Bucks and Bits

 November 18, 2019

by Matthew Braunschweig

AI has your money! Never let it be said that my articles “bury the lead”. But let me amend that statement and say, If you’re Smart and/or lucky, AI is controlling your money.

It is no secret that Artificial Intelligence is coming into its own in both practicality and usefulness. It is also no secret that every single time there is a substantial innovation in technology, the financial industry is the earliest of early adopters. Those two things being said, it is obvious that AI has at least some part in the economic success the world is currently enjoying. Markets are setting new highs of course, but they are also dong things which traditional (aka, human) traders have never seen, and this is quite frightening to traditional (aka, human) traders.

Not-so-stranger things

Lately you can’t talk to a trader without hearing “We’ve never seen anything like this before”. They mioght be talking about the record highs, but they also might be referring to anomalies in the market which they can’t explain. Take earlier this year when one of the markets most trusted indicators, the “Yield Curve”, did what they called “Inverted”. The Yield Curve inversion has been commonly known as the Death Curve, because every time it has ever inverted, bad things have followed. So the traders ran about shouting the sky was falling and urging everyone into their defensive positions, guess what happened? Nothing. That's right, the sky did not fall, and in fact the markets are now seen as healthier than ever.

So what did happen, that made nothing happen? It is very likely that the machine learning AI was adjusting the investments it was managing, many of which had been previously managed by traditional (aka, eh, you know) traders. The machines had determined that they needed to do some unorthodox trading in order to the fix the bad choices the previous managers had made, and hence, this resulted in a controlled, non-panicc driven “Death Curve”. The poor investments being liquidated by the unorthodox trades were likely absorbed by the panic driven traditional investors who dove in willing to take some losses in order to protect for the coming crash, which never came.

No mo’ FOMO

Fear of Missing out, or FOMO, has been around for decades. Alan Greenspan refereed to it is “irrational exuberance”, but FOMO was easier to type and say, so, its FOMO today. FOMO is just what it sounds like. People doing something they don’t understand because they are afraid of being left out of the fun. I’ve never been to a time-share seminar, but I’m guessing this is a common sales tactic in those as well. I liked how they summed it up in the classic Mike Judge film Office Space. “Ya know, Bob, fear will make someone work just hard enough not to get fired”, so fear is a pretty awful investment strategy, and it is one of the top motivators of traditional investors today.

Machines, of course, feel no fear. I don’t mean this as a bad or scary thing, but rather as a fact. The closest thing to fear machines recognize is in statistics. They look at data, see that when factor A changes in a specific way, it results in outcome B. Factor A may be a inverted yield curve or poor earnings or a negative tweet by a Kardashian, and then the AI adjusts its strategies to best weather the expected outcome.

Another term used far too often by financial “experts” is “baked-in”. This is the idea that an investment isn’t going to change much because everyone already knew what was going to happen. “oh, company A is announcing sales numbers next week and they are expected to be great, but that’s already baked into the stock price”. This is essentially the traditional investors saying “we were wrong over the past few months, but now we’ll be right”. Fortunes have been made and destroyed by being on-time, so if someone is saying “baked-in” they are basically saying they were wrong before, so they probably aren’t the best one to listen to.

So whats the point?

The point is, humans are unpredictable, impulsive and fearful, and AI is none of those things. Roller coasters are popular because they are scary, thrilling and unpredictable. The same holds true to many things in life, including investing, but with machines running things, they could get a bit more boring. Just boring profits and high-returns, how dull.

So don’t panic when you realize that your money is being controlled by a heartless AI. Well, unless you are one of those aforementioned Traditional (aka, human) traders. If you are, then perhaps you may want to get your resume in shape. I hear there are lots of opportunities in time-share sales.