by Michael Senescall, undertaking his PhD on Applied machine learning in multifactor investment portfolios and works at the Australian Bond Exchange in the Data and Analytics Centre of Excellence
In this era of unprecedented technological advancements, embracing artificial intelligence (AI) has become a strategic imperative for those working in financial services.
Most of us are familiar with the advances in language technologies with ChatGPT and other large language models helping people in all walks of life write everything from business letters and emails to resumes and creative writing, songs and screenplays and plenty of other everyday written tasks.
But it’s also all happening in finance and it’s exciting stuff.
Yes, really...and as we launch into the brave new world of 2024 it’s something that affects us all.
AI finance algorithms excel in maths questions, arithmetic problems that people find difficult to solve and it’s a power that’s increasingly being harnessed by the number crunching professions.
And it’s no exaggeration to say that the innovations we are seeing today can be likened to the development of the Abacus by the ancient Mesopotamians or the 17th century invention of the slide rule or the 1960s and 1970s explosion of desktop and pocket calculators.
These were all considered huge breakthroughs for mathematical calculations back in their day, and it’s happening again, this time right out of cyberspace.
AI is a game-changer in the way the global financial industry approaches data, credit risk and portfolio management.
Its prowess lies in its ability to approximate complex statistical theories swiftly - navigating the complexities of diverse data sources – and doing in a fraction of the time feats that would take accountants, advisors and statisticians' days, weeks, and months to complete.
When you think about it, the finance industry is a fitting Petri dish for experimenting with the future of AI in numbers because information processing and management are such core functions of what it does.
It's already proving a boon to anyone who works with data too complex to model with traditional methods as it unlocks new dimensions of account assessment and decision-making.
It makes tricky stuff easy.
Which is great news for large businesses with diverse portfolios and multiple investment demands to remain profitable, adaptable, and legally compliant to the economic environment of the day.
And for mum and dad investors who just want their retirement nest eggs looked after in the best, safest and most efficient ways possible.
In my area of research, it’s all about enhancing risk-parity portfolios by incorporating machine learning and pushing the boundaries of traditional investment strategies.
Which is another way of saying that AI, properly applied, will see the finance industry prosper, most likely ahead of others.
Financial institutions of all shapes and sizes by their very nature are already well known to invest heavily in data technology ahead of other industries.
There is also a school of thought that any major changes are more likely to be incremental in such areas as lending and wealth management.
That’s because there’s always the human factor in finance where people remain keen to have their investments ultimately managed by a trusted advisor, a human being at the end of the phone or who can generate a personal email.
AI is a powerful force when harnessed but a technology that fundamentally relies on people to give it worth.
But in this era of the world needing to process intricate data at unprecedented speeds, whether its deciphering language or counting numbers or recognising images, AI is quickly proving itself indispensable to its human masters in navigating the world’s financial minefields.