The Online Investing AI Blog

Entropy by Jef Safi

Entropy has a bad rap.

When you hear about entropy in science class it’s usually described as a messy bedroom, a completely disordered state. It has nothing to do with intelligence, in fact, it looks like the complete opposite of intelligence.

But, according to a Harvard computational physicist, entropy holds the key to intelligence and — defying the bad reputation thrust on it by millions of high school science teachers — entropy is more like a state of exploration, or even play. It’s an insight that could lead to new technologies and has important implications for econophysics and stock trading, believe it or not.

Alexander Wissner-Gross, who is part of both Harvard’s Institute for Applied Computational Science and MIT’s Media Lab, recently published a paper called, “Causal Entropic Forces,” which, using cosmology as its inspiration, seeks to reveal the “deep connections between intelligence and entropy maximization.”

And that gives us a clue to how it works in finances and trading. Wissner-Gross sees entropy as the universe’s way to explore possibilities and to seize future possibilities as possible. As he tells Io9, it’s a lot like playing Go.

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The whole philosophy of using machine learning and artificial intelligence in investing is that machines can make trades quickly and without being burdened by emotions.

It’s the last bit that I’ll talk about today. Emotions — like fear and greed — skew the decision-making processes of the investor, causing him or her to but too high or sell to low based purely on feelings. A good example: you would probably pay more for food if you’re hungry than if you just had a big dinner.

Therefore — and this conclusion is inescapable — machines that do not have emotions can trade better.

Except, this logic is totally wrong. Well, not wrong. But it forgets the most important variable. The market and the economy runs on emotions. Even if every investor was an emotion-less cyborg, the rest of the economy, which underlies all stocks and commodities, runs on desires and emotions.

A successful investment system can not possibly rule out emotions. In fact, the most successful investment system would totally understand emotions, but not ruled by them. This system would understand how desire for something quickly turns to the desire to not lose something — fear. Likewise, it would be able to sense when the momentum of fear turns into a buying opportunity. It could sense that the greed in the real estate market was becoming too frothy, or that the fear of a recession was starting to bottom out.

In short, the best investment system understands emotions. It just isn’t ruled by them.

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The notion that robots are sweeping in and stealing jobs is become an increasingly more virulent meme.

You can check out some of the angst at the Boston Globe and here, at Boing Boing.

It follows a long list of such occupational fears. The Irish, Italians, Japanese, Mexicans, and, more recently, Chinese were all identified as job thieves at one time or another. Robots are just the latest immigrant class who are threatening upheaval in the workplace, although they’re not arriving in boats or on planes, but in labs and in factories.

These robots aren’t quite yet the Jetson type or Lost in Space models. It’s mainly automation that people are worried about. But the anthropomorphic types of robots are right around the temporal corner, as well.

Factory robots are being used to perform precise tasks that humans used to do. This is even a threat to cheap factory labor in places like China.

But the extent of the robots reach doesn’t just stop at the edges of the factory floor. Desk jobs and professional occupations — once thought immune to automation — are drifting into the cross hairs.

Artificial intelligence and machine learning make jobs like writing — Yikes! — and security susceptible to automation.

So what can we carbon-based lifeforms do, but prepare to welcome our new robotic overlords?

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Our blog talks a lot about using artificial intelligence — or, AI — as a tool for investing and trading.

Trading firms and hedge funds are using AI every single minute of every single trading day to place investments and make trades. Billions and billions of dollars — not to sound too Carl Sagany — are riding on how well AI or machine learning trading schemes work.

We’re also seeing artificial intelligence revolutionize other industries. Pick up an iPhone and ask Siri about AI. She might lead you to several stories on the web about how AI is being used in everything from telecommunications to health care.

But, the perception among many is that we are still stranded in the depths of AI winter — that’s the term for the years of little progress in artificial intelligence. Some experts are saying that this is a misperception. AI has made huge gains in the last few decades, but when compared to the expectations, this progress seems minuscule.

If the perception is that AI is hopeless — and the reality is that AI developers are making great strides in creating artificial intelligence- and machine learning-based products, then wouldn’t placing bets in AI companies add up to a possibly lucrative, albeit contrarian investment idea?

One contributor to Seeking Alpha is seeing AI as a possible investment play.

Over the past few years, we have seen forms of artificial intelligence begin to quietly creep into our everyday lives and become something on which we depend. A very simple form would be something like Microsoft Corporation’s (MSFT) spelling and grammar check in its Word software or the method that Facebook, Inc. (FB) uses to suggest people that you might know.

Seeking Alpha writer, Matt Cilderman, has a few recommendations.

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Each day, machines, not humans, are plowing through statistics and crunching numbers trying to devise trading algorithms to make money in stock markets, futures markets, commodities markets, and any other place that traders can turn a dime.

They’ve been successful.

But not totally successful. And not successful for long stretches.

The stories of trading strategies failing are just as common as stories of amazing machine-learning success in the market.

Why is that?

I’ll take a stab. I believe that most machine learning and artificial intelligence programs are essentially created short-sighted. To build an automated trading system, you “train” the program to understand data. This data can be technical or fundamental, or a range of other data sets. The program learns the relationships between the data and the market. When factor x goes up, the market reacts with a y, let’s say.

But, this data is not an object, per se, but is really a shadow of currents in a broader economy. So, the program ends up not be predictive at all. It is reacting to a reactive set of data.

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While you go about your day and fret about the latest economic downswing, five fingers are folding into an economic punch that will soon spread across the globe.

This economic punch will not be good, or bad.

There is no defense for the punch.

It’s coming.

A.I.

The first part of this punch is artificial intelligence — or AI. For years, people wrote AI off as hype. Now, robots and super-smart computer applications are getting noticed. From Siri to Jeopardy-winning Watson supercomputer, A.I. can no longer be ignored. More and more factories are utilizing robots to improve production.

3-D Printing

Remember when desktop printers were the rage? They actually revolutionized the office and created entire new industries. Now, imagine a device that can sit in your home and produce objects–real, three dimensional objects. Experts say this will change the way we shop, the way we recycle, and the way we make and save money. There are also plans to create printers that can make pharmaceuticals and revolutionize health care.

Personalized Medicine

Speaking of health care… Today’s medicine is like a shot gun. You take a whole bunch of treatments and pills and throw them at patients and see which ones have the best chances to succeed. The truth is, however, that there are physiological differences between individuals. An effective treatment for you, might be ineffective for me. A pill that causes side effects for you, may not have any problems for me. Personalized medicine will treat people as they are — as individuals. It could save lives. And save trillions of dollars.

Crowd Sourcing, Crowd Funding

Karen Klein was a school bus monitor who was mercilessly bullied by a group of middle school students. She won’t need that job now. A crowd-funded project that was attempting to raise $5,000 so she could take a vacation ended up generating more than $700,000 in donations. This is just one story. More will follow, including new plans to allow people to crowd invest in start-ups.

Augmented Reality

New technology will blend cyber-reality with reality. It’s called augmented reality. One way this works is through glasses and contact lenses that display data for the user. Think fighter pilots and their heads-up display.

Good and Bad

There’s always good news and bad news with technological developments. This five-finger economic punch is no different.

On the one hand, robots will make our lives easier. On the other hand, they may also take our jobs.

3-D printing can usher in an age of abundance. But, during a transition, stores may shutter and businesses could be wiped out.

Despite the bad news, the overall, long-term prognosis is good. With every wave of technological change, there’s been struggle, but in each case, people have found a way to absorb the economic punch of new tech and counter with new opportunities and even better technological solutions.

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Humans can do a lot of things better than computers–but that list is shrinking.

Once, investing and trading solely belonged to humans. Computers were number-crunching machines that helped investors and traders make decisions.

Then, algorithmic trading came along. Trading strategies designed and maintained by computers saw more and more action in the market. Although,there were always people nearby monitoring those trades.

Now, computers have taken another step toward mastering the market.

At a recent conference in Barcelona, Spain researchers released their findings that showed computer model trading agents beat human traders and other computer trading systems.

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Here at Online Investing AI, we are dedicated to using new technology to develop Automated Trading systems. But there is one small problem with a purely programming approach. It does not allow us to leverage off the best trading strategies that people have already developed. That’s where you come in.

Are you a successful trader? Are you looking for ways of using new technology and Artificial Intelligence to improve your trading strategies? If the answer is yes, then we are looking for you.

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I just finished reading Automatic Quantum Computer Programming and it really got me thinking about the possibilities and promise of quantum computers. For those unawares, quantum computers have the potential to revolutionize our lives as much as the digital computer has. Why? Because they can solve problems that digital computers cannot solve.

How do they do it?

Quantum computers use the characteristics built into the quantum world such as superposition and entanglement to solve these difficult problems. In an ol’ skool digital computer, each bit can only have a value of 0 or 1. However, in a quantum computer, a single quantum bit can have a value of both 0 and 1, at the same time. This is stored as a probability of being a 0 or a 1. So, while the computer that you are reading this on can only store one piece of information in a single bit, a quantum computer can store much more information in a single quantum bit. This powerful ability is known as superposition.

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Whether it’s under the guise of high frequency trading or algorithmic trading or quant trading, advanced technology is becoming more accepted and implemented.

This technology includes artificial intelligence and machine learning.

There’s a good chance it’s trading at least a portion of your money right now.

Is this a good thing? Yes.

Is this a bad thing? Yes.

Could it be bad and good all at the same time? You bet.

The most important thing is be prepared for this revolution in finance. Here are a few ways to be prepared for artificial intelligence in finance.

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