How is ML in finance different from ML in other fields? originally appeared on Quora, the place to gain and share knowledge, empowering people to learn from others and better understand the world. You can follow Quora on Twitter, Facebook, and Google Plus.

In my view, the main differences stem from differences in data. In finance, data are (very) noisy, and often non-stationary. “Signals” cannot be split from “noise” in any unique way, as a matter of principle. This is very different from, say, image processing, where the level of noise can be controlled, at least in principle. Also, the notion of non-stationary data is non-existent for image processing. Because of a pronounced role of noise, some ML models, for example non-probabilistic models, are not very useful in finance.

The other difference is the amount of data. Many interesting problems of finance are problems with small-to-medium datasets, which makes applications of data-hungry methods such as deep learning problematic. Therefore, in finance enforcing some prior knowledge is often necessary, via (depending on a method used) choices of regularization, Bayesian priors, or other general principles such as analysis of symmetries.

One more important difference is that the “true” state space in finance is not well defined. There are so-called black swan events - things that are outside of financial models, for example political risk, that nevertheless might have severe impact on security prices. There is a difference between uncertainty and probability (risk). Most ML models (as well as most of classical financial models) deal with probabilistic systems with a well defined state space - they do not admit black swans. They are models of risk but not models of uncertainty.

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