Black Box Model

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.