Machines informing financial positions and
investments. Are we simply moving forward with new technology or we are just
down right lazy?
While our past is cast in stone and
unchangeable and our present is an ongoing phenomenon; our future however is
more uncertain. Nowhere else are the consequences of these uncertainties more
significant than the world of investment banking. Within the investment banking
area, particularly in the light of artificial intelligence (machine learning),
there are two critical Investment banking products to consider: Mergers and acquisitions
(M&As) and equity stock markets (shares).
Let us consider M&As as they were done previously,
companies (medium and large scale) required the services of industry experts to
identify the best fit M&A companies and provide a web of information needed
for the closure of deals. With shares in the past, the biggest challenge for
stock traders was predicting stock prices and market trends in the financial
equity market to maximize returns. One of Warren Buffet’s more inspiring quotes,
“It’s easier to look back than to look
into the future’’, emphasizes the difficulty in predicting stock behavior. In
those days, stock trades involved buying stocks on a physical trading floor and
required a network of persons to execute a trade, with traders relying more on
bare intuition and basic trend analytic tools. These all happened in the analog
world!!
In the digital age of
today, there are different algorithms and indicators that have been developed
to change interaction between buyers and sellers. Buyers can find a best fit
company in a matter of hours, saving them the cost of research and precious
time. The use of artificial intelligence tools such as machine learning and big
data have emerged with several programs. These programs obtain as much available
historical data about a company and seek to create a relationship between this
historical data and future prices of the shares of the company. To achieve
this, investors and researchers create different algorithms (decision trees,
support vector machines, Naive Bayes classifiers, etc.) and price indicators.
Some of these algorithms have been designed to be so intelligent that they are
not rigid to any single investment approach but adapt to market trends and
situations.
All this is not to say
that traditional investment banking as was practiced in the ‘analog world’ is
dead. In fact, very intelligent and experienced bankers and traders are still very
relevant in the process of negotiating and structuring deals to reduce tax
payments and place stock trades based on knowledge of future occurrences. A
valid question though is: “How much
longer will human experience still be required?’ Currently, a tech start-up
based in Cambridge, Massachusetts, USA called Kensho has received a lot
of buzz and huge investments from large corporations such as Goldman Sachs, Google
ventures and Consumer News and Business Channel (CNBC) for its development of a
software called Warren. Kensho believes
that Warren will replace financial analysts in investments transactions. The
company boasts of the capacity of Warren to search financial data and reports
and provide replies in natural language within seconds.
I have a friend, George,
back home in Nigeria. He is one of the hundreds of thousands of investment
bankers in the world. Does this mean he is going to be jobless in the near
future? I know machines are smart or can be programmed to be smart, but we all
realize the intuition of humans and the capacity of mankind to reason through
complex and confusing situations. In such situations, simple algorithms may
fail, especially the situation that has not obeyed the rules. Take for instance,
the earthquake and Tsunami in Japan in 2011 (deemed the costliest natural
disaster in history). Then you need a human, then you need someone like my
friend George. Now, I am not in anyway suggesting that technology is not the
way forward. However, in going forward technologically, we need to allow for
man to move machine and machine to listen to man. After all, even unmanned
space shuttles are still “manned” by men on Earth.
References
Walters, Richard 2015 Investor rush to artificial intelligence is
real deal http://www.ft.com/intl/cms/s/2/019b3702-92a2-11e4-a1fd-00144feabdc0.html#axzz3oG7w4n00
Financial Times 4th
January 2015
The Economist 2015 Artificial intelligence: Rise of the machines
http://www.economist.com/node/21650526/print1/13Artificialintelligence
The Economist 5th August 2015
