Economist and researcher Aaron Brown said Tuesday that while many are worried about using artificial intelligence (AI) in financial markets, we should be paying attention to how stupid our financial behavior has become.
Okay, so Brown didn’t use those words exactly, but the underlying thesis of his most recent op-ed in Bloomberg essentially argues this point. “Many on Wall Street worry about the impact of injecting artificial intelligence into financial markets. Perhaps we should pay equal attention to subtracting human intelligence,” Brown, the head of financial market research at AQR Capital Management, wrote in the article.
Brown framed his argument around the reality that very few investors and managers paid attention to security valuations over the last years. Security valuation is essentially the process of keeping prices in line with the market reality. But hedge funds are driving up the overall cost of seemingly everything because it clearly makes their members super wealthy (despite so many assets now being priced at artificially high levels), disregarding the actual value of assets to humans.
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What happens in California comes for the rest of America. Read this and be warned (not that I haven’t been warning you for years). https://t.co/zwoMPSgqYA
— KAY SMYTHE (@KaySmythe) May 22, 2023
“But today some hedge fund money is moving into dumb versions of these strategies,” Brown continued, citing one of the fastest growing products in investment management: quantitative investment strategies. QIS, by Brown’s estimation, is basically the absurd idea that humans should hand over investment decisions to limited quantitative rules rather than human judgement.
Much of Brown’s thesis centers on using these quantitative measures over smart humans, or even replacing intelligent individuals with AI, and how dangerous that could be for hedge funds and the wider economy in general.
But the really crazy part, at least to me, is the thought that anyone can trust a computer to do a better job of managing money than we can as humans. More than that, handing over responsibility of this management to computers can lead to a net loss in human knowledge capital around the markets. (RELATED: Dear Kay: I Just Saw The Banking News. Are We Screwed?)
Put it this way: less than 100 years ago, most of what makes up our financial industry didn’t exist. In fact, almost nothing we do today existed 100 years ago. Around 20 years ago, we were still hitting computers to make them work. Now we’re going to hand over our knowledge capital to machines made with human biases, thereby disregarding our own intellectual capital?
Sure, that sounds smart and safe, said no one, ever.