6 Reasons Why Machines Are Better Than Us For Investing

The advent of machines has revolutionised the world around us, impacting all aspects of our lives, including investing. While investing was solely for humans for decades, machines have now stepped into the world of investing and transformed it. In fact, recent trends show that the lack of cognitive biases and emotional thinking makes machines better than us at investing. This article explores why machines are better than us for investing, outlining the flaws human investors possess and how machines tackle the same.

• Human investors have certain behavioural and cognitive biases that flaw their investment decision-making capabilities.
• Common human biases include overconfidence, aversion to loss, procrastination, difficulty with mental accounting, herd mentality, and inability to foresee longer durations.
• Machines operate on algorithms and data to make investment decisions based on facts rather than emotions and feelings.  

1. We are overconfident

Human investors suffer from certain cognitive biases, the chief of which is overconfidence. Many investors trade believing they can consistently time and beat the market. This overconfidence results in risky investment decisions, whereby investors take on bigger bets than they should and ignore important data that contradicts their gut feeling. Machines do not suffer from such overconfidence and are trained to make financial trades based on objective data and algorithms. The lack of overconfidence in machines helps them make more calculated and bias-free decisions, reducing unnecessary risk exposure arising from human overconfidence. If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.

2. We have a strong aversion to loss

As humans, we have a strong aversion to loss. In other words, we experience a psychological phenomenon where the pain of losing is much greater than the pleasure of gaining. This aversion to loss often results in investors selling their assets too early out of fear of the possibility of future losses. Conversely, some tend to hold onto their losing investments for too long in the hopes of recovery under the influence of the same phenomena. Both these behaviours can be detrimental to long-term returns. Machines, on the other hand, are programmed without emotional responses to losses and gains and execute trades based on hard data and investment strategies. In simple words, machines do not let emotions get in the way of buying and selling decisions.

3. We procrastinate

Procrastination is yet another flaw of human investors. As humans, we harbour a strong bias for urgency over importance. In simple words, we tend to push things (even important ones) until they become urgent. Saving money does not seem urgent to most investors, and neither does the act of saving money offer instant gratification. Even today, many investors tend to delay saving for retirement until they are almost 50 years of age. We are always looking for the ‘perfect time’ to start investments, and this ideal time never arrives. However, this delay results in missed opportunities. Machines are better than us for investing because they lack this procrastination quality. They are pre-programmed to take action as soon as certain pre-set parameters are met. In other words, they seize investment opportunities in real-time, be it executing a trade, reallocating resources as per market trends, or rebalancing a portfolio.

4. We cannot foresee a longer duration

Machines are better than us for investing because they can foresee longer durations. While human investors understand the long-term perspective and concepts of compounding, we still fail to imagine the impact of the same over, say, 25 years of investment. Similarly, we realise the impact of inflation on our investment corpus over 25 years. However, we fail to estimate the increase in cost of living over this time in realistic terms when making investment decisions. In short, we underestimate the time value of money. Therefore, short-term market fluctuations and emotional reactions often distract investors from their original long-term plans, resulting in panic selling or strategy switches. Machines, on the other hand, are designed to adhere to their pre-programmed long-term strategies. They allocate resources and make investments in keeping with algorithms that are designed for long-term growth. This disciplined approach allows them to outperform human investors who may react impulsively to market volatility.

5. We cannot do mental accounting

Sound investment decisions are based on accurate mental accounting. Managing complex financial data, computing taxation, transaction costs, and valuation of underlying assets can be challenging. Moreover, investors generally have to make these calculations within a short period to capitalise on trading opportunities. The room for errors and inaccuracies is quite high with human calculations. Machines are better than us for investing simply because they are designed to perform these complex calculations in a few seconds. They can process large volumes of data and numbers from different sources to produce precise results. The quick turn-around time with machines makes them best-suited for times when investors want to seize real-time market opportunities.

6. We start believing the crowd

While humans may be largely individualistic in various aspects of their lives, when it comes to investing, most succumb to a herd mentality. In simple terms, investors follow what others in the crowd are doing. The rationale here is that if everyone is buying a certain stock, it must be the right choice. However, this crowd mentality can result in bubbles, poor investment choices, and a failure to recognise risky trends. Most human investors are scared of betting against the trend. Machines are immune to this herd mentality. They execute trades based on predefined algorithms and parameters rather than crowd popularity. They use data to identify the best opportunities. This is what makes machines better than us for investing. You can consider investing Bajaj Finance Fixed Deposit. With a top-tier AAA rating from financial agencies like CRISIL and ICRA, they offer one of the highest returns, up to 8.85% p.a.

In a nutshell, human investors are often susceptible to various emotional and rational biases that are absent in machines, making them better than us at investing. Humans can tackle these biases in one of two ways: train their minds to consciously recognise and limit these biases or fall back on the service of machines to do the investing. The second option has gained immense popularity in recent times with the advent of robo-advisors. Here, humans decide on their financial goals and objectives and the amount of money they wish to save, while machines outline how they can achieve these goals and save for them.