Prediction in financial domains is notoriously difficult for a number of reasons. First, theories tend to be
weak or non-existent, which makes problem formulation open-ended by forcing us to consider a large
number of independent variables and thereby increasing the dimensionality of the search space. Second, the
weak relationships among variables tend to be nonlinear, and may hold only in limited areas of the search
space. Third, in financial practice, where analysts conduct extensive manual analysis of historically well
performing indicators, a key is to find the hidden interactions among variables that perform well in
combination. Unfortunately, these are exactly the patterns that the greedy search biases incorporated by
many standard rule algorithms will miss. In this paper, we describe and evaluate several variations of a new
genetic learning algorithm (GLOWER) on a variety of data sets. The design of GLOWER has been motivated
by financial prediction problems, but incorporates successful ideas from tree induction and rule learning.
We examine the performance of several GLOWER variants on two UCI data sets as well as on a standard
financial prediction problem (S&P500 stock returns), using the results to identify and use one of the better
variants for further comparisons. We introduce a new (to KDD) financial prediction problem (predicting
positive and negative earnings surprises), and experiment withGLOWER, contrasting it with tree- and rule-induction
approaches. Our results are encouraging, showing that GLOWER has the ability to uncover
effective patterns for difficult problems that have weak structure and significant nonlinearities.Information Systems Working Papers Serie