My Investment Skills Worse Than a Monkey's... Thinking 'Should I Leave It All to AI?' [AI Error Notes]

Stock Competition: Monkeys vs Humans, and AI
Absolute Reliance on AI in Fund Management Ends in Bankruptcy
AI and Humans: Collaborative and Complementary in Investment

Editor's NoteExamining failures is the shortcut to success. 'AI Error Notes' explores failure cases related to AI products, services, companies, and individuals.

Many investors were disappointed when they saw last year's investment return report card. This is especially true if they had a large portion invested in the domestic stock market.

"Why do the stocks I buy always fall? How can this be? Maybe even a monkey randomly picking stocks would have a better investment return."

Such thoughts are not unreasonable. In fact, there was an experiment.

Stock Battle Results: Professional Investors' Returns -13.4%, Monkeys...

My Investment Skills Worse Than a Monkey's... Thinking 'Should I Leave It All to AI?' [AI Error Notes]

Monkeys and people looking at stock market reports and monitors. ChatGPT (DALL·E 3)

The American economic media outlet The Wall Street Journal (WSJ) conducted an interesting experiment in 2000. It was a stock battle between monkeys and humans. Professional investors selected stocks based on cold rationality and expertise.

On the other hand, the monkey randomly threw darts at a stock price table printed in the newspaper to pick stocks. The professional investors' return was -13.4%, while the monkey's return was -2.7%. Although both recorded negative returns, the monkey was the winner in this contest.

A similar experiment was conducted in the UK in 2002. Participants included a 5-year-old child, an astrologer, and an investment expert. The 5-year-old chose companies with fun names or those that made products they liked.

The astrologer and investment expert each selected stocks based on their knowledge and experience. The investment expert's return was -46.2%, the astrologer's was -6.2%, and the 5-year-old child recorded a remarkable +5.8% return.

Everyone tries to predict the stock market. However, as everyone knows, this is impossible so far. These cases are proof. Humans are rational and logical beings, but at the same time, they are biased and impulsive. They greedily pick stocks by only looking at market trends and sentiment, ignoring the intrinsic value of the stocks. At times, gripped by fear, they sell everything and flee even when they shouldn't.

Therefore, people seek investment methods that compensate for human weaknesses. Something that can dramatically change their poor investment performance. Now, it seems we might have found such a method: Artificial Intelligence (AI).

Introducing AI and Firing 600 Analysts

The letters "AI" are superimposed over an image of red and blue bar graphs symbolizing the stock market trending upward. Photo by Getty Images Bank

BlackRock officially launched its generative AI research lab in 2018. Robert Goldstein, the Chief Operating Officer (COO) of the world's largest asset management firm, said:

"Generative AI holds tremendous power regarding company operations, talent strategy, and overall strategy. This is a completely new world."

BlackRock acquired the robo-advisor company FutureAdvisor and started robo-advisor services. A robo-advisor is a program or computer that directly handles all investment decisions. The term is a combination of "robot" and "advisor." Investors set their investment preferences and target returns, and the robo-advisor manages assets accordingly. AI has deeply penetrated investment sites worldwide, including Wall Street.

Global investment bank Goldman Sachs introduced the AI investment analysis program 'Kensho' in 2017. Subsequently, they fired about 600 analysts, leaving only two engineers to manage the AI investment analysis program. Kensho could perform in 5 minutes what would take 15 people a month. Confident in these results, Goldman Sachs declared itself an 'AI company.'

The growth of robo-advisors is noteworthy. According to Koscom, as of July 2024, the number of robo-advisor contract holders in Korea reached 317,434, a tenfold increase from 38,707 in 2017. Assets under management nearly doubled from 421.9 billion KRW in 2017 to 878.4 billion KRW.

The younger generation, the MZ generation (Millennials + Generation Z), who will lead future asset markets, also show considerable trust. In a 2020 survey by asset management company Vanguard, 49% of Generation Z (born 1997?2002) and 47% of Millennials (born 1981?1996) responded that they "trust robo-advisors." This is about 20?30% higher than Generation X (born 1965?1980) and Baby Boomers (born 1956?1964).

AI-Enhanced Investment Techniques Result in ‘Bankruptcy’

The robot appears as if it is thinking, with its right hand placed on its head. Behind it, bar graphs and area charts are drawn as the background. Photo by Getty Images Bank

However, as expectations for the 'investment genius AI' swell, it might be time to consider the possibility of a bubble.

There was a company claiming to predict the global stock market and introduce successful investment strategies through machine learning and cutting-edge algorithms. Hedge fund Sentient Investment Management gained attention in 2016 for its AI-based investment strategy. The company recorded a 4% return in 2017 but failed to generate profits in 2018. Its assets under management remained below $100 million. Ultimately, the fund was liquidated two years after its establishment. This case highlights the limitations and challenges of AI-based investing.

In Korea, there was even a stock investment battle between humans and AI. It was a 2021 contest between stock investment AI and the 'Super Ant' investor Mahaseven (SBS 'Battle of the Century - AI vs Human').

Mahaseven was famous for turning 1 million KRW into 7 billion KRW over 10 years. Each had 10 million KRW to invest, and the contest lasted four weeks. In the first week, AI posted higher returns. However, from the second week, the tide turned. The final result was a human victory. AI recorded -0.01%, while the human achieved +40.4%. The vague notion that AI might outperform humans, especially when monkeys have better returns than humans, is risky.

News claiming that OO is better than humans should be reconsidered. The first trap is that investment return contests are generally 'short-term.' In short-term investments, luck plays a significant role. Conversely, in long-term investments, the influence of luck diminishes due to the law of large numbers.

Also, consider the nature of 'news.' If humans were smarter than monkeys, it wouldn't be news. Only newsworthy are stories where monkeys outperform humans. There have probably been many 'OO vs human stock investment battles,' but only those experiments where humans lost became news.

AI and Humans: Collaborative and Complementary in Investment

An illustration depicting the collaboration between robots and humans. Getty Images Bank

Like the trap in the experiment where 'a monkey beat a fund manager,' vague expectations that 'AI will grow my investment' should be approached with caution. While investment experiments are interesting, they do not imply that professional investment analysis and research are useless. Rather, they remind investors to humbly accept market uncertainties and reconsider the importance of diversification and long-term investment.

Looking at how global financial firms adopt AI, they pursue 'AI and human collaboration' rather than 'AI vs human.' AI excels at processing vast data and pattern analysis. It can monitor markets 24/7 and analyze numerous indicators simultaneously. Meanwhile, humans have strengths in macro insight, understanding market psychology, and crisis response. Flexible judgment in unpredictable situations remains a human domain.

Successful AI adoption requires several principles. AI should be used as an auxiliary tool, with humans managing final decisions. Additionally, human experience and intuition remain crucial in risk management and long-term strategy formulation. The true competitiveness in the AI era will depend on the ability to harmoniously combine technology and human wisdom.