So, back to the question of whether computers will make the business of active management redundant. 
The simple point I would like to make is this. While the games of chess, Go and poker are complex in that there are an unimaginable number of permutations, either in terms of possible moves (in chess and Go) or possible hands (poker), the rules that govern each of them are simple and could be written on the back of a cigarette packet. In chess, there are only six different pieces, and each is only allowed to move in a particular, simple way. In poker, there are a small number of meaningful hands and the rules clearly state which beats which.
The same cannot be said about investing. Why? Because financial asset prices are driven by human behaviour, and you can’t write the rules that govern human behaviour on the back of a cigarette packet as you can with chess, Go and poker.
Simplistically, but importantly, what distinguishes computers from humans is that humans have the ability to imagine. And it is the ability to imagine that gives and perhaps may always give humans the edge over computers.
The US Air Force knew this. Top brass there realised long ago that pilot capability could be more effectively appraised by a test of a candidate’s imagination, rather than by an IQ test. As recounted by renowned scientist Michio Kaku, the USAF tested prospective pilots on their ability to imagine different solutions to a problem. The particular case that Kaku cites was one in which candidates were told they were stuck behind enemy lines, then asked how many escape plans they could hatch.
How does all this relate to investing? Simple.
Imagination requires an appreciation of the future. As Kaku says, computers can only at best appreciate the future in one dimension – they can predict, for example, the airflow over an airplane wing. Humans, on the other hand, have the capacity to predict the future on multiple scales. This ability is the result of the hundreds of millions of years of the evolution of life that have culminated in the emergence of the human brain. It does not therefore take a huge leap of logic to believe that humans have a key edge over computers, whether in the world of investing or in other areas.
Indeed, in a recent article in Prospect Magazine, Resolution Group’s chief economist Duncan Weldon wrote: “Machines are less likely to be able to replicate creativity, social interaction, and the need for human-to-human contact anytime soon, and a surprising number of jobs involve these attributes”.
Furthermore, although there are many instances in which artificial intelligence is helping to improve decision making, there are others where this is not the case. AI systems designed to perform the same task can end up in conflict rather than working together. One example of this is so-called ‘bots’ designed to correct errors on Wikipedia. According to the the Guardian newspaper: “One of the most intense battles played out between Xqbot and Darknessbot which fought over 3,629 different articles between 2009 and 2010. Over the period, Xqbot undid more than 2,000 edits made by Darknessbot, with Darknessbot retaliating by undoing more than 1,700 of Xqbot’s changes. The two clashed over pages on all sorts of topics, from Alexander of Greece and the Banqiao district in Taiwan to Aston Villa football club.”
One can imagine bots of the future designed to make investment decisions also coming into conflict with each other, with a plethora of inputs telling one to buy and the other to sell.
Even if AI can be used to make good investment decisions, we are a long way from such systems becoming refined and widespread. A search on ssrn.com for the terms “artificial intelligence” and “investing” yields just one result and the paper in question, which puts forward a framework for picking stocks based on an analysis of past data, concedes that there are flaws in its methodology.
It looks like my younger colleagues can breathe a sigh of relief.
Peter Elston is chief investment officer of Seneca Investment Managers. The views expressed above are his own and should not be taken as investment advice.