Читать книгу Artificial Intelligence for Asset Management and Investment - Al Naqvi - Страница 15

ALI does not float like a butterfly or sting like a bee but most certainly was the only analyst in our institute who saw it coming. By mid-January of 2020, ALI was convinced that within the next 60 days, the US stock market would decline down to the 18,000 to 19,000 range. ALI became suspicious when a news report about some type of a viral outbreak in China caught ALI's attention. Many of us missed that little news segment as it stood too far away to make a dent in the rapidly shifting consciousness of the modern world. But not for ALI. ALI stands for Artificial Learning & Intelligence. ALI is an intelligent machine, and its story to predict the Covid-19-related crash of 2020 is as follows.

It was early January, and the world was focused on turmoil in the Middle East. A war was brewing, and geopolitical tensions were rising. Fear was in the air, but as we now know, for all the wrong reasons. ALI, who neither exhibits fears nor inhibits desires, was focused on something totally different. Ignoring all that was occupying our attention, it had picked up a trigger word related to a viral outbreak in China, and it was not ready to let go. Since viral outbreak could be the trigger words for ALI to identify a potentially serious risk, it was holding on to it as a dog holds on to a bone. Suddenly, the pattern-seeking mind of ALI went in hyper-stimulated mode when ALI began discovering words such as “SARS,” “pandemic,” “viral outbreak,” “panic,” and “human-to-human infection.” Like hammers pounding on ALI's consciousness, these word combinations made it go in a panic mode of its own. By the third week of January of 2020, ALI began screaming for attention. It was ignoring the highly publicized impeachment proceedings, the looming threat of violence in the Middle East, the tragic death of a legendary basketball player, the Oscars, and the Superbowl. All of these events attracted tremendous attention and occupied human attention. But it was as if ALI knew that all these attention-grabbing events would take a backseat in consciousness when compared to what was coming. ALI kept insisting to pay attention to what would eventually come to be known as Covid-19.

As ALI passed on the findings, we knew some type of threat assessment would be needed. Let us examine three pieces of information that were published in articles in major newspapers in January:

1 Coronavirus disease is transmitting from human to human;

2 Coronavirus is killing people as people do not have immunity against it; and

3 Coronavirus has no vaccine.

Logic dictates that the above information was enough to project that in a deeply interconnected world this virus would spread throughout the globe, that it would be devastating for people, and that it would lead to a catastrophic negative financial impact. Despite the logical inference, the world ignored the threat. The stories that appeared in the newspapers were written as if it were a problem unfolding on a distant planet. The authors and journalists covered the story as if they were some impassionate observers studying the phenomenon taking place in a lab experiment and far removed from the reach of the virus. It was in China—a distant land. The language of the articles suggested that we were standing on some high ground, protected, and shielded, while watching Wuhan wash away in a flood of obscurity. Our lack of empathy was on full display. A sheer deprivation of insight was widely observable not only in the political circles of many countries but also in the financial markets. The Dow Jones Industrial was leisurely strolling in record territories, carefree and exuberant. Oblivious that a train wreck was heading in our direction, we casually responded, probably enjoying the bliss that ignorance offers with undeniable consistency. DJI remained energized. Not until the third week of February 2020 investors finally recognized something was off. And even then, it took a while before the state of denial was lifted. On March 23, 2020, DJI bottomed out at 18,591.

One of the commonly used models in epidemiology is known as the SIR model. SIR is used to study the spread of diseases. It is remarkably powerful and simple. It divides the world into three buckets. The first bucket is composed of potential patients—the population that can get infected. The second bucket is composed of those who get infected. The third of those who have recovered. Hence the name SIR, susceptible, infectious, and recovered. As we connected the outputs of ALI in the SIR model, we recognized that growth of the virus would be exponential. But beyond applying the SIR model for infectious disease, we decided to apply it to study the infection of news. Similar applications of SIR have been done to understand viral marketing. After all, news can be viewed as infection where uninformed (bucket 1) become informed (bucket 2) and reach a point where they take an action (bucket 3). The action could be anything, buying a product, voting for a candidate, or selling your stock. Estimating how and when a certain segment of the population gets ready to take a specific action is a valuable tool.

When we studied the spread of the news about coronavirus, we were able to estimate by what time markets would get infected enough to respond to the news. With historical responses for such events fed into another machine learning algorithm, we projected that the market would decline to 18,000 to 19,000 within two months. On March 23, 2020—almost 60 days from our projection—DJI declined to 18,591.

Anytime anyone claims that they have the crystal ball to see what is happening in the market, you have already made the biggest mistake in investment: hubris. Yes, you can be right once, but the market finds its own way. It always outsmarts you. Which obviously means that we probably got lucky and were not necessarily right. Thus, the lessons of the above story are not to brag that we got it right. The lessons are far more profound.