The financial sector’s attitude towards new and emerging technologies is the result of the influence of opposing forces. On the one hand, there’s an eagerness to innovate if it means getting a competitive advantage or improving operational efficiency. On the other hand, a genuine safety concern comes with each innovation, as do issues with compatibility with legacy systems and institutions.
As hard as the naysayers might try, however, new technologies have found their way into the sector and changed it, seemingly forever. Algorithmic and high-frequency trading are an example. The rise of retail investors and their use of social media is another, as are the blockchain, cryptocurrencies, and the decentralized finance movement. Recently, the adoption of AI and its effect on finance has been the talk of the town.
Highmoon Capital is a hedge fund created from a need for a new approach to the ever-changing topography of the financial sector. Established in 2022 by Lumine Lin, a trader with an unorthodox background in art and game development, it champions the strategy of organic holistic investing, which lies at the intersection of finance and psychology. And it’s also technology-enabled.
It starts with a simple recognition that, as humans, we are not the perfectly rational beings we like to think we are — even when we try, like when handling trades worth thousands or even millions of dollars. Everyone has biases, and no one is immune to the influence of emotions.
Behavioral psychoanalysis helps understand those biases and their relationship to how investors behave and how markets change their dynamics. Biases such as loss aversion might lead people to become trigger-happy sellers and buyers, propelled by the fear they’ll create losses. On the other hand, the sunk cost fallacy will make people hold on to stocks for much longer than they need to. And, of course, there’s the bandwagon effect, which the world saw play out with meme stocks recently.
Understanding these biases and how they manifest has multiple uses. For one, the insights it provides can help better understand past and future behaviors of individual investors. It can also help explain what’s going on when the market doesn’t make sense, like when there’s an overcorrection to news. Those who use behavioral psychoanalysis in trading can also help others see where their biases lie, whether it’s colleagues or clients. And being able to identify and counteract biases also has a risk-management value.
Highmoon Capital elevates the concept by marrying it with generative artificial intelligence. When a generative AI is paired with behavioral psychoanalysis, it can discern cognitive biases from text, understand the emotional context behind the words, and even detect subconscious sentiments. That kind of AI-driven sentiment analysis is used to create projections of specific market movements, which allows it to look for trouble ahead and plan for it — a crucial risk management task.
From its founder’s artistic background to having a Chief Psychology Officer, Highmoon Capital has little chance of being just a regular hedge fund. The blend of technology, psychology, and finance it proposes might be the thing that defines the future direction of the industry. The company’s care for the wellbeing of the people using its services and trading platform certainly sets it apart. It just might be that the truly revolutionary thing Highmoon does is use technology to make trading feel more human.
Copyright © 2023 California Business Journal. All Rights Reserved.