An Automation Tipping Point

From The Economist Cover story on automation: For the first time, the pot of passive equity assets it measures (meaning machine traded index funds) exceeds that run by humans. This raises the prospect of computers taking over expert investors’ final task: Automating the strategy and planning of investment strategies. If that happens, that would lead to a better, much deeper understanding of how markets work and what companies are worth.

“Thirty years ago the best fund manager was the one with the best intuition, says David Siegel, co-chairman of Two Sigma. Now those who take “a scientific approach,” using machines, data and AI, can have an edge.”

A machines drive the bus, the traders invert how they plan. Instead of data proving a hypothesis, data allows discovery of new ones. The silver lining for market strategists: machines need to know data required to feed the beast. And that data is based on a combination of market and technical expertise.

In chess, the rules stay the same. Markets by contrast, evolve, not least because people learn, and what they learn becomes incorporated into prices. ” If somebody discovers what you’ve discovered, not only is it worthless, but it becomes over-discounted, and it will produce losses. “There is no guarantee the strategies that worked before will work again,” according to Ray Dalio. “A machine learning strategy that doesn’t employ human logic is bound to blow up eventually if it’s not accompanied by deep understanding.”

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