All
HAL the Investor
Finance, that invisible hand which guides us all, is
beginning its first steps into the digital age. This isn’t to say that the finance
world doesn’t use smart phones or laptops – they were among the first afford
them. The speed and interconnectivity
offered by computers has in its own way revolutionized wall street (which now
exists entirely in a few boxes full of wires in new jersey actually). But for
the most part finance has continued relatively the same way as it always has:
investors pay agents to identify opportunities with the best return on
investment for them, the agents receive a commission.
Sure algorithms do most of the work now, but this is more like moving from an abacus to a calculator – but what if your calculator had a mind of its own. Imagine now that you are budgeting your money for dinner for the next week. Suddenly your calculator sends you a message about how you can spend less money eating somewhere else - somewhere you haven’t even heard of. Instead of budgeting your money, you’re investing it and your computer can do it even better than your broker. For those of you who are thinking of entering finance, don’t worry this is still a long way off – we still need you to do your job. And you’re in luck – because doing your job is about to get a whole lot easier.
Companies like Sybenetix and Essentia Analytics use new
software to monitor trade performance, the context in which investment
decisions are made, and correlate the two. Essentially a portfolio manager’s
investment strategy is explained to the software which then looks at your
actions in the market while monitoring the market’s behavior at the same time
in order to identify the most beneficial investment for you - effectively removing
blind spots in the market from the trader’s view. Moreover, computers are not
subject to the subconscious biases like herd-mentality which can have serious
consequences – recapturing, according to Sybenetix, up to 3% of profits. In a
world where a million dollars is small scale, 3% is quite substantial.
Yet there still remains major problems. For one, computers don’t
understand human uncertainty as it manifests itself in the market as more volatile
sectors of the stock market. Second, even if the your computer can identify
better opportunities it is only doing so according to how an opportunity is defined
by its programmer. Third, extreme trade speeds with and huge sums of money
being moved creates a huge risk if the computer has a bug in the code, is based
off a poor model, or is hacked or … well you get the point. Fourth, finance is a reflection of human
capital allocation (money, effort, time) and as men like Steve Jobs has shown
us todays failure can be tomorrow’s superstar. Perhaps one day the computer
mind will outmatch our slimy pink ones – but for now at least we can be a bit
better for their help.
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