OPINION


IBS Journal May 2018


13


Can analytics be used to predict a future financial crash?


The Queen of England famously asked academics: “Why did nobody see it coming?” The answer is because we humans are incredibly skilled at ignoring or discrediting those who make unpalatable predictions. But can we change that through AI?


Nageswar Cherukupalli


Vice president – Client Services Data & Analytics, Financial Services and Insurance, Infosys


M


any people correctly predicted the cataclysmic financial crash of 2008. Economics analyst Ann Pettifor


released The Coming First World Debt Crisis in 2006; it was only after Lehman Brothers folded that her book became a bestseller. Nor was she a lone voice: other eminent professors, investors and business leaders sounded the alarm long before the crash.


It’s a difficult and time-consuming business to gather the required information and create new economic models that can help simulate the real-world scenario to predict the next financial crisis.


Can AI predict the financial crash?


Money should be predictable if only on the principle of rational self- interest. The most cursory glance at economic history – or even the current bitcoin bubble – shows us how misguided this belief is.


Lawrence Rufrano, who worked at the Federal Reserve during those febrile days in 2008, eloquently summed up the limits of human reason when applied to finance. “Perhaps the most important lesson we learned,” said Rufrano, “was that the economy is more fragile than we like to believe and that humans alone cannot possibly serve as the sole protectors of the global financial system.”


Human frailty might be a given, but the unspoken question is whether current artificial intelligence (AI) technologies are capable of predicting the next crash. One of the main problems with using AI or other technologies to predict the financial future is the transparency in the predictors’ methodology and technology used, or people will continue to have questions about economists’ credibility.


An AI ecosystem for the world economy


None of this is to disparage the undoubted capabilities of AI in warning us of impending catastrophe. Financial services firms are among the


biggest investors in a variety of AI and machine learning tools that are already delivering invaluable insight into risks. Palantir, the CIA-backed startup, has for some years been pioneering the use of AI to counter fraud, and was instrumental in bringing disgraced financier Bernie Madoff to justice. Other companies are using deep learning technologies to crunch through huge volumes of unstructured data such as corporate reports and social media to spot risks and identity fraud (among many other uses).


In fact, there are hundreds if not thousands of businesses applying the latest AI technologies to help forecast the future. However, these businesses


are only focusing on one part of the vast, complex world of finance – either an individual company, or a particular type of risk.


In our globalised, highly-interdependent world we need a much more holistic analysis to reveal the unseen perils that threaten the fabric of our financial system. Technology firms might promise solutions for addressing fraud or compliance failures, but these are unlikely to be enough to predict fundamental structural problems such as the sub- prime mortgage crisis.


The obstacle is not that AI is incapable of answering these questions, but rather that it will require much greater collaboration and cooperation between tech and financial businesses. When democracies face an unprecedented threat, a common reaction is to form a government of national unity. If we are serious about predicting and thus avoiding the next Great Recession, we need to take the same approach. The world needs an AI ecosystem that is capable of gathering and crunching through many zettabytes of financial data from an enormous variety of sources.


Of course, this raises numerous difficulties, not least in areas such as data protection and intellectual property. If we can solve these questions, then there is every chance that AI could be the one to predict the next global crash.


www.ibsintelligence.com 13


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52