Problem: Forecasting the future is based on the past: thus, it relies on the fundamental assumption that the future will be like (or at least relatively similar to) the past. In high stakes scenarios like finance or contingency planning, a bad forecast can be catastrophic.
Solution: I recently stumbled upon the work of Marcos López de Prado who is a huge proponent of the phenomenon called “Nowcasting” — rather than using forecasts based on data from the past, he proposes a model of using real-time data, testable theories, and specified strategies to achieve financial results. The business, really just an investment fund, would double-down on accelerating the world of financial technology in machine learning by building and optimizing a fund around Nowcasting and using creative ways to assess corporate earnings before the quarterly earnings report cycle. See below for Professor Parado’s Tweet where he explains the concept.
There are a few applications of Nowcasting which caught my eye and that I would like to call out here (you can find them in the PowerPoint slide from Parado’s talk “Advances in Financial Machine Learning“) :
Earthquakes are one example of the scientific application of nowcasting. Through early warning systems, scientists and seismologists can provide 1-2 minutes of warning before an earthquake hits due to real-time data collection.
Inflation: based on web-scraping millions of online prices every day, are much more accurate than the forecasts derived from convoluted econometric models
Liquidity conditions, based on millions of daily FIX messages from market participants
Earnings of retailers, based on satellite images of parking lot occupancy, email receipts, etc.
Industrial production, based on engineering datasets, cargo shipments, auto production numbers, electricity consumption, etc.
Best Buy experienced a large revenue increase in the 2019 holiday season, clearly outpacing Target. Measurable AI used e-mail receipts to report this information, months ahead of the regulatory filings for Q4 of 2019.
Many say that data is the new oil. I simply believe that data is information, and information is power. Nowcasting takes advantage of data to create strategic advantages in business.
Monetization: Fees and carry from the fund built on this model (this monetization model is used widely in Venture Capital, see more here).
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)