Erez Katz/Co-Founder and CEO at Lucena Research Inc.
“THE MACHINES ROSE FROM THE ASHES OF THE NUCLEAR FIRE. THEIR WAR TO EXTERMINATE MANKIND HAS RAGED FOR DECADES, BUT THE FINAL BATTLE WOULD NOT BE FOUGHT IN THE FUTURE. IT WOULD BE FOUGHT HERE, IN OUR PRESENT. – The Terminator, 1984
OK, ok, don’t panic. Yet. BlackRock’s big news this week caused lots of buzz around the financial news media, propelling some fear, uncertainty and doubt for smaller firms already intimidated by the $5 trillion AUM big boys’ teams of PhD quants – let alone stock-picking-super-robots. Let’s get a few things straight.
As CNBC’s Josh Brown [@reformedbroker] said this week, the controversy around AI-assisted vs. human investing is not about active vs. passing investing but rather systematic vs. faith-based investing. Basically, it’s humans with better calculators. BlackRock is offering its customers lower-cost quantitative stock funds that rely on data and computer systems to make predictions, an investment option previously available only to large institutional investors. Even sophisticated active managers wait for the very moment of capitulation to enter their positions, since it represents the optimal entry point for profit. The human emotional element is truly what makes markets less efficient. The good news is that with machine learning and data mining we can quantify the statistical state of investors’ mood as it relates to a specific stock, sector, or the overall market. So here’s why smaller competitors should heed Yoda’s warning that “fear is the path to the dark side.” The new capabilities BlackRock is touting will ultimately be democratized for the entire financial industry. Along with F-15 pilot Tucker Balch, Ph.D, I founded Lucena Research and developed a fin-tech platform that levels the playing field for small to midsize financial firms to better compete with the BlackRock’s of the world. Lucena delivers new value to the market by democratizing PhD-level analysis and displacing it with affordable artificial intelligence and machine learning. Smaller firms indeed will no longer be able to compete against the BlackRock’s of the world without machine learning. However, as that technology is commoditized and democratized over time, they may end of fairing much better than they did when it was more human. Lucena helps investment professionals generate Alpha, minimize risk via portfolio optimization and hedging and construct new portfolios using predictive analytics and machine learning technology. The teams at Nasdaq and other large and small financial institutions have already taken notice and are collaborating with us.
Quantitative analysis takes most of the emotional elements out of the decision process, although it doesn’t totally remove it. There have been many studies that have documented long-term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured in models based on perfect investor rationale. To truly make a decision free of emotion, one needs to employ an algorithmic research approach combined with investor’s insight. At Lucena, our customers ultimately have the final say as to how trades are executed, we simply provide the scientific overlay in order to keep emotion vulnerability in check – an investment variable that is more important to address than ever before.