A black box model is a magical, computational input-output system, where the input is financial, and market data and the output is investment strategies.
Sounds great, right? Have the black box on the computer do the heavy lifting of deciding what to do with all that cash. But that’s not necessarily the case. Using a black box model can be risky, particularly when the market is going cray (or ‘volatile,’ as the fat cats say).
Crashes in 1987, 1998, and 2015 have people giving black box models some serious stink-eye. Today, black box models include machine learning and AI, and are still controversial, especially during market freak-outs.
Related or Semi-related Video
Finance: What is program trading?14 Views
Finance a la shmoop what is program trading? okay well watch two episodes of
Big Bang Theory if you first watch one episode of Keeping Up with the [Man and woman watching TV]
Kardashians deal alright no different kind of program trading, program trades
in a Wall Street sense are run by a computer program, hence the catchy name
and it's also called the black box like a program kicks out that if the S&P 500
is down 0.3 percent in an hour and the US dollar has risen relative to the
pound and goog is outperforming the tech index and the moon is in the seventh
house and Jupiter is aligned with Mars then short a million shares of GE like
that would be something that the box would tell you or something like that
and there are a ton of weird mathy things behind the rationale for each of [Math formulas appear]
these trades some of it makes sense to normal people but most of it needs three
PhDs in math and physics and other stuff to translate rationally
well the dangerous thing here about program trades is that usually there is
no human involved when they execute a trade that is it's just computers
talking to other computers but thankfully computers never have glitches [Computer chip blowing off steam]
right they never have mistakes and things generally always run smoothly
when computers are involved right well this is a really smart way to manage
your retirement money just give it all to a black box and assume the guys who
wrote the algorithm knew what they were doing or maybe not [Hacker using a PC]
Up Next
What is the Black Scholes Model? The Black Scholes Model is used to determine the price of call options. It looks at the change in stock price over...
What is a Chartist? A chartist is a trader and/or analyst who relies on technical analysis and charts in order to make decisions for trading the ma...
Technical analysts don't care how companies make their money or how they run their business; they're just interested in the numbers. The data. Yeah...
What is a Breakaway Gap? A breakaway gap is the point in time when a stock price changes direction (it goes from increasing to decreasing or vice v...