Published in the Financial Times, 10 March 2017
Sir, John Gapper argues that algorithms will increasingly replace asset managers and that they may do better (“Technology outsmarts the human investor”, Comment, March 8). He uses algorithm effectiveness in medicine as his example.
However, he fails to mention one big difference. In medicine things do not change except over very long periods. Diagnostic algorithms are therefore operating in a field of long-term relative certainty. Not so with markets. They react to events, often unpredictable ones. The psychology of markets changes constantly and with it the drivers of risk and performance. This makes the value of algorithmic approaches much more uncertain than in fields such as medicine.
Mr Gapper may be right that asset managers have disappointed and that many are hoping that algorithms may do better. But the reality may be more prosaic. The idea of beating the market may simply be no more than a chimera constructed by asset managers to justify their fees.
As investors’ faith in asset managers gets ever shakier, there are two options. Believe asset managers’ new tale — technology will make everything better. Or accept that beating the market is a matter of luck, not skill or technology.
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