Financial Singularity

DEFINITION of 'Financial Singularity'

Financial singularity is the point at which all investment decisions are 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‚Äč 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, which proposes that at some future point technology created by humans will become aware and infinitely more intelligent than humans. With reference to financial markets, artificial intelligence could create evolutionary algorithms that would 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.

The theoretical possibility of a financial singularity is disputed, however. Economist Robert Shiller, has disputed the possibility of a financial singularity. While AI can simulate reactive behavior in the market, it remains to be seen how a computer can simulate proactive investment decisions. In our current environment, many investors act on hunches and superstition to seize profitable opportunities, or 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."