Artificial intelligence (AI) is the next big technology. It’s important to remember that it’s new and that it’s technology. History tells us quite a bit about how innovations like this have played out in the past.
Running water seems boring now. But at one point in time, it too was a new technology.
According to economic historian Robert Gordon, filtered running water and sanitary sewer pipes reached 0.3% of homes in 1880.
Sixty years later, 93% of urban households had running water. This was such a crucial factor in extending life expectancy because it reduced disease. Running water also improved economic productivity by reducing sick days.
Gordon found that it took 40 years from the time Edison built the first power plant in 1882 before electricity in manufacturing boosted productivity.
Automobiles and personal computers both took 30 years to boost productivity.
With that perspective, we need to adjust our expectations for AI. It’s going to be huge … in 2050 or so.
That doesn’t mean we can’t benefit from AI today…
How to Benefit From the Smartest Assistant Out There
Right now, AI might be the smartest assistant you could ever have. You tell AI what to do, and it does something. If you’ve tested ChatGPT or other AI tools, then you know their first response is a rough draft. You need to give it more specific information.
You also need to query if it’s sure about the answer. You may recall some lawyers in New York were fined because their legal briefs included citations that ChatGPT made up. Fake data is so common it even has a name. Experts say the software is “hallucinating.”
This tells us we need to do two things if we want to truly benefit from AI…
First, we should avoid trusting it completely.
Second, we need to thoroughly understand the problem we need help with. You can’t just turn AI loose on some data and expect anything of value. You need to guide it. To do that effectively, you need an understanding of the desired output. Then you can guide AI toward your goal.
This might all sound discouraging. Everyone else is hyping AI. And here I am advising caution…
But I’m actually trying to encourage you to benefit from the AI that exists today. Use the tool as it is … instead of pretending it can do things that aren’t yet possible.
As long as we can understand the realistic capabilities of AI as it operates for us now, we can use it to improve our performance in the market.
Use AI to Win in the Markets
One way to improve trading with AI is to consider how we invest or trade now. Everyone uses a system. Even placing random trades and exiting after large gains or losses is a system.
If you have a system, you may have tested it. Or someone else tested it and showed you their results. Not many have realized this yet, but testing is where the current state of AI can help in a big way.
I put together an hour-long educational video on this topic to show you how we can design the kind of trading system, along with AI, that would give us an exciting edge in the market.
This is something I’d normally reserve for my students at the New York Institute of Finance, but I wanted to share it with you all as I take on a larger role at Money & Markets.
You can watch that free lecture here:
Here are some timestamps if you’d like to jump to a certain topic:
- Learning from Renaissance Technologies [5:35]
- What is Systems Trading? [15:39]
- Designing Trading Systems — First Steps [18:26]
- Designing Trading Systems — Critical Components [23:13]
- Designing Trading Systems — The Process [37:42]
- Improving Trading systems with AI [51:11]
I’d also love to hear your thoughts about it. You can email me and the team at StockPower@MoneyandMarkets.com to share your feedback!
Until next time,
Mike Carr
Chief Market Technician