A Man with a Machine
The investment industry is increasingly using AI technology to make investment decisions, but computers are not ready to replace human intelligence just yet.
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Artificial intelligence (AI), which is powered by machine learning technology, has affected many aspects of our lives. For example, Apple’s Siri uses natural language processing to understand the commands of users and then frame the appropriate responses. Medical image analysis, which uses deep neural networks, is also widely used in the healthcare industry to provide more accurate medical diagnoses.
The adoption of machine learning technology in the investment industry has also picked up steam in recent years. Hedge fund managers and other institutional investors are increasingly turning to machine learning for opportunities to generate superior returns. Many have attempted to identify outperforming stocks and estimate the likelihood of bond default, using mathematical algorithms to facilitate their investment decisions.
This accelerated adoption is partially driven by an explosive growth in alternative data. Such data is compiled from sources such as financial transactions, sensors, mobile devices, satellites, and the internet, and cannot be handled by traditional software such as Microsoft Excel. Machine learning technology makes it substantially easier to extract information from this hard-to-process data, and this has led to an “arms race” in alternative data among institutional investors.
While alternative data has certainly taken the spotlight in recent years, traditional data, particularly data relating to financial statements, also merits a fresh look through the lens of AI. Financial statements, together with other information contained in corporate reports, have long been one of the most important sources of information for investors. The tradition of analyzing financial statements for investment decision making can be traced back at least as far as Graham and Dodd (1934). In their canonical book of value investing, Graham and Dodd devote several hundred pages to analyzing financial statements to arrive at the intrinsic value of a company.
Financial Statement Data