Economic Data Sciences PRO
Understandable A.I.
Understandable Artificial Intelligence
Sept 2019
EDS Tool Overview
Stochastic Gradient Descent
Stochastic Gradient Descent
©2019 Economic Data Sciences
What Is It?
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Often referred to as SGD
- This method is an iterative approach to optimization
- This approach can be traced back to at least 1951
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Two parts:
- Stochastic = random starting position
- Gradient Descent = the approach used to optimize
- This method is so popular it is a default tool in Microsoft Excel
Basic Gradient Descent
©2019 Economic Data Sciences
Assumes All Trade-Offs Are Smooth
- A seeker finds the most benefit per unit of uncertainty
- It does this by 'rolling' along the line
Yup, found the best
Stochastic Gradient Descent
©2019 Economic Data Sciences
Why Does this Matter? Part I: Rough Trade-offs
- The real world isn't like theory, it's messier
- SGD sends several 'seekers' to find the best option given the complexities of the real world
I'm The Best!
I'm The Best!
I'm The Best!
I'm The Best!
I'm The Best!
Only This is Truly The Best
Stochastic Gradient Descent
©2019 Economic Data Sciences
Why Does this Matter? Part II: Many Different Risks & Goals
- Risk, uncertainty, and opportunities come in many different forms
- A technique like SGD is needed to consider all of these simultaneously
Does It Work?
©2019 Economic Data Sciences
Proof Is In The Pudding
- Forgetting about all of these details the important question is:
- Does it work?
- EDS has now conduct 30+ projects
- In 100% of cases, improvements have been made after the analysis
- How?
- In essence, the ability to consider more factors and information leads to more informed decisions
- Simply, more informed decision making leads to better outcomes
Why Doesn't Everyone Do It?
©2019 Economic Data Sciences
A Natural Question is to Ask Why Haven't You Seen This Before
- The simple answer is many have tried
- Using SGD means it is difficult to be 'sure' the solution is best
- Past solutions haven't been able to solve this issue
- In short, it is easy to do poorly
- Only the EDS technology can provide consistent and confident results
- Our distributed approach coordinates a single problem across a cluster of computers
What Is So Special About EDS?
©2019 Economic Data Sciences
Distributed, Coordinated, & Informed
- A real world problem usually includes:
- 100s of important factors
- Qualitative & Quantitative
- 1000s of potential investments
- 100s of important factors
- EDS's technology has three key pillars for success:
- Distributed: Only distributed systems can handle problems of this size
- Coordinated: Working with a distributed system means that all of the distributed workers must be coordinated
- Informed: Keeping a memory of what solutions work best means EDS can solve these problems faster
©2019 Economic Data Sciences
On The Shoulders Of Giants
\small Utility = \underbrace{\small \mu}_{\text{\tiny Return}} - \underbrace{\small \lambda \tiny 1 \small \cdot \sigma}_{\text{\tiny Variance}} - \underbrace{\small \lambda \tiny 2 \small \cdot TEV}_{\text{\tiny Tracking Error}} - \underbrace{\small \lambda \tiny 3 \small \cdot TFS}_{\text{\tiny Factor Sensitivity}} ...
- Building on current methods adds interpretability and transparency
- Extendable frameworks allow inclusions from other models and insights
- Tail-Risk, Diversification Ratio, Black-Litterman, etc.
1950s
1980s
2010s
An Extendable
Framework
EDS's mathematical insights extend current best practices
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SGD Primer Sept 2019
By Economic Data Sciences
