Robot-analysts make BETTER stock recommendations than human investors and earn five percent more in returns, study finds
- Researchers gathered reports from different robo-analyst firms in the US
- They found robots make faster and better stock recommendations than humans
- The technology also earned returns up to 6.9%, whereas humans had 1.7%
- The robot’s lack of biases and conflict of interests makes it more efficient
Robots are said to take over some 200,000 jobs on Wall Street over the next decade and a new study suggests this prediction could soon become a reality.
Following the analysis of 76,000 reports from seven different robo-analysis firms, researchers determined that the technology is able to make recommendations similar to their human counterparts – but faster and more accurately.
Because the automation is less subject to behavioral biases and conflicts of interest, it can produce a more balanced distribution of ratings, which includes investment’s risk and suggestions whether to hold, sell or purchase.
Looking at the robot portfolios, the study found their buy recommendations earned returns from 6.4 percent to 6.9 percent, while those of its human counterparts only ranged from 1.2 percent to 1.7 percent.
Although robo-analysis sounds like it could weed out human investors, researchers believe that as long as there are people that need human interaction, ‘the buy-side, the sell-side will still be around.’
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Because the automation is less subject to behavioral biases and conflicts of interest, it can produce a more balanced distribution of ratings, which includes investment’s risk and suggestions whether to hold, sell or purchase (stock photo)
The study was conducted by a team at Indiana University, who wrote: ‘Our study provides the first comprehensive analysis of the properties of investment recommendations generated by ‘Robo-Analysts,’ which are human-analyst assisted computer programs conducting automated research analysis.
‘Robo-Analyst firms generally advertise sophisticated technologies such as ‘Natural Language Processing,’ ‘Machine Learning,’ and ‘Artificial Intelligence’ on their corporate websites and produce reports that rely more on technical analysis than on subjective insights
The researchers noted robo-analysts are capable of producing a more balanced distribution of buy, hold and sell recommendations than do human analysts, which suggests that they are less subject to behavioral biases and conflicts of interest.
Human analysts work to keep a great relationship with company management, while robots are not able to conduct the same conversations, Bloomberg reported.
Looking at the robot portfolios, the study found their buy recommendations earned returns from 6.4 percent to 6.9 percent, while those of its human counterparts only ranged from 1.2 percent to 1.7 percent
However, although those on the other side of the call may not get the same flare at first, calls from the robot can ‘generate substantial returns for individual investors,’ the experts shared.
While investigating the reports, the researchers found that out of the all the outstanding robo-analyst recommendations, more than 30 percent represented buy ratings compared with 47 percent from traditional analysts (the overall number of outstanding recommendations from traditional analyst.
It was also discovered that about a quarter of the recommendations made by the technology were deemed as sell, compared to just six percent from human analysts.
The study also highlights the results of buy recommendations, which, from the robot-analyst, were found to generation ‘generate economically and statistically significant positive abnormal return.’
The reports show the technology earned about 6.4 percent to 6.9 percent in returns, while the portfolios from human analysts only ranged from 1.2 percent to 1.7 percent.
‘Our results ultimately suggest that Robo-Analysts are valuable, alternative information intermediary to traditional sell-side analysts,’ reads the study.
‘These findings are important in light of both technological developments in the financial services industry as well as changes to the traditional sell-side research paradigm’
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