The Role of AI in Forecasting Economic Trends

Artificial intelligence (AI) has made its way into banking and decentralized finance, so it’s no wonder people are now using it to forecast economic trends. Can it trade stocks better than an expert? Will the federal government look kindly upon its role? While only time can tell, several signs provide insight into those questions.

The Difference Between Econometric Models and AI

Traditional economic forecasts rely on statistical models and analytics tools. They can't really make predictions unless input data is in a particular, structured format. They’re not data-driven to the extent AI is — few tools can keep pace with its processing speeds.

Human intuition is far less accurate than econometric models, but it’s used just as often. Instead of plugging numbers into a spreadsheet and paying attention to market forecasts, people make predictions based on their expertise and gut feelings.

These strategies are often inaccurate. Take forecasts on the United States Consumer Price Index, for example. While experts estimated prices would rise by 7.5% in 2022, they actually increased by 6.5%, according to the U.S. Bureau of Labor Statistics.

AI outperforms econometric models and human intuition. It can interpret complex relationships between variables, even considering outliers on a weighted scale. Also, it mitigates loss aversion, overconfidence, and the gambler’s fallacy, preventing biases from skewing forecasts.

AI enables automation, so it can execute trades, adjust prices, or transfer funds at the most advantageous times. Naturally, it also reduces administrative work. According to one estimate, it could automate up to 70% of the workday today.

Examples of AI Techniques Used to Forecast Trends

Whatever AI technique a person uses influences their forecast generation approach. With machine learning, they can uncover nonlinear relationships between variables. These models can __process complex data in milliseconds __and update it whenever they receive new information.

A neural network uses a series of interconnected nodes to recognize patterns. It’s inspired by the human brain — the artificial neurons work together in real-time to solve problems. As a result, its forecasts are precise and reasonable.

With natural language processing, someone can process text-based data to make forecasts. This system can also analyze sentiment to determine tone and mood. Instead of pressing buttons, updating a spreadsheet, or entering code, the user can use plain language to generate output.

Image recognition works similarly, analyzing images and videos to reveal hidden patterns or forecast trends. For example, when leveraged in an AI-powered surveillance system, it could evaluate foot traffic and purchase frequency to predict the following month’s sales figures.

The Implications of AI Forecasts on Various Sectors

Naturally, the finance sector will be most impacted by AI-driven economic forecasts. It could automate stock trading, predict inflation, and estimate growth rates with unparalleled accuracy. However, no technology is infallible — an algorithm simply doesn’t have the expertise of an industry professional, even if it has access to massive amounts of data.

A good hypothetical is necessary to explain. During the non-fungible token craze, an algorithm may have misinterpreted the fad as a valuable emerging alternative investment. It couldn’t have understood the general public’s negative sentiment, which would’ve skewed its findings.

The same situation could happen in e-commerce, where forecasts are vital for knowing how much to order and when to change prices. On one hand, AI could align retailers’ actions with customer demand, improving brand loyalty. Conversely, it might misread the situation because of incomplete information, leading to poor business outcomes.

Whether the implications are more positive or negative, big change is coming. As a result, government policies may evolve. They’ll likely target data privacy and copyright instead of policing the act of forecasting.

The Senate Task Force on AI has passed at least 15 bills to date, with more on the way. It probably won’t be nearly as strict as European lawmakers. However, any privacy and copyright laws limit what data companies can use in training and forecasting, which would reduce model accuracy right off the bat.

Will AI Become the Standard for Forecasting Trends?

Since AI is relatively new, it likely won’t replace industry experts and professional stock traders anytime soon. However, whether its hype continues, it will likely have a permanent place in forecasting since it enables automation and rapid insight generation.