Oct 2, 2019
In this episode Adam Butler and Rodrigo Gordillo host ReSolve's
Head of Quantitative Research, Andrew Butler to discuss how ReSolve
employs tools from the field of machine learning to produce
meaningful and practical improvements in investment outcomes.
We start with Andrew's background in applied mathematics and in
particular his experience applying ML tools to solve complex
real-world problems in the physical sciences. It was fascinating to
hear Andrew recount how he came to understand that the tools that
work well to model physical systems are much less useful in a
financial context. This was a consistent theme throughout the
discussion.
Our objective was to offer a high-level overview of the ML toolset
so we started by defining what ML is and digging into three
traditional classes of ML: unsupervised learning, supervised
learning, and reinforcement learning. We make each method
accessible with simple examples and discuss how ReSolve uses the
respective techniques to improve outcomes at virtually every step
in the investment process.
At many points the group paused to reflect on the myriad ways in
which financial markets are distinct from other problem categories.
We explore why it is critical to view financial markets through the
prism of ML for any statistical inference, and discuss several
tools that should be handy in the toolbox of every modern financial
analyst.
Of critical importance, we reinforced the fact that the ML toolset
is useless – if not downright dangerous – if deployed naively
without the direction and support of experienced operators. Without
a deep understanding of the unique properties and pitfalls of
financial markets ML tools are likely to do much more harm than
good to portfolios.
We also discussed why the most important step – by far – in
data-driven research is the validation and online learning step –
the sentinel – where trader intuition and experience can amplify
results by orders of magnitude.
There was some debate about the role of machines and humans in
finance and more broadly, and how those roles may evolve. Rodrigo
held out hope for sustained human dominance in complex tasks while
Adam argued that machines could be playing a much larger and
positive role in society already if humans would just get out of
the way!
There is a lot of marketing around the field of machine learning at
the moment but very little nuanced, practical wisdom. We hope you
take something of practical relevance from our conversation.