Using AI to Invest in the Market? Here's Why You Shouldn't

It seems like everyone is talking about artificial intelligence these days -- and for good reason. Machine learning software is being used to write books, create art, and even diagnose illnesses. But there are some places the bots definitely don't belong -- including in your brokerage account. Read on to learn more about why your favorite AI shouldn't be managing your investments.

Incomplete or inaccurate data

Popular artificial intelligence software learns by consuming data. Unfortunately, AI predictions can be derailed by having incomplete or outdated information. As the old saying goes, garbage in equals garbage out.

Investors on Wall Street consider a wide variety of data when making their predictions. Can artificial intelligence recognize the link between the oil market in eastern Europe and the American solar industry? Did the person training the software consider including that information? If you don't know what your AI investor knows, you might be disappointed by its predictions.

Even with the most comprehensive dataset, an artificial intelligence software could be missing some information. For example, ChatGPT hasn't been trained on any data newer than 2021. If you were to predict the outcome of a football game, but you didn't watch the fourth quarter, how sure would you be in your prediction? Would you put money on it?

Qualitative vs. quantitative

Machine learning artificial intelligence is really good at predicting patterns. But when up against the randomness of human interpretation and reaction, it can be difficult for a bot to make successful predictions.

The father of modern economics, John Maynard Keynes, famously said "the market can stay irrational longer than you can stay solvent." It isn't enough to be able to predict quantities like sales numbers or profit margins, you also need to predict how people will react to those quantities. Even a good year could see a company's stock price fall if numbers miss the consensus. And traders can still bid up the stock price of a company that's never made a profit because they like the story.

One-dimensional recommendations

No two people are in the exact same financial situation. Yet if two people asked the same AI software the same question, they would receive the same advice. Even if an AI can account for the vast array of factors that affect company performance, and the often irrational response of Wall Street to that information, it likely won't understand the person asking the question.

Total return sounds like a great goal, but what if you're nearing retirement and can't stomach short-term turbulence? What if you live off of dividends? A good investment strategy isn't one size fits all, but tailored to your unique risk capacity, time horizon, and financial goals. As of yet, artificial intelligence cannot account for the personal side of personal finances, and makes no great replacement for a financial advisor.

Artificial intelligence, powered by machine learning, is an incredibly powerful and ever-evolving tool. However, the predictions of such software are limited to the data they have and their ability to interpret that data correctly. The bots are sorely lacking in their ability to account for human nature. So, for now, it's best to leave the AI out of trading.