Algorithms: The Next Crises Creators?

Algorithms provide a much-needed service: they instantaneously perform a given function, or output by sifting through seemingly insurmountable quantities of data and ascertaining the input. In the financial services industry, algorithms can be used to determine investor sentiment and rapidly make trading decisions. In the healthcare industry, they can ascertain the correct diagnosis when fed the thousands of data points that comprise an individual’s medical records. Despite their plentiful benefits, algorithms do pose problems to humanity. As noted in Farman’s article, they have the capacity to shorten our attention spans and ability endure the “delayed” part of delayed gratification. Spikes in ADHD accompany persistent cell phone usage in teens, and the proliferation of algorithms could have a similar effect. For instance, tasks that previously took periods as long as days, such as solving complex mathematical equations, can be completed in seconds with Excel-like appliances. As society gradually reduces its critical thinking and attentiveness, the impact could well be catastrophic, not only on specific individuals but on the collective well-being.

Returning to the financial services algorithm (an area of specific interest to me, unsurprisingly.) An impressive portion of the world’s assets reside in AI and algorithmic investments, and the precise figure is only expected to grow, with Deloitte’s head of wealth management projecting $5-7 trillion being robo-managed/advised by 2025. Because of the high proportion of money managed by systems that trade on signals, a whole new host of risks exist. Take the financial crisis of 2008, for instance. A record plummet of 7% in the Dow Jones Index on September 29, 2008, while caused not by algorithms but by new information around stock fundamentals, was exacerbated by the speed with which institutions could exit out of positions. Generally, quick trading aids overall efficiency, but in cases of steep declines, can cause hysteria and precipitated lower dips in value than would otherwise occur. As the world’s wealth becomes more and more concentrated in funds that trade on signals and enable instantaneous sales, the magnitude of such drops will only rise, making massive declines in individual’s wealth in the matter of seconds fully conceivable.

 

Image result for algorithmic trading

Investment professionals increasingly occupy roles of oversight, deferring to algorithms in lieu of active or direct management.

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