Beyond Human Comprehension

About the Book

Money managers have reached the limits of their human capabilities, and you need look no further then the growth of index funds for evidence of this. Ninety percent of active money managers have not been able to beat the performance of the S&P500 Index for any extended period of time. We have overloaded our human decision makers with information; more information than they can possibly assimilate. The only way to handle this problem is with advanced intelligent computer systems; systems that can detect and understand the complex non-linear relationships that exist within financial data. To beat the dumb index will require investment professionals to embrace change and learn to harness the new advances in computer intelligence. We need to think about changing the security analysis process just like Frederick W. Taylor changed the industrial process a hundred years ago.

It is hard to believe that the first electronic computer (ENIAC) was introduced in 1946 and was less sophisticated than many of the toys your children currently play with. While it has taken the human brain over 50,000,000 years to evolve to what it is today; it has taken the computer a mere 52 years to evolve to its current status. In a matter of just 52 years the computer has gone from being able to do a few mathematical calculations per second to being able to beat the best human chess master in the world. With computer speed and storage capacity doubling almost every eighteen months it won’t be long before the computer has the raw intellectual capacity of the human brain. It is already solving specific problems, such as picking stocks, better than humans. What do you think will happen during the next 50 years?

Many people respond to the idea of Artificially Intelligent (AI) investment systems by saying that they are nothing more than quantitative systems. Yes, they are quantitative systems in that they run on computers, but there is a real difference between what is normally called a quantitative system and an advanced AI system. The difference is, who makes up the investment rules and what information is important in discriminating between good and poor investment opportunities. In most quantitative systems, even in an advance Expert System form, humans make up the investment rules and mathematically derive the weightings associated with the rules. Computer systems that depend on outside human intelligence to program their actions are not inherently intelligent. In advanced AI systems, the computer makes up its own rules and weightings. The computer learns from examples of good and poor performing stocks, and determines its own ways for discriminating between them. The procedures that are derived by the computer are often so complex that they defy human understanding.

In addition to making up its own rules, advanced AI systems look at corporate financial data differently. Just like in the human brain, where information is not stored in the brain cells, but rather in the connections and relationships between cells, so too is corporate performance information stored in the relationships between financial numbers. Assessing the performance of companies is not so much in the numbers as it is in the connections between the numbers. Financial analysts recognized this early on and have used first order relational information in the form of financial ratios for many years. With advanced AI systems we are finally able to look at and evaluate high order interrelationships in financial data that have been far too complex to analyze with less sophisticated systems. These then are the fundamental differences between what has been used in the past and what will be used in the future.

This book is designed to explain some of the limitations of human cognitive ability and to suggest an alternative approach to one of the most interesting problems facing the financial industry; how t

About the Author

Thomas E. Berghage Thomas Berghage is co-founder and CEO of NeuWorld Financial, a San Diego based money management firm. Commander Berghage was a member of an elite group of Navy Research Psychologists working on advanced military systems. Mr. Berghage is a past president of the Financial Analysts Society of San Diego. He has an undergraduate degree from Minnesota State University, Mankato an MA degree in research psychology from Western Michigan University, and an MBA degree from Central Michigan University. Mr. Berghage has written several articles for Artificial Intelligence In Finance and has presented his work at the Institutional Investor Institute in New York. Scott T. Berghage Scott Berghage is vice president/portfolio manager at NeuWorld Financial. Prior to joining NeuWorld Financial, Mr. Berghage founded and was CEO of a start-up venture in the garment industry, focusing on international trade. Mr. Berghage holds a Bachelor’s degree in Business Administration from the University of San Diego and a Professional Certificate in International business, from USD.