Technology has made everything better, faster, and cheaper over the years, and investing is no exception. Indeed, many robo-advisory firms have launched in the last five years touting the benefits of algorithmic investing rather than human selection. But in a world where convenience sometimes seems to trump involvement, can we really rely on the marvels of our modern age to their fullest.
Artificial intelligence based on historical pattern recognition is already pervasive throughout our society. Take Waze or Google Maps; most of the time we need only type three or four letters and the system knows exactly where we want to go. Likewise, computers are great at processing rules-based algorithms. But there are still some things that require the kind of vision, sensibility, and insight that only a human being can offer.Program Traders that had automatic stop loss orders lost millions as the selling triggered computer programs to initiate even more selling. The computer programs were simply acting out the instructions set out by their algorithms, namely: “In a significant down market, take losses and sell no matter what”.
The robocall software were wise enough to evaluate the different possibilities for the market drop including the possibility of a malfunction in the system. Like good soldiers, these programs carried out their duties exactly as described. There was no chance of the ‘programs’ veering off the path or taking pause for reflection.This is where human wisdom outperforms even the most sophisticated artificial intelligence. Not only are humans flexible by nature but our gut instinct gives us an uncanny ability to evaluate all forms of information including the absence of information.
Ever seen a magician pull off the ‘disappearing in the box’ trick or ‘catch a bullet in the mouth’. Although the trick has every bit the appearance of realism and even though we cannot explain how the trick is done, we know that we are victims of an illusion. The magician is toying with us. The ‘how’ is not known but for certain the magician did not vanish nor take a live bullet in the mouth.
In contrast, pure robo advisors generally rely on a 10-point questionnaire to summarize their client’s situation. For millennials at the beginning of their wealth accumulation years, the lack of a human element in the investment decision-making process is acceptable. Accounts are small, usually in the tens of thousands. In a small portfolio, higher fees from an active human advisor are likely to neutralize any benefit.