Artificial intelligence alone is not sufficient to run effective investment teams even well into the future but the combination of human intelligence – the «AI + HI» model – is the way to go, CFA told finews.asia.
The recent emergence of artificial intelligence (AI) has spotlighted the importance of human input (HI) – or lack thereof – in the future economy across all fields, including investment management. In a monotonous and more certain environment, AI may well play a more dominant role but CFA’s senior director of industry research, Larry Cao, believes that major tail risk events, such as the current coronavirus pandemic, create opportunities for humans to justify a greater and permanent purpose.
«For machine learning models that need longer-term data series, new environments do present a challenge although we would quickly add that the challenge is not unique to AI programs and is the same for all quantitative models,» Cao said.
«If you think about it, it probably does not end with models either. Discretionary investors rely on their experience accumulated over the years, but no living investor has experienced a pandemic of this magnitude, so it is new for all of us.»
«AI + HI»
According to Cao, there are some simple principles investment managers could follow when addressing new environments. For machine learning models, investors could reduce reliance on historical data due to lower compatibility with the present environment and use simpler models such as the application of variables that focus on explaining outcomes. Ranges applied within models should also be monitored for compatibility with previous testing.
«[These] are a few things they could do, practically all consistent with our philosophy that the future investment teams will be following an 'AI + HI’ model,» he said, quoting Goldman Sachs managing director Ingrid Tierens who said that all AI and quant models «should come with a health warning of sorts».
«AI programs are never meant to be replacements for portfolio managers and analysts but rather providing better support,» Cao explained. «In times of crisis and uncertainty, investors will naturally rely on their experience and judgment more so than ever.»
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