Quants vs bipeds

“To be human is to feel inferior”

– Famed psychologist, Arthur Adler

Long before the age of artificial intelligence (AI) and supercomputing, Adler was on to something.

It is now largely taken as a given that machines outperform humans.

Whether we’re talking about chess, weather predictions, keyhole surgery or even something that requires artful interpretation like linguistic translation…

If machines are not already superior, then I think most of us accept it’s only a matter of time.

Obviously this view has long been established in financial markets.

Rapid advancements in processing speeds over the last two decades has meant that computers can crunch terabytes of data… spewing out algorithmic models and routines capable of beating out even the most seasoned and successful market veterans.

Case in point, “the world’s most profitable hedge fund”, according to Bloomberg, is Renaissance Technologies… a fund driven by quantitative models and statistical analyses.

In theory an algorithm or quant-based systems execute nothing less than a “pure trade”. Cold logic. No biases. No anxiety. No desperate need to cover the costs of a Tuscan summer home.

To riff on one of the marketing straplines for The Terminator (1984): It doesn’t eat. It doesn’t sleep and it won’t rest until you’re in profit.

According to CNBC, one of the major advantages a quant system has over us mere mortals is that it cannot be swayed by a compelling story or “cognitive glitch”. Humans, no matter how reasonable and disciplined, are emotional and prone to unconscious influence.

Even Warren Buffett – our champion of human investing glory – admits to “dawdling” instead of selling Tesco shares when it first occurred to him. The move cost the company $444m.

“Computers don’t mind boring stocks” says the CNBC article… because they don’t care about pleasing clients. Worryingly, big (human) hedge funds are thought to include a lot of household name companies just to “convince investors are doing the right thing.”

All this makes intuitive sense, doesn’t it? The machines have a clear and efficient “vision” of the market… while our own is obscured by slurry of human “mind-mess”.

The thing is… it’s not entirely true

True AI doesn’t yet exist.

But what these quants and algorithms have mastered is an ultimate form of conventional “thinking”.

Quants tend to follow the crowd and are, as yet, incapable of anticipation:

Raw processing power may have its uses in financial markets, but until scientists develop a truly intelligent investing system, rather than a trend follower, the truly skilled human fund manager has no reason to fear.

These computers however are not investors in the true sense of the word, but semi-automated trading bots seeking signal within market noise. Their models analyse price data, rather than creatively assessing, for example, how accurately a share that represents fractional ownership of a real business reflects the present and future value of that business.

Until computer traders can develop genuine artificial intelligence they will remain unable to gain an edge over the best human investors in spotting a catastrophic disruptive threat to an industry, or a revolutionary emerging technology.

– Financial Times, January 2016

Taking this financial tech trend to its logical conclusion, the end game could be quite fun to watch. If these super-investing systems “solve” the markets, they will cancel one another out. They will eliminate advantage. So the future for algos and quants could be one of ever diminishing returns as the technology improves.

So, what is your edge?

Well, the true advantage (and fun) for an investor is surely beating the crowd, not following it.

What made me think about all this was a recent conversation I had with Eoin Treacy. Eoin – who manages $600m in client capital – is one of the most respected traders and investors in the business. You may have seen him on Bloomberg TV, or at one of the many conferences he gets invited to speak at.

Best of all, he’s human.

Right now Eoin is in the middle of a very exciting project that is capable of handing you something that might a first seem impossible: market foreknowledge.

What Eoin’s uncovered here is real (not artificial) market intelligence… an opportunity to regularly anticipate and move ahead of the rest of the investment herd. You might even call it “legal front-running”.

I’ve asked Eoin to explain this new project to you himself next week. If you’re keen to gain an edge in your investing or trading… one that Eoin discovered due to his understanding of human psychology… I think you’ll find it truly fascinating.

In some ways it’s the perfect synthesis of a human-machine approach. Crunching 17 years of data, Eoin has isolated an overlooked event that repeats every 14 days… and come up with a very clever way for you to intercept the predictable, recurring price moves.

Eoin is, I believe, the only investor in the world who trades this market “reflex”. To my eyes, it has astonishing potential.

More on this one very soon,

Harry Hamburg
Editor, Exponential Investor

Category: Artificial Intelligence

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