Practice Strategies
Artificial Intelligence, Investment And "The Wisdom Of Crowds"
Following the launch of a competition to test AI-driven predictions about investment and markets, we speak to an organisation seeking to promote the benefits of an "ensemble" approach to data predictions.
When it comes to using AI to guide investment, it pays to harness
the “wisdom of crowds” rather than hope that a single engine
delivers the goods, so a figure in the tech world
argues.
This publication recently spoke to Arnaud Castillo, founder and
chief executive of CrunchDAO, a research team
of data scientists using the power of “collective
intelligence,” competition, and Web 3.0 tech to produce
financial insights. The firm has launched the ADIA Lab
Market Prediction Competition, a machine learning contest.
(ADIA Lab is an independent research lab supported by the
Abu Dhabi Investment Authority, the sovereign wealth fund.)
With wealth managers wondering whether AI can solve some of their
investment and risk management challenges, there’s real ferment
in the tech space to come up with tools. Tests, competitions –
even injecting an element of fun into the process – appear to be
a smart way to approach harnessing different ideas from thousands
of people.
The ADIA Lab competition, launched in early May, has a total
prize pool of $100,000. Running competitions as a way of
unlocking ideas is a passion for Castillo, who is based in
France.
“If you want to diversify risks you need to find assets that
aren’t correlated. Machine learning is good at that because it
can tell you what the correlation is. This [insight] is already
used a lot in the Modern Portfolio Theory,” he told
WealthBriefing.
The benefits of the solutions [via AI] improve when a range of
“answers” from AI are drawn together to create an
“ensemble,” enabling the real signals to be drawn from
market noise, Castillo said.
(The use of the word “ensemble” is significant. As explained in
one definition, “in statistics and machine learning, ensemble
methods use multiple learning algorithms to obtain better
predictive performance than could be obtained from any of the
constituent learning algorithms alone.”)
“This is about bringing together thousands of predictions,”
Castillo continued.
Castillo has worked as an M&A Analyst at Lehman Brothers on
Wall Street and as mergers and acquisition vice president at
Deutsche Bank.
Wall Street experience
During his time on Wall Street, Castillo came to realise that AI
in its current form did not possess the skills required to
accurately predict stock and bond prices. What he found was that
by trading their "predictions" algorithms, AI instantly corrects
the anomalies they have detected, thus changing the initial
parameters of the prediction and rendering it obsolete.
Castillo found that financial markets' quantitative research has
been limited for many years due to using too few parameters in
their mathematical models, where successful tools like ChatGPT
are trained on more than 175 billion parameters. It was then that
he decided to take it upon himself to solve this problem, leading
him to co-found CrunchDAO. Castillo thinks it is better to design
models that take into account the complex and changing phenomena
of the market, rather than using convenient but inappropriate
mathematical models for financial data.
Hot trend
“AI is obviously a big trend but it’s not new. Algorithms have
been around for a while,” Castillo said, citing the creation of
the MSCI Barra Risk Model some years ago.
Work has been done to look at non-linear factors and release the
value of machine learning.
“The wealth management market is a `winner-takes-all’…we have to
compete to get the most out of the market,” he said.
The CrunchDAO team of researchers can make predictions for
different clients. “This is bringing an additional value of
quality and predictions that you can get.”
Castillo commented on how the term “artificial intelligence” can
be misused and misunderstood: “I have always thought AI is
not the right word..it is not artificial and it is not
intelligent. It is real as it is fed with historical data and
learning to it to replicate signals it finds. There is no
creativity or imagination – it is about replicating history.
People are realising that ChatGPT is extremely powerful and in
some ways more powerful than Google.”
Explaining AI to the client is a big task.
AI can also be used in areas such as behavioural finance, he
said. AI acts without sentiment and is free of biases.
(See
views by this news service about AI and what it brings, or
does not, to wealth management.)