AI is transforming many industries around the world. One of the latest industries it’s having a major impact on is the investing sector.
We’re now starting to see an influx of AI investing solutions to the market. From AI stock recommendations to AI trading software. AI is taking on a bigger role in investment decisions, and it turns out that these AI investing solutions are starting to invest our money better than humans. It comes as no surprise then that over 90% of private equity firms now believe AI will disrupt their sector by 2024.
How can AI outperform humans?
Removes emotion from decision making
One of the main reasons humans make poor investment decisions is due to emotional decision making. As humans, we’re particularly prone to loss aversion. This is where our desire to avoid losses is stronger than our desire to win. We end up becoming so fearful of losses that we focus less on making gains, and more on losses. This way of thinking means that we are more likely to make poor investment decisions.
When AI is making our investment decisions it is not subject to loss aversion. For example, when humans handle their own trading many will either end a good trade too early or close a bad trade too late. Since AI isn’t subject to emotional decision making it can work more efficiently, make more complex decisions and execute trades that humans can simply not match.
AI can handle more data
AI is able to process a huge amount of data which enables it to understand the current market direction and anticipate behavior with high accuracy.
One study by the Indiana University analysed more than 76,000 reports issued by seven different robo-analyst firms between 2003 and 2018. They found that AI is not subject to behavioral biases and conflicts of interest, which enables it to outperform humans at producing a more balanced distribution of buy, hold, and sell recommendations. The buy recommendations were also found to be more profitable than the buy calls from human analysts.
Simply put AI is better at predicting outcomes, recording fewer errors, and running at a higher efficiency.
Has lower fees than human advisors
In previous years, to invest in the financial markets you would have to pay large fees to a financial advisor. AI has changed this and made investing more accessible than ever, and at a lower cost. A traditional financial advisor may charge high fees as they have various costs to make up for such as office rent, wages, bills etc.
Leveraging AI for investments results in lower overheads. This allows the savings to be passed onto the investor, thus increasing their overall returns.
Although it is very unlikely that AI will fully displace humans when it comes to investing, it certainly appears that AI has the capability to outperform humans and produce higher returns.
AI in the investing sector clearly has many benefits, hence why more and more companies are looking for new ways to integrate AI technology. From executing trades to managing portfolios, the rise of AI investing has only just started and it’s set to massively shake up the investing industry.