Artificial intelligence to Change Financial Markets

March 31, 2017

The Artificial intelligence (AI) revolution is changing the financial markets by providing greater data-driven decisions investments, explained a distinguished academic.

AI’s ‘deep thinking’ offers efficient data analysis
and eliminates decisions on sentiments

The Artificial intelligence (AI) revolution is changing the financial markets by providing greater data-driven decisions investments, explained a distinguished academic.

Dr. Huining (Henry) Cao, Chair of the Finance Department and the Faculty Director of the Finance MBA at Cheung Kong Graduate School of Business, said AI’s potentials to make investment decisions more scientific and less sentiment-driven are very promising. In China AI would be particularly impactful because “irrational behavior” in a market that is driven to a significant extent by retail investors, as opposed to institutional investors. “It’s so easy to make money in China, it’s much harder in America,” he said. AI can address the impact of sentiment-driven decisions, as well as decisions based on what’s said on social media and chatroom platforms.

Dr. Cao spoke to a packed room in New York at a special edition of Knowledge Series events hosted by CKGSB. The subject of the presentation and his prestige drew many business leaders and observers from the New York area, who also asked many questions. Dr. Cao’s presentation was arranged in partnership between CKGSB and Confucius Institute for Business at the State University of New York.

Dr. Cao, who holds doctorate degrees in Finance and Pathology, explained that AI is essentially the computer’s ability to learn and function like the human brain. Its utility lies in it being more efficient and accurate in processing information as compared to humans.

As a result, AI would analyze data at greater quantity and at a much faster speed. This is very critical because finance is data-reliant and information intensive. AI would, for example, improve information on performance of investments, reduce random forecasts, and would operate without the human sentiments in analyzing information with ‘deep thinking.’

Deep thinking would revolutionize a profession where currently all the quantitative strategies are based on linear strategies by replacing it with a process that will capture nonlinear patterns on a larger strategy space, which would provide portfolio weights and risk estimates. With this, it is conceivable to have an app that picks stocks. 

To be sure, the advantages of AI also offers possible challenges. One, Dr. Cao explained, is that AI doesn’t allow us “to know the logic behind its recommendations.” The more critical issue, one that raises many questions from the audience, will AI replace human workers.

“Certainly, many functions will be handled better by AI,” Dr. Cao said. It is possible that AI would replace such professionals in wealth management, investment, and analysis.

Will there be any room for people in finance? “Finance still needs the human touch,” Dr. Cao said. The machines, he explained, will complement humans; and there will always be room for human’s artistic and scientific innovation.

Yajun Li, who works for a firm promoting energy affordability, said CKGSB’s knowledge Series provides an effective platform to discuss and learn about critical issues and how current events shape the evolution of markets, environment and societies. She said Dr. Cao’s explanation that AI would allow for better risk management would offer a benefit to all because it would create more economic and environmental stability.

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