Investment in AI-Powered Trading Bots: A Cautionary Tale
Warning: AI Trading Bots May Not Be the Answer to Your Investment Prayers
Search for "AI investing" online, and you’ll be flooded with endless offers to let artificial intelligence manage your money. I recently spent half an hour finding out what so-called AI "trading bots" could apparently do with my investments.
The Hype and the Risks
Many prominently suggest that they can give me lucrative returns. Yet as every reputable financial firm warns – your capital may be at risk. Or putting it more simply – you could lose your money – whether it is a human or a computer that is making stock market decisions on your behalf.
The Role of Human Investment Professionals
John Allan, head of innovation and operations for the UK’s Investment Association, warns that AI-powered investment is still in its infancy. "Investment is something that’s very serious, it affects people and their long-term life objectives," he says. "So being swayed by the latest craze might not be sensible."
The Limitations of AI
Firstly, AI is not a crystal ball, it cannot see into the future any more than a human can. And if you look back over the past 25 years, there have been unforeseen events that have tripped up the stock markets, such as 9/11, the 2007-2008 credit crisis, and the coronavirus pandemic.
Secondly, AI systems are only as good as the initial data and software that is used to create them by human computer programmers. To explain this issue we need a little history lesson.
Weak AI and Generative AI
Investment banks have actually been using basic or "weak AI" to guide their market choices since the early 1980s. That basic AI could study financial data, learn from it, and make autonomous decisions that – hopefully – got ever more accurate. These weak AI systems did not predict 9/11, or even the credit crisis.
Fast-forward to today, and when we talk about AI we often mean something called "generative AI". This is far more powerful AI, which can create something new and then learn from that.
The Risks of AI Trading Bots
Generative AI can also simply just go wrong, and produce incorrect information, something termed a "hallucination", says Prof Sandra Wachter, a senior research fellow in AI at Oxford University.
"Generative AI is prone to bias and inaccuracies, it can spit out wrong information or completely fabricate facts. Without vigorous oversights it is hard to spot these flaws and hallucinations."
Data Leakage and Model Inversion Attacks
Prof Sandra Wachter also warns that automated AI systems can be at risk of data leakage or something called "model inversion attacks". The latter – in simple terms – is when hackers ask the AI a series of specific questions in the hope that it reveals its underling coding and data.
The Trust Factor
So despite all these risks, why are a sizeable number of investors seemingly keen to let AI make decisions for them? Business psychologist Stuart Duff, of consultancy firm Pearn Kandola, says some people simply trust computers more than other humans.
"It’s almost certainly reflecting an unconscious judgement that human investors are fallible, while machines are objective, logical and measured decision makers," he says. "They may believe that AI will never have an off day, will never deliberately cheat the system, or try to hide losses.
Conclusion
In conclusion, while AI-powered trading bots may seem like a tempting option for investors, it is essential to exercise caution and carefully consider the risks involved. AI is not a panacea for investment woes, and it is crucial to understand its limitations and potential pitfalls.
FAQs
Q: What are the limitations of AI-powered trading bots?
A: AI is not a crystal ball, it cannot see into the future, and it is only as good as the initial data and software used to create it.
Q: What are the risks of using AI-powered trading bots?
A: AI can produce incorrect information, go wrong, and be prone to bias and inaccuracies.
Q: Can AI-powered trading bots be hacked?
A: Yes, automated AI systems can be at risk of data leakage or model inversion attacks.
Q: Why are some investors keen to let AI make decisions for them?
A: Some people simply trust computers more than other humans, believing that AI will never have an off day, will never deliberately cheat the system, or try to hide losses.
Q: What should I do if I’m considering using AI-powered trading bots?
A: Exercise caution, carefully consider the risks involved, and thoroughly research the potential pitfalls before making a decision.
