Postpone the rise of the machines

Bad news for our would-be robot masters: Computers are befuddled by recent stock market behavior.

Published August 13, 2007 1:44PM (EDT)

Free your mind from fears of artificially intelligent robot domination.

At least for now.

As the turmoil on Wall Street deepened last week, financial reporters flocked to a new subplot -- the failure of a particular kind of computer-based approach to stock-trading. So-called quant funds (short for quantitative) rely on complex mathematic models to analyze stock market ups and downs and automatically execute buy or sell orders in order to take advantage of profit-making opportunities where the window of opportunity might be measured in split-seconds. The abrupt surges and declines recorded in stock market indexes late in the trading day during the past few weeks may be attributable to a horde of lemming-like hedge fund computers simultaneously operating on the same interpretation of market trends, with no time for humans to intervene.

But the interpretations have been wrong. The models aren't working. The quant funds are getting mauled.

No doubt this is distressing for the operators of hedge funds, who have access to the best financial modeling expertise and computer processing power money can buy. There has been much muttering and gnashing of teeth as to how recent market behavior has been unprecedented. Unprecedented!

How could the best minds (and computers) of our generation have been so wrong?

We will not wail and moan here. How the World Works finds the failure of the quant funds refreshing. The world is complex and inherently unpredictable. Yay! Imagine how dire our lives would be if the models actually worked, 100 percent of the time? Where would be the fun in that? If computers were better at investing than humans, why not hand off everything else to them: government, culture, war?

Every failure of a quant fund is a victory for the human spirit. Enjoy it while it lasts.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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Globalization How The World Works Stock Market U.s. Economy