I have read an interesting article on Global Capital (see attached) that explores the potential and limitations of AI in financial markets. While many in the industry are optimistic about AI's ability to analyze data, predict trends, and cut costs, the article questions whether it can truly solve complex, real-world market challenges. It highlights how financial markets are dynamic and interactive, making it difficult for AI to sustain an edge, as successful strategies are quickly adopted and lose effectiveness.
The piece uses the example of the January bond issuance rush in European markets, where psychological factors and risk aversion drive behavior. While AI might optimize the timing of bond issuances, treasurers are unlikely to trust AI over human judgment for high-stakes decisions in uncertain markets. The article ultimately argues that emotional biases, often seen as flaws, are a critical link between financial markets and real-world consequences.
A few questions that came to my mind while reading it, which though useful to share with the group for discussion, or thoughts around it:
- Can AI overcome the unpredictability of financial markets, or is it inherently limited?
- How can trust in AI-driven financial tools be improved?
- Should financial markets embrace emotional decision-making as a key component, or strive to eliminate it with AI?
Quick answers to your questions in blue (happy to continue the conversation off-line): - Can AI overcome the unpredictability of financial markets, or is it inherently limited? - Not in the near term (who knows in the medium to long term)
- How can trust in AI-driven financial tools be improved? - A big part of it is a cultural challenge. AI-Driven decisions will start by empowering humans to make better informed decisions. It will take some time for humans to be "hands-off".. but it will start with the simpler tasks.
- Should financial markets embrace emotional decision-making as a key component, or strive to eliminate it with AI? On top business schools we study "behavourial finance", since most of the decisions are made by humans. So we cannot ignore emotions (fear, exhuberance, ....) from Financial Markets. This assumes the "Efficient Market Hypothesis" applies all times, and it is far from true. Also, there are technical factors to take into account (not only emotionals): short-squeeze, ...
Very interesting article. Thanks for sharing it.
While AI is becoming an essential tool for many tasks, it is also true that AI will always lack what we call gut feeling.
Does this lack of human intuition allow AI to make better choices?
We make many decisions based on our instintive feeling and many times we tend to be right (i.e., how many times we have run models that tell you to buy a security when your gut feeling is telling you that it is not a good idea.....)
While AI will always give you the best decision based on rational data and previous experience, I think that some of us will struggle to make important decisions based only on what AI says to be the best choice.