Imagine If Robo Advisers Could Do Emotions– Andrew Lo

MIT Sloan Professor Andrew Lo

MIT Sloan Professor Andrew Lo

From the Wall Street Journal

At a conference last year, I was approached by an audience member after my talk. He thanked me for my observation that it’s unrealistic to expect investors to do nothing in the face of a sharp market-wide selloff, and that pulling out of the market can sometimes be the right thing to do. In fact, this savvy attendee converted all of his equity holdings to cash by the end of October 2008.

He then asked me for some advice: “Is it safe to get back in now?” Seven years after he moved his money into cash, he’s still waiting for just the right time to reinvest; meanwhile, the S&P 500 earned an annualized return of 14% during this period.

Investing is an emotional process. Managing these emotions is probably the greatest open challenge of financial technology. Investing is much more complicated than other chores like driving, which is why driverless cars are already more successful than even the best robo advisers.

Despite the enthusiasm of tech-savvy millennials—the generation of investors now in their 20s and 30s who are just as happy interacting with an app as with warm-blooded humans—robo advisers don’t take into account the limits of human cognition; they don’t make allowances for emotional reactions like fear and greed; and they can’t eliminate blind spots. Robo advisers don’t do emotion. When the stock market roils, investors freak out. They need comfort and encouragement. During last August’s stock-market rout, Vanguard Group told The Wall Street Journal it was “besieged” with calls from jittery investors and had to pull volunteers from across the company to handle the call volume.

But what if a robo adviser could identify the precise moment you freak out and encourage you not to sell by giving you historical context that calms your nerves? Better yet, what if this digital adviser could actively manage the risk of your portfolio so you don’t freak out at all?

Imagine if, like your car’s cruise control, you can set a level of risk that you’re comfortable with and your robo adviser will apply the brakes when you’re going downhill and step on the gas when you’re going uphill so as to maintain that level of risk. And if you do decide to temporarily take over by stepping on the brakes, the robo adviser will remind you from time to time that you need to step on the gas if you want to reach your destination in the time you’ve allotted. Instead of artificial intelligence, we should first conquer artificial emotion—by constructing algorithms that accurately capture human behavior, we can build countermeasures to protect us from ourselves.

Robo advisers have great potential but the technology is still immature; they’re the rotary phones to today’s iPhone.

Marvin Minsky, the recently deceased founding father of artificial intelligence, summarized the ultimate goal of his field by saying that he didn’t just want to build a computer that he could be proud of, he wanted to build a computer that could be proud of him. Wouldn’t it be grand if we built a robo adviser that could be proud of our portfolio?

See the post at  WSJ “The Experts” 

Andrew W. Lo is the Charles E. and Susan T. Harris Professor at MIT Sloan School of Management, director of the MIT Laboratory for Financial Engineering, principal investigator at MIT Computer Science and Artificial Intelligence Laboratory, and chief investment strategist at AlphaSimplex Group.

 

 

Opinion: your future financial adviser could be a robot – Vasant Dhar & Roger M. Stein

MIT Sloan Researcher Roger Stein

MIT Sloan Researcher Roger Stein

From MarketWatch

President Donald Trump has vowed to bring manufacturing jobs back to the U.S. through new policies and regulatory reform. But this effort faces a strong headwind: In all walks of life, human employment is being challenged.

Many manufacturing jobs have been replaced by robots. Meanwhile, drivers are on their way to being displaced by driverless cars, tax professionals by software, and much more.

Recently Trump turned his attention to the financial services industry, signing two directives aimed at repealing portions

NYU Professor Vasant Dhar

of the Dodd-Frank and Consumer Protection acts, citing onerous restrictions that hamper legitimate investing and financial activity.

But regulatory change isn’t likely to repel the march of the robots that is transforming the financial services business. FinTech — the finance industry equivalent of robots in manufacturing — is too far along for that. If future investors and consumers of financial services begin to trust FinTech platforms as they have done in retail and travel, then fewer humans will be working in finance.

Read More »

Robots are moving in to our homes, but there’s no killer app – Elaine Chen

MIT Sloan Senior Lecturer Elaine Chen

From The Conversation

Not too long ago, robots were giant, caged things, mainly found in automotive manufacturing lines. Social robotics was a new field of research pursued by the best and brightest in university research labs.

In the past few years, however, it seems that social robots have finally come of age. All of a sudden, the market is teeming with products. Some are distinctly humanoid.

The rise of social robots

Softbank Robotics’ Nao, Pepper and Romeo all have a head and two arms. With their stylised designs, they deftly avoid the “uncanny valley” of human-machine interfaces (realistic enough to look human, but non-human enough to look spooky).

Others are more subdued in their anthropomorphism. Blue Frog Robotics’ Buddy sports an animated face on a screen, and scoots around on wheels. Jibo is yet more subtle in its ability to evoke humanity, with its stationary base and a head that can turn and nod.

Read More »

Imagine if robo advisers could do emotions — Andrew Lo

MIT Sloan Professor Andrew Lo

MIT Sloan Professor Andrew Lo

From The Wall Street Journal 

At a conference last year, I was approached by an audience member after my talk. He thanked me for my observation that it’s unrealistic to expect investors to do nothing in the face of a sharp market-wide selloff, and that pulling out of the market can sometimes be the right thing to do. In fact, this savvy attendee converted all of his equity holdings to cash by the end of October 2008.

He then asked me for some advice: “Is it safe to get back in now?” Seven years after he moved his money into cash, he’s still waiting for just the right time to reinvest; meanwhile, the S&P 500 earned an annualized return of 14% during this period.

Read More »

Robots add real value when working with humans, not replacing them — Matt Beane

MIT Sloan Ph.D. Student Matt Beane

MIT Sloan Ph.D. Student Matt Beane

From TechCrunch

In the popular media, we talk a lot about robots stealing jobs. But when we stop speculating and actually look at the real world of work, the impact of advanced robotics is far more nuanced and complicated. Issues of jobs and income inequality fade away, for example — there aren’t remotely enough robots to affect more than a handful of us in the practical sense.

Yet robots usually spell massive changes in the way that skilled work gets done: The work required to fly an F-16 in a combat zone is radically different from the work required to fly a Reaper, a semi-autonomous unmanned aerial vehicle, in that same zone.

Because they change the work so radically, robot-linked upheavals like this create a challenge: How do you train the next generation of professionals who will be working with robots

My research into the increasing use of robotics in surgery offers a partial answer. But it has also uncovered trends that — if they continue — could have a major impact on surgical training and, as a result, the quality of future surgeries.

Read More »