48 ms·

Arguably, this has already happened at least twice in the past. One with the discovery of the Black-Scholes model, and arguably again with the advent of HFT (a

Arguably, this has already happened at least twice in the past. One with the discovery of the Black-Scholes model, and arguably again with the advent of HFT (and the ability to basically front-run trades). The interesting thing about markets is you generally can only make money when things are mispriced. This limits the total potential gain even for actors with perfect information. Suppose we did have an AI model that could with near certainty predict both the future cash flows of a company and future interest rates. You could very easily calculate the discounted cash flow and determine the fair share price today or at any point in the future. Rather than collapse, markets likely become more stable and stocks would perform more like bonds.

thomasahle 3y ago
> The interesting thing about markets is you generally can only make money when things are mispriced. Why would you think things are not terribly mispriced right now? If only we were a lot smarter we'd know how.
- logicchains 3y ago
  >If only we were a lot smarter we'd know how. That's not true. Pricing and predicting in the real economy depends on information; for a given amount of information, there are vastly diminishing returns for further intelligence. Because intelligence only allows predicting a bit further in future, as the complexity of predicting the future increases exponentially with lookahead distance; it's O(e^n). This is why hedge funds pay for things like satellite footage of oil tankers to predict changes in supply.
- aeternum 3y ago
  Yes, things might be significantly mispriced, but the amount of mispricing is a finite quantity. This is clear in the classic pump and dump scheme. During the pumping stage, the unscrupulous actor loses money by injecting some amount of mispricing by purchasing the security and bidding up its value. The hope is to generate momentum and hype that triggers others to amplify that mispricing. Then during the dump scheme, the unscrupulous actor can capitalize by removing the mispricing.
stubish 3y ago
It sounds like you also need an AI to generate that mispricing. Like a form of SEO, the misinformation bots tweet to all the trading bots and try to trick them into mispricing shares, so your trading bots can quickly gain advantage. Corewars using the world economy.
- VaxWithSex 3y ago
  The best way to predict the future is to invent it. --Alan Kay
melvinmelih 3y ago
> Suppose we did have an AI model that could with near certainty predict both the future cash flows of a company and future interest rates. You could very easily calculate the discounted cash flow and determine the fair share price today or at any point in the future. The thing about trading is that, ultimately, prices are not determined by information, but how the hive mind interprets that information. And in practice, that is not always a 1:1 relationship (see the meme stock hypes). As Keynes* famously said: the markets can stay irrational longer than you can stay solvent, is exactly the reason why even having access to perfect information will not make you necessarily successful.
- jandrewrogers 3y ago
  > As Buffett famously said: the markets can stay irrational longer than you can stay solvent Buffett did not say this. It is widely attributed to the economist John Maynard Keynes almost a century ago but there is no evidence that Keynes ever said it. I believe the current hypothesis is that it originated with a well-known economist in the 1980s.
- waveBidder 3y ago
  it's a Keynes quote, but yeah.
  - melvinmelih 3y ago
    My bad, corrected!
RandomLensman 3y ago
If every investment became risk free because of perfect information about the future, it would likely increase the total market value by quite a lot.
- rpigab 3y ago
  Or decrease, because who would go to the casino if everyone knew the outcome? Only the owners and staff. "Useless" companies are part of the total market value. If they never get any funding, that's less value overall. Even if that translates to more value for "useful" companies. Also, if you know with absolute certainty from the beginning that Apple Inc is going to be worth X billion dollars, then you never get to buy stock at less than X billion dollars, because everyone has the perfect information. Value would be constant, and investors would get exactly zero return, because zero risk. There are other variables, how long it will take and how many people can afford to fund it from the beginning and for that long, of course.
  - RandomLensman 3y ago
    You could calculate the value of things under the discounting changes. The idea of perfect foresight of the future is kind of insane anyway. Not sure why all of sudden we would go back to believing in a deterministic universe.
    - aeternum 3y ago
      The universe can be both deterministic and mostly unpredictable. In fact it most likely is both of those things. Entropy bounds computation and prediction of chaotic systems requires extreme amounts of computation.
      - RandomLensman 3y ago
        Our current understanding puts some things into the category random, could be wrong, of course.
  - alephnan 3y ago

thomasahle 3y ago

> The interesting thing about markets is you generally can only make money when things are mispriced. Why would you think things are not terribly mispriced right now? If only we were a lot smarter we'd know how.

logicchains 3y ago
>If only we were a lot smarter we'd know how. That's not true. Pricing and predicting in the real economy depends on information; for a given amount of information, there are vastly diminishing returns for further intelligence. Because intelligence only allows predicting a bit further in future, as the complexity of predicting the future increases exponentially with lookahead distance; it's O(e^n). This is why hedge funds pay for things like satellite footage of oil tankers to predict changes in supply.
aeternum 3y ago
Yes, things might be significantly mispriced, but the amount of mispricing is a finite quantity. This is clear in the classic pump and dump scheme. During the pumping stage, the unscrupulous actor loses money by injecting some amount of mispricing by purchasing the security and bidding up its value. The hope is to generate momentum and hype that triggers others to amplify that mispricing. Then during the dump scheme, the unscrupulous actor can capitalize by removing the mispricing.

stubish 3y ago

It sounds like you also need an AI to generate that mispricing. Like a form of SEO, the misinformation bots tweet to all the trading bots and try to trick them into mispricing shares, so your trading bots can quickly gain advantage. Corewars using the world economy.

VaxWithSex 3y ago
The best way to predict the future is to invent it. --Alan Kay

melvinmelih 3y ago

> Suppose we did have an AI model that could with near certainty predict both the future cash flows of a company and future interest rates. You could very easily calculate the discounted cash flow and determine the fair share price today or at any point in the future. The thing about trading is that, ultimately, prices are not determined by information, but how the hive mind interprets that information. And in practice, that is not always a 1:1 relationship (see the meme stock hypes). As Keynes* famously said: the markets can stay irrational longer than you can stay solvent, is exactly the reason why even having access to perfect information will not make you necessarily successful.

jandrewrogers 3y ago
> As Buffett famously said: the markets can stay irrational longer than you can stay solvent Buffett did not say this. It is widely attributed to the economist John Maynard Keynes almost a century ago but there is no evidence that Keynes ever said it. I believe the current hypothesis is that it originated with a well-known economist in the 1980s.
waveBidder 3y ago
it's a Keynes quote, but yeah.
- melvinmelih 3y ago
  My bad, corrected!

RandomLensman 3y ago

If every investment became risk free because of perfect information about the future, it would likely increase the total market value by quite a lot.

rpigab 3y ago
Or decrease, because who would go to the casino if everyone knew the outcome? Only the owners and staff. "Useless" companies are part of the total market value. If they never get any funding, that's less value overall. Even if that translates to more value for "useful" companies. Also, if you know with absolute certainty from the beginning that Apple Inc is going to be worth X billion dollars, then you never get to buy stock at less than X billion dollars, because everyone has the perfect information. Value would be constant, and investors would get exactly zero return, because zero risk. There are other variables, how long it will take and how many people can afford to fund it from the beginning and for that long, of course.
- RandomLensman 3y ago
  You could calculate the value of things under the discounting changes. The idea of perfect foresight of the future is kind of insane anyway. Not sure why all of sudden we would go back to believing in a deterministic universe.
  - aeternum 3y ago
    The universe can be both deterministic and mostly unpredictable. In fact it most likely is both of those things. Entropy bounds computation and prediction of chaotic systems requires extreme amounts of computation.
    - RandomLensman 3y ago
      Our current understanding puts some things into the category random, could be wrong, of course.
- alephnan 3y ago