Monday, November 2, 2015

Finance 9000

                                                                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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