The Predictive Edge

CHAPTER 2Understanding Artificial Intelligence

Artificial intelligence often evokes images of humanoid robots, self‐driving cars, and futuristic cities. While these are facets of AI's potential, its true power lies in its ability to process vast amounts of data, recognize patterns, and make predictions with an accuracy that often surpasses human capabilities. These capabilities are a vital component of modern investment strategies.

This chapter examines artificial intelligence, its history from machine learning to deep learning, and the importance of large language models in financial forecasting. AI is more than a tool or a technology; it is a paradigm shift, a new way of understanding finance. As we will explore in later chapters, AI is becoming an integral tool for processing market data, identifying trends, and even directly trading stocks with superhuman proficiency.

By first building a foundation for understanding key AI concepts in this chapter, you will be better equipped to see how artificial intelligence transforms investing. From using AI for sentiment analysis of market‐moving news to creating agents capable of high‐frequency trading, the connections between AI and stock market forecasting will become clear as we progress. For now, we start by understanding the basics of AI.

What Is Artificial Intelligence?

To understand artificial intelligence, we briefly need to explore what “intelligence” is. We first break the concept of intelligence into understanding and ...