What is 'Financial Singularity'

Financial singularity is a theoretical point in time when all investment decisions will be made by intelligent machines rather than human agents. Many financial institutions and startups currently use algorithms to guide human agents who offer advice to clients. The growth of interest in artificial intelligence (AI) in the financial sector and the proliferation of robo-advisors could lead to the development of computers with the ability to instantly adapt and react to changing market situations. When all human fallibility is eliminated from markets, efficient markets, which have only existed so far in theory, could become a reality.

BREAKING DOWN 'Financial Singularity'

The concept of financial singularity is derived from the idea of a technological singularity, also known as “the singularity,” which proposes that at some future point in time, the artificial intelligence technology created by humans will advance exponentially, outpacing the intelligence and capability of humans and potentially altering the world in ways the human mind can’t envision. While the idea of singularity has existed since the 1950's and been popularized by science fiction writers, it’s become more talked about in recent years as technology has advanced. In 2006, the non-profit Machine Intelligence Resource Institute (MIRI) launched an annual Singularity Summit at Stanford, where scientists, mathematicians, researchers and businesspeople gather to discuss trends and safety measures to prevent the singularity from occurring.

In regards to financial markets, the theory is that artificial intelligence could create evolutionary algorithms that would surpass and replace human decision-making. Asset prices would reflect the true, expected value of future profits and cash flows and would be a totally accurate representation of market fundamentals.

Under this scenario, truly efficient markets would come into being for the first time in history, as there would be no opportunity to exploit mispricing in the market because asset prices would reflect all available information.

Skepticism surrounding Financial Singularity

Not everyone, however, buys into the theory that financial singularity is inevitable. Economist Robert Shiller has spoken out against the possibility of a financial singularity. While AI can simulate reactive behavior in the market, it remains to be seen whether it's possible for a computer to simulate proactive investment decisions. In our current environment, many investors act on hunches and superstition to seize profitable opportunities, and AI would have to account for human emotion and unpredictability. In Shiller's words, "Perfectly efficient markets require the effort of smart money to make them so; but if markets were perfect, smart money would give up trying."

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