Finance, the last stop for AI

Financial investing, an area shrouded in secrecy imparted by hedge funds, is an industry that long claimed applications of Artificial Intelligence. However, generally speaking, the alpha generated is related to either preferential access to information or random luck, thus far. The former is illegal and that requires a lot of secrecy and the latter attracts talk by mad and fast money experts, who rise like vampires after the markets close every day.

Unlike real markets where AI has shown significant gains, financial markets are generally not amenable to such applications. This is because today’s prices depend very much on today’s information and information that affects prices of financial assets do not have eyes, noses and faces. Prices of financial assets are not based on history, the fundamental premise of Artificial Intelligence, and hence any conventional application of contemporary AI is unlikely to produce alpha (risk adjusted excess returns).

This leaves the talkers, who do not have to demonstrate alpha and those who have preferential access to information, who do not talk. The latter variety always claimed high mathematics, hiring PhDs left and right from Physics and other advanced disciplines. The experts did not know that they were hired as a shield to divert attention from illegally created alpha. The dance continues on Wall Street, with the talkers pretending to know everything and those who make money from preferential access to information, not seen anywhere.

Finance is likely the last stop for AI. Those worried about AI taking over the World may want to test their overwhelming expertise in the financial markets. That may give them a slightly different perspective.