Advances in Artificial Intelligence (AI) and large Language Models (LLMs) in the past 1 year alone have ushered in a complete rethink as to how the future of mankind could look. While the average exposure is limited to the experience some of us have with Open AI’s Chat GPT bot, the applications of this new technology are expected to traverse multiple aspects of our daily lives.
Already, we see that certain industries have started to feel upended, whereas alarm bells are ringing for many more. This has also kindled a debate around the efficient & ethical use of AI & LLMs with issues around originality, misinformation & privacy. For the world of finance, AI represents a paradigm shift on multiple fronts.
Robo Advisors
At a base level, the concept of Robo Advisors (essentially chatbots trained to advise clients on their portfolios) has been around for some time. These Robo advisors would replace humans in manager/advisor-client interactions and are envisioned to be more efficient.
These expectations emanate from Behavioral Finance theory. Humans, as managers/advisors/clients, have inherent cognitive and emotional biases that may lead to suboptimal portfolio recommendations, but an AI-powered tool would not be susceptible to such biases and errors, leading to efficient & effective decision-making.
Information Processing
Traditional portfolio management has a hard reliance on past data & while past performance is no guarantee of future returns, the empirical evidence suggests that markets move in trends and are impacted by a multitude of factors. Mining historical performance & the impact these factors have on overall performance helps establish correlation. This correlation, once firmly established, lends predictive power to data.
With AI, portfolio managers and advisors are now equipped with a quantum leap in computing power that allows them to mine past performance & break its attribution down to factors quickly and more accurately. This helps create predictive models of how markets may behave going forward or what factors are important to consider when managing portfolios.
Forward-Looking Forecasts
The most interesting feature of AI is its ability to learn and absorb new data constantly. Traditionally, data mining, even with leaps in computing power, has been constrained in predictive power as the absorption of new information has been slow or a manual process that data miners would need to plug in.
With AI, portfolio managers & advisors now have the ability to constantly update forecasts in real-time based on the receipt of new information. This creates more responsiveness & leads to better & timely decision-making.
In a whirlwind year of advancements, the influence of Artificial Intelligence and Language Models resonates deeply, particularly in reshaping the financial landscape. Beyond the novelty of Robo Advisors and their promise of unbiased decision-making, the true game-changer lies in AI’s capabilities to decode historical data correlations and compose predictive models that surpass traditional methods. The real strength, however, lies in AI’s inherent adaptability — a constant learning loop that enables real-time assimilation of new information, empowering financial experts with unparalleled skillfulness and precision in decision-making. As AI continues its ascent, its capacity to revolutionize predictive analytics and redefine financial strategies stands as a testament to an era where technology doesn’t just assist but fundamentally transforms the future of finance.
