Artificial Intelligence: A Primer for Investors
When many people think of Artificial Intelligence, they think of talking robots or machines drawn straight from a science fiction movie. But Artificial Intelligence (AI) is better understood if one sees it not as robots, but as a mathematical algorithm that can extract insights and knowledge from enormous data sets. In that sense, AI is trained to work just like the human brain does - it can study data to discover patterns, logic, and ultimately use data to 'teach itself' how to work better and more efficiently.
The 'self-learning' aspect of AI is what scares a lot of people, and gives rise to the "robots taking over the world" doomsday scenarios. Those fears are not unfounded, but we would argue that they are far-fetched - at least given where the technology stands today, and how it's being used. Today, AI is impacting nearly every industry vertical from manufacturing to healthcare to retail sales and financial services, giving rise to new business models and creating efficiencies that are saving companies - and customers - billions of dollars1.
For investors, failing to acknowledge the role of AI in business would mean, in our opinion, ignoring one of the key components driving the modern economy forward.
Data-Driven Business is Smarter Business
Again, while many people still see Artificial Intelligence as a science fiction concept, in reality it has applications that matter and are helpful to our everyday lives. Take Netflix, for example. Did you know that 80% of hours streamed on Netflix are based on recommendations (driven by its AI-powered recommender system), while the remaining 20% is search-driven?2 The takeaway: a vast majority of Netflix's streamed hours are due to AI.
Netflix studies have found that if a user does not find a suitable program within 90 seconds, he or she is likely to close the app or seek entertainment elsewhere. With the AI-powered 'recommender system,' however, the AI gets to know a user's interests and habits, and based on 'self-learning' it can personalize and target its recommendations to keep the user engaged. This recommender system is said to save the company more than $1 billion per year3.
There are several other practical, commonsense applications in business where AI can create extraordinary efficiencies while saving corporations big dollars. In the Banking and Finance sector, AI can be used for automated trading & investment discovery, trading strategies, customer behavior analysis, identity verification, and fraud detection.
Artificial Intelligence has transformed - and continues to transform - financial wealth management with the advent of "robo-advisors," which use sophisticated algorithms to create investment management efficiencies. Computers can now be tasked with the often arduous and technical tasks of re-balancing portfolios, altering allocations with rule-based prompts or based on changing market conditions, and even automate processes like tax-loss harvesting and regular rebalancing.. Artificial Intelligence can refine the investment process and potentially help investors avoid unnecessary and sometimes costly errors.4
In the Healthcare Providers sector, AI can be used for enhanced and instantaneous diagnostics, image analytics for early disease detection, drug discovery, patient monitoring (pre-emptive warning systems), personalized medicine and treatment, and VR for surgical training and simulation. In the Insurance sector, we can use algorithms for claims management and fraud detection, analyzing customer behavior and reducing revenue churn, automated underwriting, and potentially more efficient, fair, and precise pricing mechanisms.
Looking at these lists, it is clear that AI is not an army of robots that are set to destroy mankind. On the contrary, the technology is likely to improve operational efficiencies, enhance quality control, generate new insights, enable new business models, and allow for precision in dealing with clients and patients.
Yes, But…Are Massive Job Losses Coming as a Result?
The answer is yes and no. The growing sense today is that AI and technological innovation are likely to automate a majority of the jobs in the US, killing millions of jobs in the process. Indeed, throughout history, technology adoption has often led to major labor displacements in advanced economies. Here in the US, during our transition from an agricultural economy to an industrial economy, the agricultural share of employment went from 60% in the late 1800's to less than 5% by 1970. As we transitioned into a service and consumer-based economy, manufacturing jobs went from 26% of total US employment in 1960 to below 10% today.5
Yet throughout those transitions, more jobs have been created in the process and the country's wealth and standard of living have increased exponentially. Perhaps the best modern example would be the introduction of the personal computer, which many feared at the time would eliminate the need for human labor in many applications. However, according to estimates by McKinsey, the introduction of the personal computer has created a net of 15.8 million new jobs in the United States since 1980, even after accounting for jobs displaced.6
In many cases, we simply cannot know how the economy and sectors will adapt. But assuming that technology increases productivity, demand, profits, and growth, jobs should follow as well, in our opinion.
Investing in AI
The biggest internet companies are building platforms designed to collect massive amounts of data and are subsequently racing to develop the AI needed to analyze it. Other companies are focusing on one of several aspects of AI, like "computer vision, natural language (text and speech), chat-bots, geolocation, predictive design and pattern recognition," according to J.P. Morgan. Still others are focusing on designing, implementing, and integrating automation and AI applications for companies.
The landscape is shifting quickly, and businesses are evolving even faster. We believe that investors would be wise to take note and to see AI not only as a potential investment opportunity, but as a potential opportunity to invest better.
Please keep this in mind as you make your plans for 2018. Also keep your eyes open for any trends that could be beneficial to your portfolio.
One such trend to consider is how technology has innovated the investment industry with the rise of robo advisors by:
- Using AI to enhance portfolio rebalancing & tax efficiencies
- Investing exclusively with ETFs
- Simplifying the investing process
- Lowering fees and expenses
