Imagine If Robo Advisers Could Do Emotions– Andrew Lo

MIT Sloan Professor Andrew Lo

MIT Sloan Professor Andrew Lo

From the Wall Street Journal

At a conference last year, I was approached by an audience member after my talk. He thanked me for my observation that it’s unrealistic to expect investors to do nothing in the face of a sharp market-wide selloff, and that pulling out of the market can sometimes be the right thing to do. In fact, this savvy attendee converted all of his equity holdings to cash by the end of October 2008.

He then asked me for some advice: “Is it safe to get back in now?” Seven years after he moved his money into cash, he’s still waiting for just the right time to reinvest; meanwhile, the S&P 500 earned an annualized return of 14% during this period.

Investing is an emotional process. Managing these emotions is probably the greatest open challenge of financial technology. Investing is much more complicated than other chores like driving, which is why driverless cars are already more successful than even the best robo advisers.

Despite the enthusiasm of tech-savvy millennials—the generation of investors now in their 20s and 30s who are just as happy interacting with an app as with warm-blooded humans—robo advisers don’t take into account the limits of human cognition; they don’t make allowances for emotional reactions like fear and greed; and they can’t eliminate blind spots. Robo advisers don’t do emotion. When the stock market roils, investors freak out. They need comfort and encouragement. During last August’s stock-market rout, Vanguard Group told The Wall Street Journal it was “besieged” with calls from jittery investors and had to pull volunteers from across the company to handle the call volume.

But what if a robo adviser could identify the precise moment you freak out and encourage you not to sell by giving you historical context that calms your nerves? Better yet, what if this digital adviser could actively manage the risk of your portfolio so you don’t freak out at all?

Imagine if, like your car’s cruise control, you can set a level of risk that you’re comfortable with and your robo adviser will apply the brakes when you’re going downhill and step on the gas when you’re going uphill so as to maintain that level of risk. And if you do decide to temporarily take over by stepping on the brakes, the robo adviser will remind you from time to time that you need to step on the gas if you want to reach your destination in the time you’ve allotted. Instead of artificial intelligence, we should first conquer artificial emotion—by constructing algorithms that accurately capture human behavior, we can build countermeasures to protect us from ourselves.

Robo advisers have great potential but the technology is still immature; they’re the rotary phones to today’s iPhone.

Marvin Minsky, the recently deceased founding father of artificial intelligence, summarized the ultimate goal of his field by saying that he didn’t just want to build a computer that he could be proud of, he wanted to build a computer that could be proud of him. Wouldn’t it be grand if we built a robo adviser that could be proud of our portfolio?

See the post at  WSJ “The Experts” 

Andrew W. Lo is the Charles E. and Susan T. Harris Professor at MIT Sloan School of Management, director of the MIT Laboratory for Financial Engineering, principal investigator at MIT Computer Science and Artificial Intelligence Laboratory, and chief investment strategist at AlphaSimplex Group.

 

 

Twitter Chat: #MITFinTechLatAm – Lee Ullmann, Pablo Wende, Ariel Arrieta

Lee Ullmann, director de la Oficina para América Latina de MIT Sloan

Pablo Wende, economista y periodista de Infobae y conductor de “Pablo y a la Bolsa” por FM Milenium

Ariel Arrieta, mercadólogo, emprendedor serial, co-fundador y socio administrador de NXTP Labs

¿Cuáles son las tendencias en cadena de bloques (blockchain), criptomonedas (cryptocurrency), ciberseguridad y gestión automatizada? ¿Cuál es el futuro de FinTech en Argentina y Latinoamérica?

Únanse para una conversación entre Lee Ullmann (@MITSloanLatAm), director de la Oficina para América Latina de MIT Sloan; Pablo Wende (@PabloWende), economista y periodista de Infobae y conductor de “Pablo y a la Bolsa” por FM Milenium; y Ariel Arrieta (@aarrieta), mercadólogo, emprendedor serial, co-fundador y socio administrador de NXTP Labs (@NXTPLabs). Platicaremos sobre las nuevas tendencias e innovaciones en materia de fintech.

La plática por Twitter tendrá lugar el 22 de mayo desde las 15:00 hasta las 16:00 ART (2:00 – 3:00 PM ET).

¿Cómo pueden participar? ¡Es sencillo! Si tienen una pregunta, respuesta o comentario, simplemente incluyan #MITFinTechLatAm en sus Tweets.

La conversación en Twitter es un precursor de la conferencia “Transformando la revolución del FinTech” organizada por la escuela de negocios MIT Sloan junto a la organización empresarial IDEA. Tendrá lugar el 29 de mayo en Buenos Aires, Argentina. La conferencia reunirá a investigadores y líderes de instituciones gubernamentales y presentadores. Entre ellos buscarán destacar las numerosas formas en que la incipiente tecnología financiera está alterando diversos segmentos del mundo financiero, entre ellos, monedas, títulos valores, préstamos, pagos y gestión patrimonial.

En promoción de las ideas de la conferencia, tendremos una conversación en Twitter sobre el futuro de FinTech en Latinoamérica, así como otras ideas de interés a tratarse en la agenda.

 

Post MiFID II, dark trading should return to basics – Haoxiang Zhu and Carole Comerton-Forde

MIT Sloan Asst. Prof. Haoxiang Zhu

From Oxford Business Law Blog 

On January 3, 2018, the revised Markets in Financial Instruments Directive, or MiFID II, became effective across EU member states. This comprehensive and far-reaching regulation will shape European capital markets in years to come. Among other things, MiFID II puts several restrictions on dark pools in European equity markets: (i) Broker Crossing Networks are essentially banned; (ii) dark pools that rely on “reference prices” on exchanges can only execute trades at the midpoint of exchange best bid and offer; and (iii) dark pools are subject to volume caps of 4% for a single venue and 8% across all dark pools (colloquially referred to as the double volume caps). On the other hand, MiFID II keeps the “Large in Scale” (LIS) waiver, so sufficiently large transactions can still go through without being counted toward, or affected by, the double volume caps.

Jargon and technical details aside, these MiFID II rules essentially push dark trading to return to basics: the matching of large institutional orders to reduce price impact (for both sides). Price impact—the very act of buying or selling moves prices adversely—can be quite costly for institutional investors, especially in today’s market where alphas are hard to generate and high-frequency traders watch every market movement at the microsecond level. By reducing the price impact of trades, investors enhance returns. Read More »

Millennials don’t save for enough retirement, but Congress can help – Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

MIT Sloan Senior Lecturer Robert Pozen

From The Hill

“Young people are not saving enough.”

“They will have to double their savings to retire at a reasonable age.”

These quotes represent the conventional wisdom about our nation’s millennials, the more than 80 million Americans between the ages of 20 and 36. However, the savings picture for millennials has become more complex, according to recent data. This cohort of young people is saving more, though for short-term goals instead of retirement.

To promote retirement savings, Congress should pass the Automatic Individual Retirement Account (IRA) Act, legislation that was introduced in the House in 2015, for millennials and other Americans without a retirement plan at their workplace.

Millennials, especially the younger ones, are now building up their savings to cover emergencies for the first time since the financial crisis. More than 30 percent of Americans ages 18 to 26 have saved enough to cover three to five months of living expenses, according to a survey conducted earlier this year by Princeton Survey Research Associates International.

A spokesman for Bankrate.com, the survey’s sponsor, explained, “Millennials have a savings discipline that the preceding generations lacked.” Despite much lower levels of earnings, millennials save on average 19 percent of their annual income, compared to 14 percent for both generation X (those in their late 30s to early 50s) and baby boomers (those in their late 50s to late 60s).

Read More »

This is your brain on stocks–Andrew Lo

MIT Sloan Prof. Andrew Lo

From MarketWatch

Ever since I was a graduate student in economics, I’ve been struggling with the uncomfortable observation that economic theories often don’t seem to work in practice. That goes for that most influential economic theory, the Efficient Markets Hypothesis, which holds that investors are rational decision makers and market prices fully reflect all available information, that is, the “wisdom of crowds.”

Certainly, the principles of Efficient Markets are an excellent approximation to reality during normal business environments. It is one of the most useful, powerful, and beautiful pieces of economic reasoning that economists have ever proposed. It has saved generations of portfolio managers from bad investment decisions, democratizing finance along the way through passive investment vehicles like index funds.

Then came the Financial Crisis of 2008; the “wisdom of crowds” was replaced by the “madness of mobs.” Investors reacted emotionally and instinctively in response to extreme business environments — good or bad — leading either to irrational exuberance or panic selling.

Read More »