Richard Craib: WallStreetBets, Numerai, and the Future of Stock Trading | Lex Fridman Podcast #159 | Summary and Q&A

TL;DR

Numerai, a crowdsourced hedge fund, and Wall Street Bets, a subreddit community, are reshaping the world of stock trading by leveraging artificial intelligence and decentralized coordination in their investment strategies.

Key Insights

• 💨 Numerai's unique approach of giving away data and leveraging the collective intelligence of its community has the potential to revolutionize the hedge fund industry.
• ✊ Wall Street Bets showcases the power of decentralized coordination and how a group of individual investors can challenge traditional financial institutions.
• 🇼🇫 The alignment of incentives, transparency, and a sense of community are essential elements in the success of both Numerai and Wall Street Bets.

Transcript

the following is a conversation with richard craig founder of numerai which is a crowdsourced hedge fund very much in the spirit of wall street bets but where the trading is done not directly by humans but by artificial intelligence systems submitted by those humans it's a fascinating and extremely difficult machine learning competition where the i... Read More

Questions & Answers

Q: How does Numerai work and why does it give away its data?

Numerai provides obfuscated data to users who develop machine learning models to predict stock market movements. The data is given away to leverage the collective intelligence of the community and align the incentives of participants.

Q: What is the main idea behind Wall Street Bets and how does it disrupt traditional hedge funds?

Wall Street Bets is a subreddit community where individual investors collaborate to create short squeezes and challenge the power of traditional hedge funds. Their collective action can lead to significant disruptions in the market.

Q: How does staking work in the Numerai community and why is it important?

Staking is a way for users to show confidence in their models by putting their own cryptocurrency at risk. High-staked models are given more weight in the overall predictions, promoting the development of more accurate models.

Q: What are the similarities and differences between Numerai and Wall Street Bets?

Both Numerai and Wall Street Bets utilize decentralized coordination and aim to disrupt traditional finance. While Numerai focuses on algorithmic trading and machine learning, Wall Street Bets leverages collective action to challenge centralized power structures.

Summary

In this conversation, Lex Friedman interviews Richard Craig, the founder of Numerai, a crowdsourced hedge fund. They discuss the recent events surrounding WallStreetBets and GameStop, as well as the impact of decentralized coordination and the power of the internet. Richard also explains the concept behind Numerai, which is to give away their data and have users build machine learning models to make investment predictions. The users can participate in a competition where they stake their models and earn cryptocurrency based on their performance.

Questions & Answers

Q: Can you summarize the important events around the WallStreetBets and GameStop saga?

The WallStreetBets subreddit users coordinated to buy GameStop stock, which had high short interest. The goal was to squeeze the hedge funds that were shorting the stock, causing them to buy at high prices. This decentralized coordination had a significant impact and created chaos in the market. The events highlighted the power of regular people to challenge centralized power structures and sparked discussions about the future of stock trading.

Q: How did the WallStreetBets users coordinate their actions and create such a massive movement?

The coordination on WallStreetBets was facilitated by the platform Reddit, where users can create anonymous accounts and communicate through subreddit forums. While there are no formal contracts or credibility measures, users can gain credibility through past performance and upvotes on their investment ideas. They would share screenshots of their trades to establish credibility. The decentralized coordination happened through a combination of hype, excitement, and the perception of credible information.

Q: Was it obvious that such a high level of coordination could happen among regular people?

No, it was not obvious that this level of coordination could happen. The lack of formal contracts and credibility raised doubts about the effectiveness of such coordination. However, the WallStreetBets users found ways to establish credibility through their past investment ideas and performance. The impact and magnitude of the movement surprised many, demonstrating the power of decentralized coordination.

Q: What is the significance of the WallStreetBets movement in terms of challenging centralized power structures?

The WallStreetBets movement was seen as a symbol of regular people rising up against powerful and misbehaving elites in finance. It showed that a distributed system of individuals can challenge centralized power structures, thanks to the internet and platforms like Reddit. The movement empowered people and gave them a sense of control and influence. However, as with any form of freedom, there are risks and concerns about potential manipulation and destruction.

Q: Is decentralized coordination always a positive force, or are there potential negative consequences?

Decentralized coordination can be both empowering and unpredictable. It has the potential to bring positive change and challenge existing power structures. However, there are risks associated with it, such as the possibility of manipulation by charismatic leaders or the potential to target and destroy entities that might be beneficial for society. The price of freedom is the uncertain balance between progress and chaos, and the outcome depends on how people exercise that freedom.

Q: What is Numerai and how does it work?

Numerai is a crowdsourced hedge fund that gives away all of its data. They anonymize the data and make it freely available for users to build machine learning models. The goal is to find patterns in the data that can be used to make investment predictions. Numerai users participate in a competition where they stake their models with cryptocurrency. The stake-weighted predictions from all users are aggregated to create a better model for the hedge fund.

Q: What kind of data does Numerai provide to its users?

Numerai buys data from various vendors, but it's not the kind of data that individuals can buy themselves unless they have a significant budget. The data includes common factors like P/E ratios and one-year momentum for each stock. The data is obfuscated and anonymized, so users don't know the specific meaning of each column. The challenge is to find patterns in the data without knowing the underlying features.

Q: How do users participate in the Numerai competition?

Users can sign up on the Numerai website and download the data pack, which includes an example Python script to build a model using the data. The competition involves staking the models with cryptocurrency based on how much the users believe in their models. Users don't upload their models to Numerai but only submit their predictions, ensuring that their intellectual property remains protected.

Q: What kind of machine learning algorithms have been successful in the Numerai competition?

Tree-based models like XGBoost have performed well in the Numerai competition. These models work effectively with financial data and provide good out-of-the-box performance. However, as the competition progresses towards the top ranks, fine-tuning and ensemble methods become crucial. Users need to consider minimizing exposure to certain features to avoid excessive risk.

Q: What kind of structure is needed to host and manage the models in the Numerai competition?

Users can set up a compute server and use the Numerai Compute utility, which is similar to an AWS image. This allows users to automate the process of training and submitting their models. Numerai never sees the code behind the models, further protecting users' intellectual property.

Q: Are there any plans to make the Numerai platform more accessible for machine learning enthusiasts?

Numerai is continuously exploring ways to make the platform more accessible and user-friendly. They aim to democratize access to high-quality data and encourage participation from a diverse range of machine learning enthusiasts. The goal is to always have the best possible models and leverage the collective intelligence of the community.

Takeaways

The recent events involving WallStreetBets and GameStop demonstrated the power of decentralized coordination and the potential for regular people to challenge centralized power structures. Numerai, a crowdsourced hedge fund, takes a similar approach by giving away their data and having users build machine learning models to make investment predictions. The competition allows users to stake their models and earn cryptocurrency based on their performance. Tree-based models like XGBoost have been successful in the Numerai competition, and users need to consider minimizing their exposure to certain features to generalize better. Numerai aims to make the platform more accessible and harness the collective intelligence of the community.

Summary & Key Takeaways

• Numerai is a hedge fund that gives away its data to users who can develop machine learning models to make predictions. The data is anonymized and obfuscated but contains valuable patterns that can be used for investment strategies.

• Wall Street Bets is a subreddit community that organizes decentralized coordination among investors to create short squeezes and disrupt traditional hedge funds.

• Both Numerai and Wall Street Bets are driven by the power of decentralized decision-making and the alignment of incentives among participants.

• Numerai aims to manage all the money in the world by continuously expanding its data and talent pool, while Wall Street Bets continues to challenge centralized power structures in finance.