in US equity markets alone.
Despite this trend, there’s still a lot of ‘grey area’ when it comes to whether it ‘outperforms’ human decision making.
Data, drunkenness and investment bias
The primary benefit of relying on AI for investment or decision-making is that the trade is executed, literally, within a nanosecond of the price-sensitive information being released. This is something that a human simply cannot do. Apart from the reaction time, humans have toilet breaks, long lunches and sick days. The algorithm, on the other hand, does not.
There are other advantages that an algorithm, or an investing robot or “bot”, has over humans. A robot governed by an algorithm shows no emotional bias. Most humans, when making trading and investment decisions, are driven by emotions like fear, greed, and prejudice.
In fact, a recent survey found that 66% of investors have regretted an impulsive or emotionally charged investing decision. Alarmingly, 32% admit trading while intoxicated.
Investment decisions and the ‘long game’
Does algorithmic trading have relevance to investment decisions, as opposed to trading decisions? Evidence suggests that many of the features and benefits of AI inherent in algorithmic, high-frequency trading are relevant to investment decision-making.
Some key benefits of ‘robots’ being used in investment decisions include the elimination of emotional conflicts, speed of execution, and the ability to analyse and assimilate vast amounts of investment-related data quickly and objectively.
These data points can include macro-economic statistics like inflation, interest rates, employment numbers, commodity price movements, currency and lead indicators of GDP like consumer confidence surveys and job advertisements. All of these factors impact share price movements in the short-term, as well as the medium- and long-term.
That being said, investment decisions have a longer time horizon and may have different objectives when taking certain factors into account, such as taxation treatment, liquidity needs, capital security and regulatory matters. In other words, investment decisions are typically based on qualitative factors while trading decisions rely more on quantitative analysis.
So, the answer to AI being ‘better at humans’ when it comes to investing in the long term, is not as clear cut as share trading, where AI is already firmly entrenched.
Augmented intelligence and the future of investing
Perhaps if not artificial intelligence, then augmented intelligence, is the future role of algorithms in investment decision-making.
In this way, a degree of collaboration between artificial intelligence and human intelligence, without replacing human intelligence, may very well be the way of the future when it comes to scaling effective investment decision-making. As the saying goes, “Money never sleeps”.
Michael Kodari, CEO of KOSEC - Kodari Securities
Michael Kodari is the Founder and CEO of Kodari Securities (KOSEC), a leading provider of investment services to a substantial and diversified client base, including corporations and ultra high net worth individuals. With over a decade of experience in funds management and stockbroking, Michael has worked with some of the world’s leading value investors and financial institutions. A philanthropist and a prominent expert in the stock market, CNBC Asia has referred to him as “the brightest 21st century entrepreneur in wealth management”.
About KOSEC
KOSEC – Kodari Securities is a leading provider of investment services to a substantial and diversified client base, including corporations and ultra-high net worth individuals. Established in 2010, KOSEC exists to empower and equip investors with the best investment opportunities, knowledge, tools and resources, as well as providing the highest level of product/service offering to help them make better and more informed investment decisions.
Find out more at https://www.kosec.com.au/