4 ms·

"isn't really making any constructive or lasting contribution to society" The common argument is that if you are increasing overall efficiency, that means that

by lkozma 16y ago

"isn't really making any constructive or lasting contribution to society" The common argument is that if you are increasing overall efficiency, that means that capital can be more readily available for real businesses which do make lasting contributions (often in the form of polluting the environment, but that's another question). It seems your argument is a bit simplistic. Couldn't the same logic be applied to the distribution of goods, middlemen, marketplaces, banking, etc. Are you dismissing all those?

dagheti 16y ago
This is true only if we accept that AI trading is actually making the market more efficient. The 'wisdom' of crowds is often foolishness, and this could be even more true for a crowd of computers. It is very possible that by using AI that looks mostly at numbers for trading is just destabilizing by relying too heavily on specific variables (the ones the algorithms can actually use as inputs) , and reduces efficient allocation of capital.
- vecter 16y ago
  This is false. You can't make money by being consistently wrong about the "true" value of an asset. Then, the only way you can stay in business is to sell the asset when it's too high, and buy it when it's too low. Notice how doing this actually decreases the amplitude of the oscillations. If you're selling at a high point, you're pushing the price back down. Likewise, if you're buying at a low point, you're pushing the price back up (both times, towards its "true" value). The reason I use "true" in quotes is because no one really knows the value of an asset. The only real estimate we have is the market estimate. Let me put it another way: if you don't believe markets efficiently allocate capital, then how would you propose we do it? By fiat? Once again, I want to emphasize that you cannot be wrong about the value of an asset and consistently make money. If these AI algorithms are consistently making money, then they are, more often than not, accurately predicting the value of that asset (where value is defined as the future market price). Of course, my argument hinges on the market price being "right", but like I said, markets are the best way we know how to value things.
  - JabavuAdams 16y ago
    What is the true value of an asset? There are many theories on this, and "what someone else will pay for it" is just one. Investors are not rational!
    - vecter 16y ago
      I'm not even talking about investors. I'm talking about how to price an apple. Do you think there's a better way to price it than by the free market? Note that I'm not advocating getting rid of regulation -- I think that's very important, since most businesses don't correctly price in externalities, a la BP and the 2008 crash. To answer your question, though, he point I'm making is that no one knows the true value of an asset. That's why we have markets: to help us price them. Unless we have a better mechanism for pricing assets (anything, not just stocks), we should take the market price as close to fair.
- motters 16y ago
  I tend to agree. One of the difficult problems with using AI for market predictions is that the market includes human psychology in the loop, which is not always rational and there are factors which are difficult to include within the model. When people are making buying or selling decisions they're often factoring in imponderables such as gossip, personal prejudices and vague hunches. These hard to simulate decision processes are then greatly amplified by positive feedback - which includes automated trading systems.
cameldrv 16y ago
Yes, but does it really matter if stocks are priced marginally more accurately? How does that significantly increase the productive output of the economy?
- vecter 16y ago
  Suppose a pension fund wants to buy 10 million shares of MSFT. Suppose the "real" price of MSFT is $22.00 and the market price is $22.05. That amounts to roughly $500,000 in extra costs for its clients (may be more or less, because the transaction will have price impact and probably rip through a few levels of the bid/ask book). These costs are forwarded to you and me, the customers of the pension fund. Multiply this by the trillions of shares being traded every year, and that adds up to a huge difference.
  - cameldrv 16y ago
    Yes, but in that case, they're probably buying from another pension fund, or a mutual fund, or someone. If they pay 500k less, that's 500k less the other pension fund doesn't get. No value is created or destroyed by people trading at marginally wrong prices. Furthermore, as long as it's the same people trading with each other at randomly wrong prices, things even out in the wash. These days though, you're dealing with PhDs doing nothing but programming computers to trade, and extracting the money from these mistakes. This makes it not even out in the wash anymore, and they're being paid billions of dollars to solve a problem that never existed. I would much rather have those PhDs figure out how to program a computer to make an electric car that is 5% more efficient, or a wind turbine that is 5% more efficient, or a search engine that is 5% more accurate, or even figure out how to make a physical constant known to 5% greater accuracy. All of those things increase the total value in the world. Instead, they're all being siphoned off by trading companies to do things that make them money, but don't create much if any value.

by lkozma 16y ago

dagheti 16y ago

This is true only if we accept that AI trading is actually making the market more efficient. The 'wisdom' of crowds is often foolishness, and this could be even more true for a crowd of computers. It is very possible that by using AI that looks mostly at numbers for trading is just destabilizing by relying too heavily on specific variables (the ones the algorithms can actually use as inputs) , and reduces efficient allocation of capital.

vecter 16y ago
This is false. You can't make money by being consistently wrong about the "true" value of an asset. Then, the only way you can stay in business is to sell the asset when it's too high, and buy it when it's too low. Notice how doing this actually decreases the amplitude of the oscillations. If you're selling at a high point, you're pushing the price back down. Likewise, if you're buying at a low point, you're pushing the price back up (both times, towards its "true" value). The reason I use "true" in quotes is because no one really knows the value of an asset. The only real estimate we have is the market estimate. Let me put it another way: if you don't believe markets efficiently allocate capital, then how would you propose we do it? By fiat? Once again, I want to emphasize that you cannot be wrong about the value of an asset and consistently make money. If these AI algorithms are consistently making money, then they are, more often than not, accurately predicting the value of that asset (where value is defined as the future market price). Of course, my argument hinges on the market price being "right", but like I said, markets are the best way we know how to value things.
- JabavuAdams 16y ago
  What is the true value of an asset? There are many theories on this, and "what someone else will pay for it" is just one. Investors are not rational!
  - vecter 16y ago
    I'm not even talking about investors. I'm talking about how to price an apple. Do you think there's a better way to price it than by the free market? Note that I'm not advocating getting rid of regulation -- I think that's very important, since most businesses don't correctly price in externalities, a la BP and the 2008 crash. To answer your question, though, he point I'm making is that no one knows the true value of an asset. That's why we have markets: to help us price them. Unless we have a better mechanism for pricing assets (anything, not just stocks), we should take the market price as close to fair.
motters 16y ago
I tend to agree. One of the difficult problems with using AI for market predictions is that the market includes human psychology in the loop, which is not always rational and there are factors which are difficult to include within the model. When people are making buying or selling decisions they're often factoring in imponderables such as gossip, personal prejudices and vague hunches. These hard to simulate decision processes are then greatly amplified by positive feedback - which includes automated trading systems.

cameldrv 16y ago

Yes, but does it really matter if stocks are priced marginally more accurately? How does that significantly increase the productive output of the economy?

vecter 16y ago
Suppose a pension fund wants to buy 10 million shares of MSFT. Suppose the "real" price of MSFT is $22.00 and the market price is $22.05. That amounts to roughly $500,000 in extra costs for its clients (may be more or less, because the transaction will have price impact and probably rip through a few levels of the bid/ask book). These costs are forwarded to you and me, the customers of the pension fund. Multiply this by the trillions of shares being traded every year, and that adds up to a huge difference.
- cameldrv 16y ago
  Yes, but in that case, they're probably buying from another pension fund, or a mutual fund, or someone. If they pay 500k less, that's 500k less the other pension fund doesn't get. No value is created or destroyed by people trading at marginally wrong prices. Furthermore, as long as it's the same people trading with each other at randomly wrong prices, things even out in the wash. These days though, you're dealing with PhDs doing nothing but programming computers to trade, and extracting the money from these mistakes. This makes it not even out in the wash anymore, and they're being paid billions of dollars to solve a problem that never existed. I would much rather have those PhDs figure out how to program a computer to make an electric car that is 5% more efficient, or a wind turbine that is 5% more efficient, or a search engine that is 5% more accurate, or even figure out how to make a physical constant known to 5% greater accuracy. All of those things increase the total value in the world. Instead, they're all being siphoned off by trading companies to do things that make them money, but don't create much if any value.