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Computer Can’t Replace Human Insight
Financial industry giant Morgan Stanley (MS) is set to replace bond traders with computers. It has, according to some, already reduced head count by 10% to 20% on some of its bond teams. This move comes after a stinging credit rating downgrade that appears to have been something of a call for the company to make big changes to better compete with its larger peers.
It is hard to deny that computers have helped to level the playing field in many financial markets, particular stock trading. However, it is equally hard to deny that computers have resulted in some high profile problems, as well. Note the near demise of Knight Capital Group (KCG) that has very publically displayed the problems with relying too much on computers. It is also displayed the benefits of humans, who had to step in a clean up the mess—since its computers weren’t programmed to do that part.
This isn’t to say that humans don’t make mistakes, they clearly do. In fact, with too much frequency, we hear about rogue traders or someone who simply pressed a button too many times. However, the speed at which computers can cause damage is often shocking to people—the Knight event is just the most recent example. Moreover, since computers are considered “perfect,” many people don’t challenge problems when they arise because they assume that the computer is correct. A good, down to Earth example of this is with such mundane things as spell check and grammar check.
The real problem that comes up is judgment—a computer can only do what it is told. Sometimes a sentence is structured “wrong” by the rules of grammar that were programmed into Microsoft’s (MSFT – Free Microsoft Stock Report) Word product, but that sentence is, in fact, correct when more appropriate judgment is applied. And spell check can’t correct a word that is used improperly—think “their,” “there,” and “they’re.” A human constantly makes judgment calls based on experience and knowledge. These are simple examples for humans, but that’s the point! If a computer has a hard time with these, how much more complex is trading stocks and bonds?
When putting a car together or performing some other rote task, a computer (often via a robot) is a marvel of human ingenuity. One robot in a factory can probably replace multiple people and do a more precise job. The financial markets, however, aren’t rote, they are living and breathing because they are based on emotion—mostly fear and greed. Computers have a particularly hard time with emotion. Most of the time things will likely go just fine—but when something is outside of the programmed parameters, look out.
This isn’t to say that Morgan Stanley isn’t making the right decision, however the timing of this move so close to the Knight Capital debacle is unfortunate at best. It simply reinforces investor concerns about the financial markets at a time when fear is heightened. If investors already think markets are “rigged” by the big players and the split second trading of computer algorithms, is adding more lightning fast computers going to increase the amount of trust Morgan Stanley patrons have in the company? Only time will tell.
All of that said, it is important in the financial markets to have perspective and experience, and to allow for human judgment. A set of numbers doesn’t make a company, the people who work at the company do. A computer can’t see them—all it can see is the numbers. A stock price changes because investors are making decisions, rational or otherwise. Computers see the changes, but can’t understand the reasons that might lie behind them.
Value Line has long prided itself on using statistics to give investors an edge in the stock market. The historical performance of the Timeliness Ranking system is impressive, to say the least. However, Value Line pairs its mathematically driven systems with human interpretation of recent events and the impact that those events might have on the future. This is a compromise between the science and art of investing. Taking a look at any of the free Dow-30 stock reports that Value Line provides investors will clearly display this, and show the value of not relying solely on computers.
The value of human judgment increases when you move beyond the Dow-30 to the rest of the 1,700 or so companies followed by computer and analyst in The Value Line Investment Survey. In fact, when examining some of the smaller issues Value Line covers, human judgment can be particularly valuable. With investor concern high and an ever increasing reliance on technology for decision making, Value Line is proud of the fact that there are humans watching every one of the 1,700 companies in its flagship offering.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.