Handling Complex Financial Models: The Virtue of Simplicity

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Abstract

Machine-learning algorithms are increasingly reshaping the trading of securities and management of investments in the financial markets. Adopting adaptive algorithms programmed to discover patterns and anomalies in large datasets, financiers hope to gain a profitable edge on competitors or detect undesired risk-exposures. The spread of algorithms in data- and model-driven finance challenges existing practices of model use and creates a demand for practical solutions for how to manage the complexity these devices add to the financial market system. Drawing on interviews with market participants developing and using machine learning algorithms for trading and investment management purposes, this paper identifies the main problems associated with the adoption of machine learning techniques in finance and examine specific solutions proposed by practitioners. The study demonstrates that practitioners use a simple heuristics, Ockham’s razor, to manage model complexity, increase model accuracy, and reduce the risk of errors. It furthermore shows that the razor principle also serves to retain an element of human judgment in an otherwise often largely automated decision-making process. The study contributes to the burgeoning scholarship on the role of automation, big data, and adaptive models in the present and future of work.
Original languageEnglish
Publication date2019
Publication statusPublished - 2019
Event4th Annual Conference of the Finance and Society Network. FSN 2019: Intersections of Finance and Society 2019 - University of London, London, United Kingdom
Duration: 12 Dec 201913 Dec 2019
Conference number: 4
http://financeandsociety.ed.ac.uk/cfp-intersections-conference-2019

Conference

Conference4th Annual Conference of the Finance and Society Network. FSN 2019
Number4
LocationUniversity of London
CountryUnited Kingdom
CityLondon
Period12/12/201913/12/2019
Internet address

Keywords

  • Machine learning
  • Financial markets
  • Quants
  • Simplicity
  • Complexity

Cite this

Bondo Hansen, K. (2019). Handling Complex Financial Models: The Virtue of Simplicity . 1. Abstract from 4th Annual Conference of the Finance and Society Network. FSN 2019, London, United Kingdom.