GUEST: Technology has changed our lives in countless ways — there are more smartphones and other mobile devices in use in the United States and its territories than the entire population of the country, and we are just on the cusp of seeing driverless cars on our roads and highways. As the field of artificial intelligence […]
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Technology has changed our lives in countless ways — there are more smartphones and other mobile devices in use in the United States and its territories than the entire population of the country, and we are just on the cusp of seeing driverless cars on our roads and highways. As the field of artificial intelligence continues to grow and improve, it too is poised to make radical changes in nearly every industry and sector of business — especially in investing.
Insurance firms and investment banks already use artificial intelligence to automate tasks such as claims processing and contract validation. Investors who understand how AI will reshape and transform the investing landscape can capitalize on this trend and use it to their advantage. Bank of America estimates the global robotics and AI industry will grow to $153 billion by 2020, with $70 billion coming from growth in AI.
Here are several ways AI is already changing the investment world, and what investors can expect in the future.
AI in today’s investment world
Though simplistic by current AI standards, the biggest example of how AI is enabling changes in investing is the rise of robo advisors. First established in 2008 as a means to provide balance to investor assets within target-date funds, robo advisors are now used to perform the basic functions of a financial advisor and enable passive investing at various price levels.
As AI matures, it will also begin to move into active investing due to cheaper computational power and advances in software, hardware, and data storage. It’s becoming feasible to use machines to identify predictors that can be used to create and evaluate profitable strategies.
Lastly, the stock market itself and companies in it are now heavily influenced by sector-leading AI companies. Savvy investors who understand the impact AI will have not only on the investment world but throughout the business world as a whole are looking for industry leaders. This is why companies such as AMD and Nvidia, which produce processors used for AI, are two of the most followed stocks on social investing sites. Other companies that are implementing strong AI plays include Salesforce, Google, Microsoft, Amazon, Facebook, PayPal, and other major tech companies. In fact, 10 of the top 15 followed stocks on social investing sites have a major stake in the future of artificial intelligence (AAPL, TSLA, FB, AMZN, NFLX, AMD, BABA, GOOG, NVDA, and MSFT).
Many public tech companies are also deeply committed to the growth of AI, often buying startups to fuel their own projects. Twitter acquired the startup Whetlab to accelerate efforts to glean insight into how, when, and where users tweet, while Google acquired AI startup DeepMind in 2014 to enhance its own AI activities.
How AI will change investing in next 5 years
At its core, investing is about identifying information to take advantage of market inefficiencies. Historically, this information was gathered from traditional sources: news outlets, company filings, experience, etc. Technological advancements have enabled the ability to capture and understand large volumes of complex and non-standard types of data that surround us on a daily basis, such as location data from cell phone applications and social media content.
We are just scratching the surface of how artificial intelligence will be used for investing. One application that I am most excited about is the opportunity to utilize AI systems to reduce the complexity of alternative data, such as satellite images or content on social media platforms.
Here are two examples:
- Computer vision models can translate satellite images of retail store parking lots into revenue estimates. Businesses can use this AI-driven data to make enhanced revenue and operating decisions, as can investors.
- AI can parse data from social media platforms. On any given day, more than 150,000 messages are exchanged between users on social investing sites. Some conversation threads are visible to tens of millions of people via financial news services and through social media. Natural language processing models take sequences of messages exchanged on social investing sites and output a value that represents trader mood or sentiment.
AI can transform extremely complex data into the kinds of metrics investors are traditionally comfortable using, which ultimately provides more traders with access to the informational advantage offered by big data. This type of complex analysis has historically only been available to large institutions, but the rise of AI and increases in processing power places this type of analysis into the hands of a greater range of potential investors.
Threatening or evolving wealth management?
AI and machine learning are here to stay, and they will undoubtedly replace the roles of many traditional investment analysts. There are many ways AI outperforms human analysts, and it can adapt to rapidly changing market conditions in mere moments. However, AI also presents new opportunities for finance professionals to thrive — from hedge fund managers to individual retail investors.
Investors who embrace AI and learn how to incorporate it in their decision-making processes are better positioned than their peers to succeed in this new investing landscape. A large number of funds are already practically fully automated, and the use of advanced AI should continue in these systems. Still, I foresee a future in which wealth managers who want to remain active in the investing process will be able to augment their decision making with new AI-driven tools and analysis.
Artificial intelligence will continue to flourish and improve the way retail and institutional investors create and grow wealth. Those who remain on the forefront of these revolutionary technologies are positioned to capitalize on a wide range of new opportunities driven by artificial intelligence.
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