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."

RELATED TERMS
  1. The Singularity

    The singularity, or technological singularity, is the idea that ...
  2. Artificial Intelligence - AI

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

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

    Machine learning is the idea that a computer program can adapt ...
  5. Knowledge Engineering

    Knowledge engineering is a field of artificial intelligence (AI) ...
  6. Homo Economicus

    Homo economicus is a term that describes the rational human being ...
Related Articles
  1. Tech

    Do Humans Have The Capacity For Safe Artificial Intelligence (AI)?

    Artificial Intelligence has become more and more present in our daily lives, but how worried should we be about our ability to keep AI safe?
  2. Investing

    Zuckerberg and Musk Clash Over the Future of AI

    Zuckerberg is against doomsday scenarios, while Musk wants more regulation of the technology.
  3. 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.
  4. 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.
  5. 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?
  6. Investing

    Amazon Leads on Machine Learning: AWS Manager

    Amazon's machine learning advantage gives the company a head start in the AI race.
  7. Personal Finance

    The Seven-Figure Asset You’re Probably Ignoring

    What is human capital and how should it factor into your investment decisions?
  8. Financial Advisor

    Is AI the Key to Scaling Your Practice?

    Financial advisors will need to harness AI to boost their businesses in the future, but the human touch will remain a key part of the industry.
  9. 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.
  10. Tech

    Will Your Job Get Eaten by Automation?

    With the rapid growth of technology, it has been widely contested whether automation will start to replace jobs.
RELATED FAQS
  1. How do managers measure human capital?

    Learn what human capital is, how managers measure it and how managers measure human capital's return on investment to gauge ... Read Answer >>
  2. What is the difference between business intelligence and competitive intelligence?

    Understand the difference between business intelligence and competitive intelligence. Learn why both are important for the ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. How does economics study human action and behavior?

    Find out why economics can be considered a deductive social science, like sociology, and how human action and behavior informs ... Read Answer >>
Trading Center