Mimicking Finance

We use frontier advancements in Artificial Intelligence and machine learning to extract and classify the part of key economic agents’ behaviors that are predictable from past behaviors. Even the agents themselves might view these as novel (innovative) decisions; however, we show in strong contrast that a large percentage of these actions and behaviors can be predicted—and thus mimicked—in the absence of these individuals. In particular, we show that 71% of mutual fund managers’ trade directions can be predicted in the absence of the agent making a single trade. For some managers, this increases to nearly all of their trades in a given quarter. Further, we find that manager behavior is more predictable and replicable for managers who have a longer history of trading and are in less competitive categories. The larger the ownership stake of the manager in the fund, the less predictable their behavior. Lastly, we show strong performance implications: less predictable managers strongly outperform their peers, while the most predictable managers significantly underperform. Even within each manager's portfolio, those stock positions that are more difficult to predict strongly outperform those that are easier to predict. Aggregating across the universe of fund managers each quarter, stocks whose position changes are least predictable additionally significantly outperform stocks whose position changes are most predictable across the universe. Our framework allows researchers to delineate and classify the portion of financial agents’ action sets which are predictable from those which are novel responses to stimuli -- open to being evaluated for value creation or destruction.