One watershed moment came in 1997 when the machine named Deep Blue became the first computer to secure victory in a match against a chess grandmaster. In the mid-2000s, IBM researchers created the Watson computer to compete with star Jeopardy! contestants, ultimately defeating two of the show’s most decorated past champions.

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AI May Not Help Pick Stocks…

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AI has a similarly long history with investing. Active investors have attempted to get an informational edge on markets by using AI processes to retrieve and process data.

Material information gleaned from running AI processes is very likely a subset of the vast information set known by the market in aggregate and reflected in market prices. If new information is obtained, the process of acting on that information (buying or selling stocks/bonds) incorporates it into market prices. As more investors employ these tools, any edge from doing so should wane.

Another reason to question AI’s role in helping market timing is limitations with its predictions. AI’s forecasting ability fares well when assessing patterns that are relatively stable.

AI is far less likely to successfully predict changes within complex systems that are as dynamic as stock and bond markets. AI trying to predict market prices is like self-piloting cars trying to read stop signs with words, shapes, and colors that differ from one day to the next. The continuous emergence of new information material to market prices is antithetical to static patterns fostering predictability.

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…But It May Enhance a Fund Manager’s Process

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AI can make businesses more efficient if used as a tool for interrogating data, servicing clients, or making processes more efficient. But like any tool, you have to know how to use it. For example, if it makes interrogating data much easier, then the chances of finding results from data dredging increase. Where using AI can be very helpful is for firms with massive data sets on their customers’ activities. It can help those firms identify what their customers are more likely to buy next and advertise in a smart way. 

Over time, the best chess players realized chess computers were a powerful supplement to strategy and pattern recognition. Similarly, the best path forward for investment management is likely an amalgam of humans and technology such as AI.

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Source: Dimensional Advisors