Buy-side institutions can benefit from knowing drawbacks of big data

Buy-side institutions that are looking to harness big data effectively can benefit from knowing about the advantages and the potential pitfalls associated with this focus on having access to robust amounts of information.

Organizations including banks, hedge funds and global asset managers can potentially harness big data to achieve a wide variety of business objectives. For example, they can leverage this information to engage in risk management, or alternatively to make more informed decisions at many different levels.

Correlations are not always helpful, note experts
However, these financial institutions need to keep in mind that there are limitations to big data. For example, gathering significant amounts of information and then analyzing it can potentially yield many different correlations, but the relationships that are uncovered in this manner are not always helpful, two New York University academics wrote in a recent New York Times opinion piece.

In the piece, Gary Marcus, who teaches psychology, and Ernest Davis, who teaches computer science, noted that between 2006 and 2011, the use of Internet Explorer and the U.S. murder rate both declined significantly. While this information might be interesting, it is difficult to make the case that the correlation between the two has a practical use.

Many enthusiastic about big data
This challenge undermines the enthusiasm that many have for big data, as this matter has generated great visibility, according to a separate New York Times piece. Journalist Patrick Tucker has been a major proponent of big data, writing about it in a book called “The Naked Future.”

“In the next two decades … we will be able to predict huge areas of the future with far greater accuracy than ever before in human history, including events long thought to be beyond the realm of human inference,” Tucker said, the media outlet reported.

While this may sound appealing, Marcus and Davis noted that the results of big data analysis can fall short of expectations. More specifically, people can frequently find a way to exploit the various methods that are leveraged when using this information. For example, individuals who are in the know can easily use a wide range of techniques to bolster their results in search engines.

There are many drawbacks that limit big data, but the two academics emphasized that processing substantial amounts of information has been crucial to the vast majority of artificial intelligence programs that have generated success. Buy-side financial institutions should keep in mind that while big data can be very helpful, it is not a solution that will work in all cases.

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