{"id":403136,"date":"2022-02-03T17:23:02","date_gmt":"2022-02-03T14:23:02","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/we-found-out-whos-better-at-making-money\/"},"modified":"2022-02-03T17:23:02","modified_gmt":"2022-02-03T14:23:02","slug":"we-found-out-whos-better-at-making-money","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/we-found-out-whos-better-at-making-money\/","title":{"rendered":"#We found out who\u2019s better at making money"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_84 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a2d1349b40d2\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a2d1349b40d2\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/we-found-out-whos-better-at-making-money\/#AIs_financial_forecasts\" >AI\u2019s financial forecasts<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/we-found-out-whos-better-at-making-money\/#Are_humans_better\" >Are humans better?<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong>#We found out who\u2019s better at making money<\/strong>&#8221;<\/p>\n<div>\n                            Artificial intelligence (AI) has now closely matched or even surpassed humans in what were previously considered unattainable areas. These include <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.wired.com\/story\/ai-ruined-chess-now-making-game-beautiful\/\">chess<\/a>, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.science.org\/content\/article\/artificial-intelligence-bests-humans-classic-arcade-games\">arcade games<\/a>, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/googles-go-triumph-is-a-milestone-for-artificial-intelligence-research-53762\">Go<\/a>, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/self-driving-cars-why-we-cant-expect-them-to-be-moral-108299\">self-driving cars<\/a>, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/ai-makes-huge-progress-predicting-how-proteins-fold-one-of-biologys-greatest-challenges-promising-rapid-drug-development-151181\">protein folding<\/a>, and much more. This rapid technological progress has also had a huge impact on the financial services industry. More and more CEOs in the sector declare (explicitly or implicitly) that they run <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.ing.com\/Newsroom\/News\/We-want-to-be-a-tech-company-with-a-banking-license-Ralph-Hamers.htm\">\u201ctechnology companies with a banking license\u201d<\/a>.<\/p>\n<p>There is also a rapid emergence and growth of the financial <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/technology\/\" data-internallinksmanager029f6b8e52c=\"4\" title=\"Technology\" target=\"_blank\" rel=\"noopener\">technology<\/a> industry (fintech), where technology startups <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.forbes.com\/sites\/moorinsights\/2021\/10\/26\/keeping-an-ai-on-fintech-ai-based-use-cases-poised-to-take-financial-services-to-the-next-level\/?sh=2d20c90f4b9f\">increasingly challenge<\/a> established financial institutions in areas such as retail banking, pensions. or personal investments. As such, AI often <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>ears in behind-the-scenes processes such as cybersecurity, anti-money laundering, know-your-client checks, or chatbots.<\/p>\n<p>                <iframe loading=\"lazy\" src=\"https:\/\/fast.wistia.net\/embed\/iframe\/2767e997um?videoFoam=true&amp;autoPlay=true\" title=\"\" allowtransparency=\"true\" frameborder=\"0\" scrolling=\"no\" class=\"wistia_embed\" name=\"wistia_embed\" allowfullscreen=\"\" msallowfullscreen=\"\" width=\"100%\" height=\"100%\"><\/iframe><\/p>\n<p>Among so many successful cases, one seems conspicuously absent: AI making money in financial markets. While simple algorithms are commonly used by traders, machine learning or AI algorithms are far less usual in investment decision-making. But as machine learning is based on analyzing huge data sets and finding patterns in them, and financial markets generating enormous amounts of data, it would seem an obvious match. In a new study, published in the <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/rdcu.be\/ch7Xo\">International Journal of Data Science and Analytics<\/a>, we have shed some light on whether AI is any better than humans at making money.<\/p>\n<p>Some specialist investment companies called <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/corporatefinanceinstitute.com\/resources\/knowledge\/trading-investing\/quant-fund\/\">quant (which stands for \u2018quantitative\u2019) hedge funds<\/a> declare that they employ AI in their investment decision-making process. However, they do not release official performance information. Also, despite some of them managing billions of dollars, they remain niche and small relative to the size of the larger investment industry.<\/p>\n<p>On the other hand, academic research has repeatedly reported highly accurate financial forecasts based on machine learning algorithms. These could in theory translate into highly successful mainstream investment strategies for the financial industry. And yet, that doesn\u2019t seem to be happening.<\/p>\n<p>What is the reason for this discrepancy? Is it entrenched manager culture, or is it something related to practicalities of real-world investing?<\/p>\n<h2><span class=\"ez-toc-section\" id=\"AIs_financial_forecasts\"><\/span>AI\u2019s financial forecasts<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>We analyzed 27 peer-reviewed studies by academic researchers published between 2000 and 2018. These describe <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/link.springer.com\/article\/10.1007\/s41060-021-00245-5\">different kinds of stock market forecasting experiments<\/a> using machine learning algorithms. We wanted to determine whether these forecasting techniques could be replicated in the real world.<\/p>\n<p>Our im<a href=\"https:\/\/buradabiliyorum.com\/en\/category\/social-mediaa\/\" data-internallinksmanager029f6b8e52c=\"1\" title=\"Social Media\" target=\"_blank\" rel=\"noopener\">media<\/a>te observation was that most of the experiments ran multiple versions (in extreme cases, up to hundreds) of their investment model in parallel. In almost all the cases, the authors presented their highest-performing model as the primary product of their experiment \u2013 meaning the best result was cherry-picked and all the sub-optimal results were ignored. This approach would not work in real-world investment management, where any given strategy can be executed only once, and its result is unambiguous profit or loss \u2013 there is no undoing of results.<\/p>\n<p>Running multiple variants, and then presenting the most successful one as representative, would be misleading in the finance sector and possibly regarded as illegal. For example, if we run three variants of the same strategy, with one losing -40%, the other one losing -20%, and the third one gaining 20%, and then only showcase the 20% gain, clearly this single result misrepresents the performance of the fund. Just one version of an algorithm should be tested, which would be representative of a real-world investment setup and therefore more realistic.<\/p>\n<p>Models in the papers we reviewed achieved a very high level of accuracy, about 95% \u2013 a mark of tremendous success in many areas of life. But in market forecasting, if an algorithm is wrong 5% of the time, it could still be a real problem. It may be catastrophically wrong rather than marginally wrong \u2013 not only wiping out the profit but the entire underlying capital.<\/p>\n<p>We also noted that most AI algorithms appeared to be \u201cblack boxes\u201d, with no transparency on how they worked. In the real world, this isn\u2019t likely to inspire investors\u2019 confidence. It is also likely to be an issue from a regulatory perspective. What\u2019s more, most experiments did not account for trading costs. Though these have been decreasing for years, they\u2019re not zero, and could make the difference between profit and loss.<\/p>\n<p>None of the experiments we looked at gave any consideration to current financial regulations, such as the EU legal directive <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.esma.europa.eu\/policy-rules\/mifid-ii-and-mifir\">MIFID II<\/a> or business ethics. The experiments themselves did not engage in any unethical activities \u2013 they did not seek to manipulate the market \u2013 but they lacked a design feature explicitly ensuring that they were ethical. In our view, machine learning and AI algorithms in investment decision-making should observe two sets of ethical standards: making the AI ethical per se, and making investment decision-making ethical, factoring in environmental, social, and governance considerations. This would stop the AI from investing in companies that may harm society, for example.<\/p>\n<p>All this means that the AIs described in the academic experiments were unfeasible in the real world of the financial industry.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Are_humans_better\"><\/span>Are humans better?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>We also wanted to compare the AI\u2019s achievements with those of human investment professionals. If AI could invest as well as or better than humans, then that could herald a huge reduction in jobs.<\/p>\n<p>We discovered that the handful of AI-powered funds whose performance data were disclosed on publicly available market data sources <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">general<\/a>ly underperformed in the market. As such, we concluded that there is currently <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/link.springer.com\/article\/10.1007\/s41060-021-00245-5\">a very strong case<\/a> in favor of human analysts and managers. Despite all their imperfections, empirical evidence strongly suggests humans are currently ahead of AI. This may be partly because of <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.frontiersin.org\/articles\/10.3389\/fpsyg.2015.01672\/full\">the efficient mental shortcuts humans take<\/a> when we have to make rapid decisions under uncertainty.<\/p>\n<p>In the future, this may change, but we still need evidence before switching to AI. And in the immediate future, we believe that, instead of pinning humans against AI, we should combine the two. This would mean embedding AI in decision-support and analytical tools but leaving the ultimate investment decision to a human team.<!-- Below is The Conversation's page counter tag. Please DO NOT REMOVE. --><img decoding=\"async\" loading=\"lazy\" style=\"border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;\" alt=\"The Conversation\" width=\"1\" height=\"1\" class=\"js-lazy\" src=\"https:\/\/counter.theconversation.com\/content\/174937\/count.gif?distributor=republish-lightbox-basic\"\/><!-- End of code. If you don't see any code above, please get new code from the Advanced tab after you click the republish button. The page counter does not collect any personal data. More info: https:\/\/theconversation.com\/republishing-guidelines --><\/p>\n<p><noscript><img decoding=\"async\" loading=\"lazy\" style=\"border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;\" src=\"https:\/\/counter.theconversation.com\/content\/174937\/count.gif?distributor=republish-lightbox-basic\" alt=\"The Conversation\" width=\"1\" height=\"1\" class=\"\" srcset=\"\"\/><\/noscript><br \/>\n<em>Article by <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/profiles\/barbara-jacquelyn-sahakian-947460\">Barbara Jacquelyn Sahakian<\/a>, Professor of Clinical Neuropsychology, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/institutions\/university-of-cambridge-1283\">University of Cambridge<\/a>; <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/profiles\/fabio-cuzzolin-1310625\">Fabio Cuzzolin<\/a>, Professor of Artificial Intelligence, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/institutions\/oxford-brookes-university-1208\">Oxford Brookes University<\/a>, and <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/profiles\/wojtek-buczynski-1310804\">Wojtek Buczynski<\/a>, PhD candidate \/ consultant, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/institutions\/university-of-cambridge-1283\">University of Cambridge<\/a><\/em><\/p>\n<p><em>This article is republished from <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\">The Conversation<\/a> under a Creative Commons license. Read the <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/theconversation.com\/humans-v-ai-heres-whos-better-at-making-money-in-financial-markets-174937\">original article<\/a>.<\/em>\n                        <\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. 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These include chess, arcade games, Go, self-driving cars, protein folding, and much more. This rapid technological progress has also had a huge impact on the financial services industry. More&#8230;<\/p>\n","protected":false},"author":1,"featured_media":403137,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/img-cdn.tnwcdn.com\/image\/hardfork?filter_last=1&fit=1280,640&url=https:\/\/cdn0.tnwcdn.com\/wp-content\/blogs.dir\/1\/files\/2022\/02\/AIvHumanHed.jpg&signature=1d49fa78f49d046b9d0e17884d4723b0","fifu_image_alt":"","footnotes":""},"categories":[18],"tags":[],"class_list":["post-403136","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-technology"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/403136","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=403136"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/403136\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/403137"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=403136"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=403136"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=403136"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}