Human beings are emotional creatures, especially when it comes to money. There’s an old traders saying that if you trade on your emotions, you won’t be trading very long because you’ll lose all your money. However hard we may try though, human beings are not able to leave all emotions at the door. Just like markets have cycles of growth and shrinkage, so do human emotions within the market with regards to risk.
There was a famous economist named Dr. Hyman Minsky who believed that financial booms and busts were unavoidable because of basic human emotions. His idea was that over long periods of time, traders and investors would slowly become more comfortable with higher levels of risk until it got to a point where overleveraging would cause markets to crash. Then with a newly restored sense of risk, the cycle would reset and continue over again and again. Minsky believed that these were primarily the reasons why we saw cycles in economies, almost at a rate and certain periods that could be predicted. Later economists called the point in time where the economy reset, a “Minsky Moment”. The ideas that Minsky explored were just as much psychological as they were economical , but most importantly showed the flaws in human trading and risk assessment.
This brings me to my idea that as long as human beings run the markets, we will continuously see periods of high volatility in markets. With the use of computers that can control the markets and work as a market maker we could see much healthier and stable market growth over long periods of time. If computers have algorithms built in that don’t adjust for risks and bring emotion into trading, like human beings, there could a large benefit if we put them to work. Even now trading bots and algorithms are getting more advanced in order to make profit and supply stability to markets. There have been market maker bots on Wall Street for some while now, but we are currently seeing a rise of High Frequency trading bots that can do a massive amount of trades in a short period of time, while also potentially supplying stability.
The future I see is eventually having traders phased out of trading daily on the market, just like we have seen with the brokers on the trading floors in the past few years. Once AI bots can do all the same work as the human traders can do, with better results and with less risk, there will only be jobs available for the bot managers.
Overall if we can get to this point with some market stability as today, and avoid a total market collapse, we can move to a future where financial crises and over leverage will be a thing of the past. We would still have to worry about the government’s financial policies and how they leverage debt, but the private sector would be much safer in the long run. Let me know what you think in the comments, I look forward to seeing what you think will happen.
-Calaber24p
Having totally controlled AI systems that run everything could be very dangerous. Are we talking I-Robot here? I think you just nailed it in the head when you said Governments financial policies and leverage debt. Is not that the root of the real problem?
Even if you did have a fully automatic computer-controlled system, you would still have to deal with unpredictable situations such as weather, wars, and the greed of criminals. ..Unless you wanted to automate those things as well...which makes humans irrelevant except as workers in such a system.
In think many of the events you are describing have a far smaller effect on profits than traders today believe they do. Maybe in extreme conditions like a full out civil war, but most of the time, in the US market anyway, traders act very sensitively to events that barely hurt profits.
Perhaps we are talking different scales. Automated systems would not have stopped major market crashed such as: the great depression, WWI, WWII, Desert Storm, sub-prime loan crisis, EU sovereign debt crisis, Sept 11th after effects, Dot-com bubble, Black Wednesday, Japan's deflationary recession of the 90's, and numerous severe droughts. Right? Or am I missing something?
I would agree more automation, removal of more traders, makes the system more efficient, but I don't see how that translates into major volatility stabilization. ..by the way, this is not my area of expertise, so if it does, I would like to learn why!
I think the claim is that those market events were more extreme than they needed to be.
I don't agree with the claim. What "stabilizing AI" would do (and maybe to an extent has already done) is allow us to take even bigger risks. That is the deeper lesson here.
@smooth, you bring up an interesting point. Like the evolution of brakes in automobiles. Yes, they have enabled cars to stop faster, but overall it has allowed vehicles to increase in operational speed.
That's why bots do a better job playing the markets. All algorithm, no emotion.
that's the reason why we have flash crushes every now and then.
exactly
What if there are just bots playing the market? What happens then?
Two scenarios that are fun to consider:
On a side note, the vast majority of money in the markets today is speculative (something close to 85 percent I've heard). This money is trying to capture value from pricing inefficiencies. If the inefficiencies disappear, will investors pull their money from the markets, compounding the low volume I mentioned in scenario 2? How much risk will this low volume create?
So all that said, I think an all-bot marketplace would force the capital markets to take on a much different (smaller) role in our economy... and would be boring :)
That's what I am thinking. Most people with bot/AI/algo trading POV think about building the best bot and are pretty myopic in their perspective. But what happens after the bot's change the actual landscape and the system adapts around them?
There's an an analogue to that in passive vs active mgmt. There's been huge inflows to the former and everyone touts it as superior due to lower fees. But how well does a passive fund perform in an all passive universe?
The bots will be consistently as good as their program. Then it becomes a challenge to have a smarter algorithm then the rest of the bots.
I believe that these algorithms ARE based on emotions by the creators OF the algorithms, because they BELIEVE (Emotional decision) this or that algorithm will be better than another one. Or there would ONLY be 1 algorithm used in the ENTIRE marketplace because it IS the BEST.
"Yeah, well, that's just, like, MY opinion, man"
It's all in the 2nd to last sentence:
"We would still have to worry about the government’s financial policies"
That will always cause volitility in the markets...
Yeah this is going to be a bigger problem. Bots arent going to run the government..... yet
Great post. So much of what you say is true. I like the idea that one day there will be a computer that can automate everything. One that liberates humans from all kinds of slavery. One that allocates resources to robots which grow food for free, and build shelter and make clothing etc. That is where technology should take humans.
And causing flash crashes. :)
HFT is still in its infancy, more advanced algorithms that work the bots will come soon I guarantee it
Just by mentioning "Flash Crash" I see you ARE aware of how much the market IS controlled by ... bots .. (because of the amount of secrecy involved) just not really into theoretical debates ..
@calaber24p
1+2:. All value is created out of human interaction because we are fallible biological entities under an entropic ecosystem. The market is a by-product of the human experience. It cannot be run by bots.
For markets to become fully bot automated we need first to become cyborgs in a way that incorporates our entities with an advanced A.I.—with our needs and desires having litle to do with the physical world and more with an augmented version of reality.
This so far belongs to the domain of science fiction. If we ever reach that point, markets will be obsolete.
Precisely! I was about to post a similar reply, but you've stated it so cogently already.
Certainly, bots can do a lot of automatic work but an algorithm made by a human could be better than a human decision? Human or computer would become a God? Please, a little realism.
The best vote you received was from wang - a bot.
How appropriate!!
And @recursive is a good one too, not a bot.
I think even AI totally controlling the market, the cycles of ups and downs will be there due to instabilities of the fundamentals and policies. The fiat currency system, in particular, cannot ensure any long-term stability because it "requires" periodic resets.
The market will still crash even if AI bots takes care of the trading. There are too many other factors that will affect the market. There may be war occur somewhere or issues such as Brexit that will cause the market to be unpredictable.
I can't argue with anything that you are saying and am grateful this post is up to stimulate thought but there are MAJOR factors that you have left out of the equation that are VERY influential on market crashes.
The truth is the the bankers own and control the monitory system around the world. The global elite run and control the banks/bankers. If you do your research you will find thousands of years of history that prove markets rise and fall according to PLANNED orchestrated events set up and influenced by the global elite.
I published an article titled "The truth about money" of which goes into the history and factual realities around "money" of which is also revealed to not be money at all but a "fiat currency".
So really until this is comprehended and something done about it other factors are quite insignificant.
https://steemit.com/money/@quinneaker/the-truth-about-money-what-you-need-to-know-to-free-your-self-from-perpetual-debt
First, I've built robo-traders and you couldn't be more wrong.
Cycles are necessary to eliminate irresponsible behavior. Computers are not more responsible; they make just as many assumptions as humans and many of them are wrong. In fact, most of the ideas that crashed LTCM were developed by people with expertise in algorithmic trading.
Instead of looking at crashes as bad, see them instead as corrective cycles. We don't need a system of perfect stability - it would be boring and bad behavior would never be corrected. We need booms and busts, so that the busts destroy the bad and irresponsible.
If you're responsible, you will do well regardless of the season.
What I love about the currency market, can go Long or short and make money ..
I think what we should talk about is as long as humans try and control and manipulate the market we will have bigger crisis-es. When we have people that think they can fix interest rates(the price of money) and control growth through debt monetization then I think we have lost our collective minds. Sure it seems to work for a while, but at what bigger cost in the future? Problem is these same psychopaths will offer a solution when their train finally hits the brick wall and they will blame it again on the "free market" which is double speak because you cant have a free market if its so grossly manipulated. Perfect plan. Manipulate things to reap huge gains, create an extraordinary crisis, insert yourself as the savior and solution. Lather, rinse repeat.
DoublePlusGood response +1
I think the markets should fall because we need a reset.
Gerald Celente and others like Peter Schiff are saying that this crash will be the dollar, and worse than 2008.
I hope not! But we shall see.
I have followed and upvoted this great content. (.05 cents!)
Have a great day!
:D
Once financial instruments are executed by blockchain, emotion will be a thing of the past.
Are you implying that the individual investor should no longer be allowed to invest in markets? Why would you want to limit the free choice of people who wish to invest their money as they see fit? Even if it is based on emotions, luck, or any other largely unpredictable source. That is their choice. Perhaps pursuit of profit is not the only reason to invest. Someone may want to invest in a stagnant company because their grandfather retired from it, a small farming collective because they support organic foods, or any other reason the person sees fit.
Stability in society can be achieved at the sacrifice of freedom, ambition, and reward. I personally don't want that. I am fine with higher degrees of automation of the infrastructure, and am fine with fund managers choosing AI systems to maximize profits, but don't take away from my options to invest or the decisions I can make to support or invest in the things I find important.
No im not implying that, Im talking more about institutional investors and how they trade and evaluate risks on a large scale.
From what colleagues have talked about, the big traders are definately moving to AI systems. But that does not mean protection from volatility. Hasn't the market been stopped a few times in the past couple of years because of what was suspected as a cascading sell-off by AI systems? One AI systems sees some sell-offs then it offloads to protect its position and then all the others follow suit. So can't AI's also cause volatility?
Hahahahaha very very good point
i disagree, your premise assumes there is only one reason for booms and busts -- i submit simple change as another major player in the ups and downs of the market -- whether with bots or with humans, there will always be change
I dont think it is the only thing that affects markets, as I said in the end the government is a huge factor, but also I think it would just make the volatility smaller. Instead of say a 50% fall we would have a smaller one, like 20%
well that is a mighty assumption to make
Very interesting!
Unless true artifitial intelligence enters the markets - conscious machines capable of indepentent thinking and reasoning, without any human emotion, then i think humans can still have the advantage. As far as i know, market bots are still programmed by humans, controlled by humans, turned on and off by humans, ect. As long as that is the case, then human emotion comes into play.
Machines can definitely provide short term advantages in HFT, but longer term trading - days, weeks, months - Im not sure they are advantageous. Intraday moves, and even daily moves in some cases, are much more convoluted than they used to be. Sometimes its as if they can smell a human trader. Longer term market moves are generally more organic.
Machines can only improve things like price equalisation through arbitrage between markets where prices are out of sync with each other. Because the market is so well connected these days, these price differentials tend to be very small and short lived. Machine-based trading systems may be able to eliminate some of the advantage of a skilled trader, especially when the transactions are not possible for a human to interact with. But markets are for humans, and thus they cannot be replaced by machines. They can help make markets more efficient, but they cannot replace humans. Without a person wanting something, there is no market in meeting those wants.
There is a lot of people with mistaken ideas about economics, usually based on Marx's well and truly disproven labor theory of value, the econometrics of Keynes and similar people whose real reason for these ideas, not a lot different from Marx, was to try and eliminate subjectivity from marketplaces. This is impossible, for the reasons I just explained above. The entire edifice of 'technocracy' falls down because of its lack of accounting for the natural, subjective nature of markets. They are trying to solve problems that were caused in the first place by big interventions in the shape of legislation and interest rate manipulation. If people understood economics, they would realise the people promoting these interventions are in fact robbing people, by clever methods, and the solutions are turning the problems created into political footballs to justify giving more power to politicians and bankers.
But they made the problems in the first place. Humans may not be perfect and markets cannot be perfectly efficient at allocating resources, but letting scamming scumbags peddling snake oil and worshiping like they are the saviors of people in trouble because of scamming scumbag snake oil peddlers... this is the problem in the first place.
Ironically, financial boom and bust cycles more or less began after the creation of the Federal Reserve.
Boom/ bust has been going on since the "market" was invented ..also known as supply and demand, boom/bust goes hand in hand with that market ..
"Yeah, well, that's just, like, MY opinion, man"
I don't think they will phase out people completely. After all, humans will keep writing the algorithms. Even if they are replaced by AI, someone is going to keep watch over that AI.
The subject is gorgeous
On Earning: «Never depend on single income. Make investment to create a second source». On Savings: «Do not save what is left after spending, but spend what is left after saving
Machines may make errors too. Afterall finance can be a useful thing if it is done with human being's interest in mind.
You are right @calaber24p human emotions change overtime and this emotions affect how a human thinks, even its consciousness are affected, which leads to a reduction of its efficiency.
I go agree on the premise that emotions are a bad influence. But I think you give the human trader much more power than they actually have in affecting the economy as a whole.
Change your look higher, not at the traders but at the emotional person(s) that set economic policy. The people that decide if we will have another mass printing of currency or if we will change the interest rate.
The past 30 years or so we have seen that those that set policy are afraid of small recessions and afraid of failures. They have adjusted the interest rate over the last decades from about 15 percent per year to a negative amount as a result. Something that should look strange to anyone..
The fact of the matter is that those in charge have changed what it is to be in business. A 100 years ago when a company did bad they would go out of business and a new one would replace it. A natural evolution towards being better for your customers.
This has changed to a situation where bad businesses can get extremely cheap loans and put up bonds on the market that are virtually guaranteed to be bought by the central bank in order to stay in business.
Today size is what matters, not how efficient or how useful you are to the economy.
If anything, your post thinks too small. Its true that emotion has gotten the better of us, but you are missing the extreme distortion of the market (grown in decades) by the policy makers.
I think the markets fine the way it is .. i like the cycles the fed creates.. it enriches the people that understand and pay attention .. and hurts the guy that doesnt care whats going on as long as he gets to borrow money to buy lots of stuff
interesting post @calaber24p
The article is a great example of the herding sheep effect! It's generated over $1 000?! Copy paste, without any thinking. Even the author is contradicting himself in the main point. If somebody trade emotional and get out, because of that (agree). So who remains to make the crises? @calaber24p, obviously it's not your field. Keep writing on what you're knowing. Keep your reputation!
And exactly the bots, which upvote such contains will destroy the great idea of Steem and Steemit!
Markets are not stable but they are resilient. This means that, if they can, they will correct themselves. The cause of the Business Cycles and all of the crashes have always been to do with government and central bank interventions. The first boom-bust cycle was when the Dutch National Bank offered free minting and certification of gold. Gold flooded into the Dutch marketplace, and the lack of seignorage cost (checking the gold was pure and pressing it into certified coins) caused the Tulip Mania. This eventually crashed.
The same principle applies no matter which boom-bust cycle you look at. Someone fiddled with the supply of money, making it extremely cheap, and this cheap money gets invested in long shots and marginal investments that are unlikely to yield a profit ever, and eventually this is discovered, and then everyone panics trying to sell off their holdings. The part of the market where this happens may not be big, it only has to be one small segment drunk on cheap money, and it makes everyone poor.
Markets by themselves do not cause this. Even the gold rushes did not cause boom bust cycles, even as the supply of gold, used as money, rose quite a lot for a time. The level of acceleration of the supply of money has to be beyond the natural cost of production.
The global market is almost completely integrated now, there is very few gaps that stop trade to and fro between interested parties anymore. We are heading for a crash soon, there is more debt in the system now than could be paid back in a hundred years, even if the investments were sound. These investments would have never happened if the interest rates were not artificially lowered.
The cost of money production and the interest rate are different phenomena but their effects are the same. They dilute the pool of money, cause massive differences between prices of some market goods and services, and others. These differences are what the market always strives to level out. The crashes are simply the market trying to eliminate these dangerous interventions that cause unnaturally rapid increase in the amount of money.
If markets can be stabilized by algorithmic trading, why aren't markets more stable today than they have been historically?
Central banks, through the manipulation of interest rates, cause the boom bust cycle. Every bust in your chart took place during the era of the Federal Reserve. By manipulating interest rates below the natural rate of equilibrium, the Fed distorts the true cost of credit, making unprofitable ventures appear profitable. Each bust is the market's response to clear out the malinvestment that was caused by monetary manipulation.
Eliminate central banks and let the market regulate itself. You won't have a boom/bust cycle, and markets will appear more efficient.
Bots ARE controlling the markets ... (With .Gov intervention of course)
"Yeah, well, that's just, like, MY opinion, man"
An AI Bot is only as good as the state space that was setup by humans and the logic how the bot move through this space. They will have difficulties with sudden unforeseen changes in the system. They do not have intuition / gut feeling which is somehow an emotion to small sudden changes that an AI Bot might not pick up.
Humans ARE the market, this volatility you see, these booms and busts have nothing to do with a free market, it's government and central banks messing with the market.
very interesting post thanks!
"With the use of computers that can control the markets and work as a market maker we could see much healthier and stable market growth over long periods of time"
Arnt most traders in the stock markets actually bots though?
The clue lies in this paragraph. Markets aim to track changes in fundamentals. This is a process of absorbing available information and making assumptions about unavailable information. It is the unavailable information that is the challenge because that is where the human element lies - people are making decisions about the world they see whether they are private businesses or consumers or government officials setting taxes and spending levels and monetary policy.
There is not a bot that can unravel that in an orderly way because it is not orderly in any event. We can only hope that a bot does not over-react in a disorderly way. However it seems that the program trading that accelerated the crash of 2008 had too many human hands in the brain box.
Hi - thank you for the article. Very interesting - but I think there is a good explanation behind each of these market downturns. It is definitely not human. Reasons are purely economics. Robots won't save anything... arguably even worsen it.
We next article Part 3 will be dedicated to this topic, if interested. For now i just wrote Part 1& 2 which i think will be a useful read ahead of the 3rd one:
https://steemit.com/philosophy/@conspi-theorist/why-global-crisis-is-inevitable-part-2-the-biggest-problem-of-capitalism