AI News, Why is machine learning in finance so hard?

Why is machine learning in finance so hard?

Financial markets have been one of the earliest adopters of machine learning (ML).

Even though ML has had enormous successes in predicting the market outcomes in the past, the recent advances in deep learning haven’t helped financial market predictions much.

Even though there are a number of papers claiming the successful application of deep learning models, I view those results with skepticism.

The issue of data distribution is crucial - almost all research papers doing financial predictions miss this point.

We expect the distribution of pixel weights in the training set for the dog class to be similar to the distribution in the test set for the dog class.

In addition to making sure the test and train sets have similar distributions, you also have to make sure the trained model is used in production only when the future data adheres to the train/validation distribution.

While most researchers have been mindful not to incorporate look-ahead bias into their research, almost everyone fails to acknowledge the issue of evolving data distributions.

For example, even if we have a complete understanding of what happened during the great depression of the 1930s, it’s hard to convert it to a form that makes it usable for an automated learning process.

(Please note that mixture of experts is a very common technique to combine the models from the same scale - almost all quant asset management firms employ this technique.) I

If there is one thing you take away from this post, let it be this: Financial time-series is a partial information game (POMDP) that’s really hard even for humans - we shouldn’t expect machines and algorithms to suddenly surpass human ability there.

What these algorithms are good at is the ability to unemotionally spot a hardcoded pattern and act on it - this unemotionality is a double-edged sword though - sometimes it helps and other times it doesn’t.

Deep Learning Natural Language Processing in Financial Modeling with MATLAB FactSet

Chris Thomas, Vice President, Product Strategist, FactSet In the constantly evolving world of financial big data, the largest issue facing analysts is not the availability of unique content to drive alpha, but the usability of that data.

FactSet has come up with a sophisticated entity driven data model that allows analysts to seamlessly connect across data sets and spend less time scrubbing data and more time analyzing it.

Now, FactSet is taking its 40 years of industry expertise and applying it to the world unstructured data to allow our users to look beyond traditional structured content sets and turn information into intelligence.

Machine learning

Machine learning is a subset of artificial intelligence in the field of computer science that often uses statistical techniques to give computers the ability to 'learn' (i.e., progressively improve performance on a specific task) with data, without being explicitly programmed.[1]

These analytical models allow researchers, data scientists, engineers, and analysts to 'produce reliable, repeatable decisions and results' and uncover 'hidden insights' through learning from historical relationships and trends in the data.[12]

Mitchell provided a widely quoted, more formal definition of the algorithms studied in the machine learning field: 'A computer program is said to learn from experience E with respect to some class of tasks T and performance measure P if its performance at tasks in T, as measured by P, improves with experience E.'[13]

Developmental learning, elaborated for robot learning, generates its own sequences (also called curriculum) of learning situations to cumulatively acquire repertoires of novel skills through autonomous self-exploration and social interaction with human teachers and using guidance mechanisms such as active learning, maturation, motor synergies, and imitation.

Work on symbolic/knowledge-based learning did continue within AI, leading to inductive logic programming, but the more statistical line of research was now outside the field of AI proper, in pattern recognition and information retrieval.[17]:708–710;

Machine learning and data mining often employ the same methods and overlap significantly, but while machine learning focuses on prediction, based on known properties learned from the training data, data mining focuses on the discovery of (previously) unknown properties in the data (this is the analysis step of knowledge discovery in databases).

Much of the confusion between these two research communities (which do often have separate conferences and separate journals, ECML PKDD being a major exception) comes from the basic assumptions they work with: in machine learning, performance is usually evaluated with respect to the ability to reproduce known knowledge, while in knowledge discovery and data mining (KDD) the key task is the discovery of previously unknown knowledge.

Evaluated with respect to known knowledge, an uninformed (unsupervised) method will easily be outperformed by other supervised methods, while in a typical KDD task, supervised methods cannot be used due to the unavailability of training data.

Loss functions express the discrepancy between the predictions of the model being trained and the actual problem instances (for example, in classification, one wants to assign a label to instances, and models are trained to correctly predict the pre-assigned labels of a set of examples).

The difference between the two fields arises from the goal of generalization: while optimization algorithms can minimize the loss on a training set, machine learning is concerned with minimizing the loss on unseen samples.[19]

The training examples come from some generally unknown probability distribution (considered representative of the space of occurrences) and the learner has to build a general model about this space that enables it to produce sufficiently accurate predictions in new cases.

An artificial neural network (ANN) learning algorithm, usually called 'neural network' (NN), is a learning algorithm that is vaguely inspired by biological neural networks.

They are usually used to model complex relationships between inputs and outputs, to find patterns in data, or to capture the statistical structure in an unknown joint probability distribution between observed variables.

Falling hardware prices and the development of GPUs for personal use in the last few years have contributed to the development of the concept of deep learning which consists of multiple hidden layers in an artificial neural network.

Given an encoding of the known background knowledge and a set of examples represented as a logical database of facts, an ILP system will derive a hypothesized logic program that entails all positive and no negative examples.

Given a set of training examples, each marked as belonging to one of two categories, an SVM training algorithm builds a model that predicts whether a new example falls into one category or the other.

Cluster analysis is the assignment of a set of observations into subsets (called clusters) so that observations within the same cluster are similar according to some predesignated criterion or criteria, while observations drawn from different clusters are dissimilar.

Different clustering techniques make different assumptions on the structure of the data, often defined by some similarity metric and evaluated for example by internal compactness (similarity between members of the same cluster) and separation between different clusters.

Bayesian network, belief network or directed acyclic graphical model is a probabilistic graphical model that represents a set of random variables and their conditional independencies via a directed acyclic graph (DAG).

Representation learning algorithms often attempt to preserve the information in their input but transform it in a way that makes it useful, often as a pre-processing step before performing classification or predictions, allowing reconstruction of the inputs coming from the unknown data generating distribution, while not being necessarily faithful for configurations that are implausible under that distribution.

Deep learning algorithms discover multiple levels of representation, or a hierarchy of features, with higher-level, more abstract features defined in terms of (or generating) lower-level features.

genetic algorithm (GA) is a search heuristic that mimics the process of natural selection, and uses methods such as mutation and crossover to generate new genotype in the hope of finding good solutions to a given problem.

In 2006, the online movie company Netflix held the first 'Netflix Prize' competition to find a program to better predict user preferences and improve the accuracy on its existing Cinematch movie recommendation algorithm by at least 10%.

Classification machine learning models can be validated by accuracy estimation techniques like the Holdout method, which splits the data into a training and test sets (conventionally 2/3 training set and 1/3 test set designation) and evaluates the performance of the training model on the test set.

In comparison, the k-fold-cross-validation method randomly splits the data into k subsets where the k - 1 instances of the data subsets are used to train the model while the kth subset instance is used to test the predictive ability of the training model.

For example, using job hiring data from a firm with racist hiring policies may lead to a machine learning system duplicating the bias by scoring job applicants against similarity to previous successful applicants.[50][51]

There is huge potential for machine learning in health care to provide professionals a great tool to diagnose, medicate, and even plan recovery paths for patients, but this will not happen until the personal biases mentioned previously, and these 'greed' biases are addressed.[53]

Introduction to Data Science with R - Data Analysis Part 1

Part 1 in a in-depth hands-on tutorial introducing the viewer to Data Science with R programming. The video provides end-to-end data science training, including ...

Entity Relationship Diagram (ERD) Training Video

Stanford Certificate - Data, Models and Optimization

Preview Stanford's online graduate certificate: Data, Models and Optimization Info: ...

Predicting the Winning Team with Machine Learning

Can we predict the outcome of a football game given a dataset of past games? That's the question that we'll answer in this episode by using the scikit-learn ...

Modeling Word Problems with Linear Functions Part 1

Identify Independent and Dependent variables at 2:22 Building a table of values to help develop the formula at 6:55 Graphing the Linear Function at 11:17 (If ...

Statistics intro: Mean, median, and mode | Data and statistics | 6th grade | Khan Academy

This is a fantastic intro to the basics of statistics. Our focus here is to help you understand the core concepts of arithmetic mean, median, and mode. Practice this ...

Financial Management - Lecture 01

finance, financial management, Brigham, CFO, financial decision, corporate finance, business finance, financial economics, financial markets, financial ...

Data Science: Reality vs Expectations ($100k+ Starting Salary 2018)

Skillshare might not like this. You can sign up for a 2 month trial for Skillshare, complete the data science course and then cancel your membership before being ...

Panel Data Models with Individual and Time Fixed Effects

An introduction to basic panel data econometrics. Also watch my video on "Fixed Effects vs Random Effects". As always, I am using R for data analysis, which is ...

Decision Tree Tutorial in 7 minutes with Decision Tree Analysis & Decision Tree Example (Basic)

Clicked here and OMG wow! I'm SHOCKED how easy.. No wonder others goin crazy sharing this??? Share it with your other friends ..