AI is changing the financial industry for the better.
Artificial intelligence isn’t coming; it’s here. AI is behind almost every activity people undertake today, from Google’s traffic data to the filters in your email, from Facebook’s face recognition software to Amazon’s product recommendations. AI is even revolutionizing your finances. What began as enabling mobile check deposit has evolved into new ways to monitor, make and communicate investment decisions. Financial firms and investment managers alike are employing AI to invest smarter, faster, cheaper and easier. Here are 11 ways artificial intelligence is improving investing
Better predictions lead to better investing decisions.
AI and machine learning are enabling asset managers to “assimilate new information more quickly and accurately into their portfolio construction processes,” says Bryan Kelly, professor of finance at the Yale School of Management and head of machine learning at AQR Capital Management. As computing power has increased, so has the financial industry’s ability to capture and analyze data with increasingly rich statistical models. This “translates into better prediction of future economic outcomes, which helps investors better allocate wealth to the most productive opportunities and better manage the risks of their portfolios,” he says. In short, smarter computers make for smarter investors.
Defense against emotional biases.
Behavioral finance has shown that try as they might, human investors are not rational. Investors of all types, from retail to institutional investors, are susceptible to behavioral bias, says Michael Cicero, director of portfolio research and management at High Probability Advisors. You need look no further than the University of Chicago’s sale of equity in 2008 for an example of loss aversion bias, or the emotional bias caused by investors feeling more pain from a loss than pleasure for a gain, by a sophisticated investment committee responsible for the endowment, he says. Irrational decisions such as those prompted by loss aversion “can be as detrimental to long-term expected return as poorly designed investment strategies,” Cicero says. AI can help investors eliminate these biases, thus increasing “the odds of investment success.”
Voice activated investing and research.
Investors don’t even need keyboards to invest anymore thanks to artificial intelligence. Firms like TD Ameritrade are rolling out voice activated investing that lets you place trades, research the markets and check on your portfolio using Amazon.com’s (ticker: AMZN) cloud-based voice service, Alexa. With an Alexa-enabled device, you can now stay on top of your investments and financial education from virtually anywhere – even while driving in the car. In-vehicle features let investors query Alexa about the stock market or check account balances and investment performance while on the go. It’s an example of multi-tasking portfolio management, compliments of AI.
Proactive portfolio management.
Artificial intelligence isn’t just improving investors’ and money managers’ reaction times; it’s also helping them be proactive. It’s not possible for human beings to evaluate all of the market factors that impact a portfolio’s performance, Appuswami says. But artificial intelligence can: “AI services, together with predictive analytics, can track multiple macro- and micro-economic indicators, regulatory trends and social sentiments,” he says. This enables them “to produce insights and timely advice, which financial advisors can leverage to make proactive portfolio rebalancing recommendations or help customers build the right financial management solutions based on the current phase of their life and lifestyles.”