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I wonder if the application of AI to finance would effectively smooth out bubble/bust scenarios. If you really think about it a bubble is when assets are overva

I wonder if the application of AI to finance would effectively smooth out bubble/bust scenarios. If you really think about it a bubble is when assets are overvalued usually due to herd mentality and fear of missing out. If AI we're more involved it would be able to short sell when something was overvalued and buy when it is undervalued. This is the essesnce of good investment and you would think machine learning would be able to gather much more raw information than any person and come to these conclusions. I think this is what Renaissance Investments does to make such amazing returns.

NTDF9 8y ago
AI wouldn't smooth out bubble because bubbles are opportunities for a few to make wealth at the expense of others. Bubble in America (at least the recent ones since Greenspan) are all down to Fed being asked to bring the society to full employment (which is so backwards as a law because a central bank cannot bring full employment). The bubbles also get created because the real risk takers (big investment funds, banks, companies) are not allowed to take losses that the masses will take. As an example, let GE, GM, hedge funds, banks who lent outsized mortgages take the loss this time while interest rates rise to "normal". Sure a few people will lose jobs but we've created this hazardous situation right now where morally bankrupt corporations are backstopped by tax payers because they're too big to fail while the individual will lose their house if they can't pay mortgages. Companies have to be allowed to fail. Fed needs to maintain price stability on CPI and assets (which they couldn't after the last bubble).
- dahdum 8y ago
  Are you suggesting individuals should be able to default on the mortgage but still get to keep the house? Or that we should let the mortgages foreclose and people get kicked out, but not perform quantitative easing in that recession?
  - NTDF9 8y ago
    I'm suggesting taking capitalism to some true form. Let badly managed companies fail, let badly managed houses of individuals get foreclosed. For innocent individuals, create a social security net. Instead of bailing out companies or keeping interest rates lower (as all the rich are asking right now so that stock market bubble stays up), use that same money to bail out underwater individuals in some way. Right now, the whole market is a perverted system saving the rich every time. That is not healthy at all.
    - Latteland 8y ago
      GE could fail. They are on the way down.
    - AnthonyMouse 8y ago
      > Instead of bailing out companies or keeping interest rates lower (as all the rich are asking right now so that stock market bubble stays up), use that same money to bail out underwater individuals in some way. Keeping interest rates lower was how they bailed out underwater individuals. Lower interest rates stimulate demand for housing, shoring up housing prices for the people who were underwater. Of course, that reinflated the housing bubble, so here we are again. What they need to do now is to slowly raise interest rates. Raising them quickly would put us right back to 2008. Raising them slowly lets housing prices decline over a period of years at rate that doesn't instantly put everyone deep underwater again, or kick every adjustable rate mortgage payment above the level that people start defaulting again.
      - NTDF9 8y ago
        > Keeping interest rates lower was how they bailed out underwater individuals. Lower interest rates stimulate demand for housing, shoring up housing prices for the people who were underwater. Of course, that reinflated the housing bubble, so here we are again. No. I meant using TARP money to wipe out a portion of that debt or create jobs instead of QE. The banks did not need bailing out. Certainly the execs shouldve been arrested. Because of decisions last time around, the execs take risks with impunity now.
hakfoo 8y ago
I'd suspect that a major difficulty of applying AI to real estate is limited fungibility and liquidity. With a stock or currency, there's usually enough of a live market that you can sell quickly at roughly market prices. Much of this is due to fungibility-- one share of INTC is worth the same as any other, so they can trade sight unseen with narrow spreads. With real estate, the AI dashboard can flash and beep and scream "Sell the houses in Roanoke now!" but there's no easy way out. You're either spending weeks or months closing out individual retail sales, and if anything goes wrong you're back to square one while the price is deflating around you, or you try to sell it commercially sight-unseen, for which you're going to take a major price haircut. Might work somewhat better with commercial real-estate which seems a bit more oriented to grading and classification to allow more sight-unseen trading.
brownbat 8y ago
Matt Levine has a half-joking article on whether or not automated trading would one day provide the ultimate fulfillment of Marxism: https://www.bloomberg.com/opinion/articles/2016-08-24/are-index-funds-communist https://www.bloomberg.com/opinion/articles/2016-08-24/are-in... If you believe that AI will get better at allocating capital over time, and that central planners are historically awful because of human flaws (from self-interest to lack of information)... then you might one day reasonably pine for self-driving economies. Asimov slipped this general idea in some of his stories as well: https://en.wikipedia.org/wiki/The_Evitable_Conflict https://en.wikipedia.org/wiki/The_Evitable_Conflict Even if you think this idea is completely silly (there's an argument it is), the Levine article is still highly recommended, primarily because he's not evangelizing so much as just toying with the idea. It's a fun read.
- mtgx 8y ago
  This kind of wishful thinking by people who dont realize there will always a human controlling that AI.
  - mythrwy 8y ago
    I think maybe that is a wishful idea from a human :)
codexon 8y ago
It is already being applied to finance. The problem is that a huge part of the market is based on emotion, so the AI makes it worse and not better. When the proverbial knife is dropping, you don't want to catch it while it is in free fall, it will likely plunge below "fair value" in a panic. Quants know this and most have programmed/taught their systems to pull out of the market or short when volatility goes up. It is happening right now. Liquidity since February has shriveled up.
mtgx 8y ago
AI tends to "over-optimize" as we know from the paper clip theory too. It's likely to make booms and busts even more drastic.
visarga 8y ago
Each recession is different, why do you think AI would be able to predict them? Where would it learn to predict from? When using AI on a time series, it is necessary to have sufficient past data.
ThrustVectoring 8y ago
Merely having a correct investment thesis isn't enough to make money - you have to also get the trade timing and execution correct, and bubbles have a nasty tendency to stay inflated long enough to squeeze out the shorts. Like, the more profitable plays are often the ones that contribute to the boom/bust cycle. In the 2008 crisis, the big winners were people who took out as much mortgage debt as possible and aggressively did cash-out refinancing, ending up strategically defaulting on houses they got more money out of than they put in. When you're in a bubble, people tend to assume that the worst-case scenarios won't happen, so they'll extend credit that you cannot pay out in those scenarios, and you wind up getting some free expected value and positive skew that way.
- im3w1l 8y ago
  Now that's a depressing perspective.

NTDF9 8y ago

AI wouldn't smooth out bubble because bubbles are opportunities for a few to make wealth at the expense of others. Bubble in America (at least the recent ones since Greenspan) are all down to Fed being asked to bring the society to full employment (which is so backwards as a law because a central bank cannot bring full employment). The bubbles also get created because the real risk takers (big investment funds, banks, companies) are not allowed to take losses that the masses will take. As an example, let GE, GM, hedge funds, banks who lent outsized mortgages take the loss this time while interest rates rise to "normal". Sure a few people will lose jobs but we've created this hazardous situation right now where morally bankrupt corporations are backstopped by tax payers because they're too big to fail while the individual will lose their house if they can't pay mortgages. Companies have to be allowed to fail. Fed needs to maintain price stability on CPI and assets (which they couldn't after the last bubble).

dahdum 8y ago
Are you suggesting individuals should be able to default on the mortgage but still get to keep the house? Or that we should let the mortgages foreclose and people get kicked out, but not perform quantitative easing in that recession?
- NTDF9 8y ago
  I'm suggesting taking capitalism to some true form. Let badly managed companies fail, let badly managed houses of individuals get foreclosed. For innocent individuals, create a social security net. Instead of bailing out companies or keeping interest rates lower (as all the rich are asking right now so that stock market bubble stays up), use that same money to bail out underwater individuals in some way. Right now, the whole market is a perverted system saving the rich every time. That is not healthy at all.
  - Latteland 8y ago
    GE could fail. They are on the way down.
  - AnthonyMouse 8y ago
    > Instead of bailing out companies or keeping interest rates lower (as all the rich are asking right now so that stock market bubble stays up), use that same money to bail out underwater individuals in some way. Keeping interest rates lower was how they bailed out underwater individuals. Lower interest rates stimulate demand for housing, shoring up housing prices for the people who were underwater. Of course, that reinflated the housing bubble, so here we are again. What they need to do now is to slowly raise interest rates. Raising them quickly would put us right back to 2008. Raising them slowly lets housing prices decline over a period of years at rate that doesn't instantly put everyone deep underwater again, or kick every adjustable rate mortgage payment above the level that people start defaulting again.
    - NTDF9 8y ago
      > Keeping interest rates lower was how they bailed out underwater individuals. Lower interest rates stimulate demand for housing, shoring up housing prices for the people who were underwater. Of course, that reinflated the housing bubble, so here we are again. No. I meant using TARP money to wipe out a portion of that debt or create jobs instead of QE. The banks did not need bailing out. Certainly the execs shouldve been arrested. Because of decisions last time around, the execs take risks with impunity now.

hakfoo 8y ago

I'd suspect that a major difficulty of applying AI to real estate is limited fungibility and liquidity. With a stock or currency, there's usually enough of a live market that you can sell quickly at roughly market prices. Much of this is due to fungibility-- one share of INTC is worth the same as any other, so they can trade sight unseen with narrow spreads. With real estate, the AI dashboard can flash and beep and scream "Sell the houses in Roanoke now!" but there's no easy way out. You're either spending weeks or months closing out individual retail sales, and if anything goes wrong you're back to square one while the price is deflating around you, or you try to sell it commercially sight-unseen, for which you're going to take a major price haircut. Might work somewhat better with commercial real-estate which seems a bit more oriented to grading and classification to allow more sight-unseen trading.

brownbat 8y ago

Matt Levine has a half-joking article on whether or not automated trading would one day provide the ultimate fulfillment of Marxism: https://www.bloomberg.com/opinion/articles/2016-08-24/are-index-funds-communist https://www.bloomberg.com/opinion/articles/2016-08-24/are-in... If you believe that AI will get better at allocating capital over time, and that central planners are historically awful because of human flaws (from self-interest to lack of information)... then you might one day reasonably pine for self-driving economies. Asimov slipped this general idea in some of his stories as well: https://en.wikipedia.org/wiki/The_Evitable_Conflict https://en.wikipedia.org/wiki/The_Evitable_Conflict Even if you think this idea is completely silly (there's an argument it is), the Levine article is still highly recommended, primarily because he's not evangelizing so much as just toying with the idea. It's a fun read.

mtgx 8y ago
This kind of wishful thinking by people who dont realize there will always a human controlling that AI.
- mythrwy 8y ago
  I think maybe that is a wishful idea from a human :)

codexon 8y ago

It is already being applied to finance. The problem is that a huge part of the market is based on emotion, so the AI makes it worse and not better. When the proverbial knife is dropping, you don't want to catch it while it is in free fall, it will likely plunge below "fair value" in a panic. Quants know this and most have programmed/taught their systems to pull out of the market or short when volatility goes up. It is happening right now. Liquidity since February has shriveled up.

mtgx 8y ago

AI tends to "over-optimize" as we know from the paper clip theory too. It's likely to make booms and busts even more drastic.

visarga 8y ago

Each recession is different, why do you think AI would be able to predict them? Where would it learn to predict from? When using AI on a time series, it is necessary to have sufficient past data.

ThrustVectoring 8y ago

Merely having a correct investment thesis isn't enough to make money - you have to also get the trade timing and execution correct, and bubbles have a nasty tendency to stay inflated long enough to squeeze out the shorts. Like, the more profitable plays are often the ones that contribute to the boom/bust cycle. In the 2008 crisis, the big winners were people who took out as much mortgage debt as possible and aggressively did cash-out refinancing, ending up strategically defaulting on houses they got more money out of than they put in. When you're in a bubble, people tend to assume that the worst-case scenarios won't happen, so they'll extend credit that you cannot pay out in those scenarios, and you wind up getting some free expected value and positive skew that way.

im3w1l 8y ago
Now that's a depressing perspective.