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."

  1. Artificial Intelligence - AI

    Artificial intelligence (AI) refers to simulated intelligence ...
  2. AI Winter

    AI (Artificial Intelligence) winter is a time period in which ...
  3. Machine Learning

    Machine learning is the idea that a computer program can adapt ...
  4. Manual Trading

    Manual trading is a trading system that involves human decision-making ...
  5. Homo Economicus

    A term that describes the rational human being assumed by some ...
  6. Business Intelligence (BI)

    Business intelligence (BI) refers to the procedural and technical ...
Related Articles
  1. Tech

    How Big Data and Artificial Intelligence Affect Investing

    Due to the increasing use of big data and artificial intelligence, investors are able to make more informed investment choices and grow their money.
  2. Tech

    Investors Turn to Artificial Intelligence (GOOGL, FB)

    Since the Alan Turing developed the Turing Test, scientific researchers have worked to develop a computer with the ability to function like a human brain.
  3. Investing

    As Hedge Funds Automate, Some Managers Prefer Human Analysts

    Some fund managers see human emotion and intuition as liabilities, but others see them as a positive.
  4. Financial Advisor

    How AI is Shaping the Advisory Landscape

    While many have been slow to adapt AI or wary of its benefits, financial advisors who do not adapt the technology to their practice will be left behind.
  5. Investing

    Man v. Machine: No Contest. iRobot vs Staffing Agencies

    iRobot's shares skyrocketed more than 200% in two years while Robert Half struggles for relevance.
  6. Personal Finance

    Is a Robo-Advisor Right for Your Investments?

    When it comes to managing your investments, how much of a role should a robo-advisor play?
  7. Investing

    Bill Gates Responds to Musk's AI Concerns

    Microsoft's co-founder doesn't think we have to worry about AI robots taking over the world.
  8. Financial Advisor

    Don't Ignore the Importance of Human Capital

    Are you ignoring the value of human capital in your financial planning? This oft-overlooked asset should be an important component of your financial plan.
  9. Tech

    The Truth Behind Robo-Advisors

    Robo-advisors are marketed and sold as being more “intelligent” than their human counterparts. But are they actually more intelligent?
  10. Investing

    Top ETFs Capitalizing on Artificial Intelligence

    Artificial intelligence is often seen as one of the frontiers of technology, and now it is intersecting with ETFs.
  1. How do firms improve their employees' human capital?

    Learn what human capital is, how a firm can benefit from improving human capital and some ways a firm can improve its employees' ... Read Answer >>
  2. What are some common functions of business intelligence technologies?

    Understand the common functions of business intelligence technologies, and learn how business intelligence is used to increase ... Read Answer >>
  3. What are some common methods of gathering competitive intelligence (CI)?

    Read about some common methods of acquiring competitive business intelligence and discover what a good intelligence analysis ... Read Answer >>
  4. How are labor demand forecasts made in human resources planning?

    Discover how human resource planning might be used to estimate the correct demand for labor in a given market, both qualitatively ... Read Answer >>
  5. What are some examples of different types of capital?

    Learn about the different types of capital, including financial, human and social capital, and how each is a valuable asset ... Read Answer >>
Trading Center