Forget AI. The Real Risk Is the Dumbing Down of Markets.
As the indexing trend of recent years shows, replacing smart humans with stupid computers has more downside than upside for markets.
Is Wall Street getting dumber?
Photographer: Bryan R. Smith/AFP via Getty Images
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. The long-term trend toward indexing —the dumb strategy of buying everything at whatever price the current owners ask just because it’s included in some benchmark — has greatly benefitted investors by reducing asset management costs and protecting from human behavioral biases to chase hot stocks and ideas and from panicking over short-term reverses.
As fewer ordinary investors and traditional money managers paid attention to security valuations over the years, the task of keeping market prices in line with economic reality has fallen to highly levered hedge funds using sophisticated and aggressive strategies. Although these funds represent only a small fraction of total assets, leverage and aggression gives them outsized influence on prices, trading and liquidity, especially with increasing amounts of assets in passive strategies, which remain on the sidelines for pricing purposes.