Technology is humanitys greatest feat, yet its greatest fear. Economic development in nations across the world is a product of technological innovation, or to use economist-speak, technological progress. <\/p>\n
By the same token, technology gets a bad rap unfairly in many cases. Some say it reduces human roles due to productivity gains from automation. Take retail banks, for instance: many of the branches on the high street nowadays are filled with self-service counters, much like supermarkets. <\/p>\n<\/p>\n
The productivity puzzle, that efficiency has not increased as technology has gained in its sophistication, is indeed baffling and is a counter argument for more and more robots, but there are possible reasons for this, namely measurement error. Simply blaming tech is nota valid reason. <\/p>\n
As mentioned above, tech gets a bad wrap. It was to blame for the flash crash in 1982, it was partially to blame for Long Term Capital Managements blow up from a Russian debt default, and it was to blame for the most recent derivative instruments that imploded the core of the financial system. <\/p>\n
So given that, why is the adoption of tech a good idea? <\/p>\n
For investment processes, rules based\/systemic programs, or the scarier-sounding algorithm is enough to make the less statistically minded switch off, but even relatively simple strategies are better than one might think. <\/p>\n
Investment strategists give views on whether they think the market is going up or down. Those with money give those with knowledge the money because they think something will happen, yet they would hesitantly give their savings to bet on an algorithm that would buy the S&P 500 futures market when it is above its 200-day moving average and sell it when it is below because surely that sounds too simple; or is it? <\/p>\n
If the futures strategy were implemented along with the following: buy every single stock in the US, choose the top 500 by market capitalisation (and weight it by that market cap) and rebalance that position accordingly every quarter, what would be the result? <\/p>\n
The answer would be an outperformance of the S&P 500 over the past five or so years, by a significant margin. Both strategies in some regard are investing in the market, except one is weighting and rebalancing the components, while the other is based on fundamental factors by a human. <\/p>\n
The first rule, which is buying when the market goes above its 200-day moving average, is in many respects a momentum strategy. A fundamental strategy based on buying higher than the sector price-earnings (P\/E) ratios is also a momentum strategy. The point here is that although both are looking for similar outcomes, someone choosing to invest would likely prefer the human P\/E method to the 200-day computer strategy, but why is that? <\/p>\n
If a plane was descending into an airport and the tannoy system explained that the air traffic controlling system was relying on technology and not a human, what would the reaction be? It is unlikely to be filled with a sense of insecurity, but that is irrational. Human error is far greater than technological error, yet people seem to think technological processes are bad and do not trust them. <\/p>\n
From an investment perspective, fundamental analysis is the foundation for many investment houses, but the two methods are not mutually exclusive. Rules-based methods are very good as a complement because they remove the human element, bias. Those who are not in favour of rules-based methods would say: well, the market changes all the time, so one does not want to be stuck in a rigidsystem that does the same thing in all market conditions. <\/p>\n
One could sort of agree, but the adage, this time is different, is clich because it simply is not true. Markets always overshoot, that is what markets do. People always get emotional and believe the hype, that is what people do. Having a system was and never is a bad thing. What is bad is not accompanying it with peoples views. Relying on a system alone has shown in most cases to create problems. <\/p>\n
The human versus AI debate is not the right conversation to be having. The focus should be on including technology alongside human decision-making because AI does not have emotion, bias and external pressure to compete with peers. Those who include both in the process or at least do not look at technology as a potential disaster are those who will benefit. <\/p>\n
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Read the rest here:<\/p>\n
Taming Technology - The Market Mogul<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" Technology is humanitys greatest feat, yet its greatest fear. Economic development in nations across the world is a product of technological innovation, or to use economist-speak, technological progress. By the same token, technology gets a bad rap unfairly in many cases. Continue reading