Robot Analysts Outwit Humans in Study of Profit From Stock Calls
Humans are losing to robots in a rapidly rising number of industries. If ‘Robo Advisors’ have taken off in the world of financial advisory or wealth management, now, ‘Robo analysts’ seem to be disrupting the hallowed world of sell side equity research analysts. Indeed, a study by the Kelley School of Business at Indian University shows that stock recommendations by computer programs outperform those by human analysts. The study looks into the reasons for the outperformance, which look obvious in some sense. First, the programs lack the several cognitive biases that human analysts suffer from and hence enjoy superior objectivity for their analysis and recommendations. Second, computers can naturally parse through vast amounts of data and information much faster and more efficiently than their human counterparts, thereby improving the efficacy of research. Indeed, the proportion of Buy and Sell recommendations from computer programs is far more reasonable than that of humans – “Out of the total pool of outstanding robo-analyst recommendations, more than 30% represented buy ratings compared with 47% from traditional analysts (the overall number of outstanding recommendations from traditional analysts was five times the robots’). About a quarter of recommendations from the machines fell into the sell category, compared with 6% from humans.
“The Indiana University study analyzed more than 76,000 reports issued by seven different robo-analyst firms between 2003 and 2018. Among the findings were that automated services are more likely to produce sell ratings (as opposed to holds and buys) than traditional firms. They also revise their reports more frequently and may be better at accounting for large and complex corporate disclosures, including filings with the Securities and Exchange Commission.
…Traditional analysts have been under pressure recently — machines have been doing a bigger share of the work while investors increasingly pile into passive funds. In the next decade, automation could reduce headcount on Wall Street and the banking industry by about 200,000, according to Wells Fargo Securities.
“What we’re seeing is that research budgets at these banks are being constrained, the value proposition of sell-side equity research is being reconsidered — for us, this industry is ripe for disruption,” said Merkley. “Technology is one of those disruptions because you can do things probably at lower cost and greater scale.””