“Extinction of old forms is the almost inevitable consequence of the production of new forms […]”
- Charles Darwin, The Origin of Species
There exists a deleterious belief about the financial world:
That financial markets are somehow too wild and random for machines to understand — they are simply too emotional, too susceptible to the whims of innumerable variables to decode.
Thus humans are indispensable for clever trading, and the careers of traditional speculators are as stable as their starched collars.
Nothing is Truly Random
Earlier this month, new temporally-aware Cortical Learning AI (CL-AI) yielded 24% non-compounded annual returns trading a portfolio of the S&P e-Mini, Gold & Copper futures over four years.
This Cortical Learning AI digests real-time, highly random data streaming in from publicly-available price charts, predicts when prices will rise or fall, makes an average of one trade per day.
By most opinions, this sort of bizarrely strong performance shouldn’t be possible. There are volumes already written on why machine learning can never truly predict financial markets.
Yet here stands a mechanical heretic proclaiming victory over flesh-based technical analysis.
So how predictable are financial markets?
Humans are infinitely complex creatures, but there’s patterns to our behavior. Rules and heuristics govern our actions to a greater degree than we’d like to admit.
Keep in mind: We’re social animals. When in doubt (and life is full of doubt), we tend to follow the crowd.
If you shout “fire” in a crowded theater, you can bet people will rush to the exits. If the media features stories of toilet paper shortages, you can bet people will rush to hoard it.
We take behavioral clues from our context: We’re afraid of missing out. Evolution wrote FOMO into our deepest subconscious. We act…