For this blog post, I first want to link to a post I just read at Kitces.com. Michael Kitces is a Certified Financial Planner and a renowned blogger of financial planning issues. Here is the link. You don’t have to read it all but I want to make sure you have access to it:
The post is titled “What Cyborg Chess Can Teach Us About the Future of Financial Planning”. Cyborg Chess is where human chess players work together with programmed robots, with the result being that the combination of the two are superior to either humans or robots alone. The Kitces blog post itself draws from a book titled “Average Is Over”, published in 2013 by Tyler Cowen. Cowen actually did the research on cyborg chess.
Part Human, Part Machine
A Cyborg is part human and part machine. Arnold Schwarzenegger portrayed a Cyborg in “The Terminator”, and subsequently again as Governor of California (well, maybe not as Governor). A Cyborg financial planner or wealth manager would mean there is a human intermediary between the investment recommendations that a programmed robot spits out and the actual execution of the trade. Step 1: Humans program the robot. Step 2: Robot churns data and spits out trade or allocation recommendations. Step 3: Humans analyze robot’s recommendations and may or may not make tweaks. Step 4: Trade is executed. In a robot-only or algorithmic trading strategy, there is no Step 3 – the robot executes the trade.
Robots In Conflict
Why does it help to have humans involved? There may be multiple robots involved, and the robots may make recommendations that are opposed to one another. Many investment managers use more than one algorithm for the same security or the same investment strategy. I use multiple indicators that tell me when to Buy and when to Sell. Sometimes these indicators tell me different things – not necessarily that one is telling me to Sell when the other says Buy, but that the strength of the indicators may be different. If so, I need to make the call and either overrule one of the indicators, or make a trade that is a compromise between the two. Don’t want to hurt the feelings of either robot. (I am kind of using Robot, Indicator, and Algorithm interchangeably here, and I mean basically the same thing – a mathematical calculation based on past performance that predicts with greater than 50% likelihood what the market will do).
An additional point of the Kitces blog is that the human skills required to be a great Cyborg chess player are not the same as the human skills required to be a great Human chess player. Magnus Carlsen, World Champion and the best chess player in the world today, wouldn’t necessarily be also the best Cyborg chess player. A good Cyborg chess player must gather the recommendation of the robot and quickly determine if the robot is right or not, and then make the next move. Quickly meaning within seconds. The skill is to be able to work together as a team. Carlsen is looking at the board himself and determining what his next moves are, depending on what his opponent does. Moves as in plural. But Carlsen is working alone. Carlsen is not a team player – a Cyborg chess player is a team player. Likewise, a good Cyborg financial advisor is part of a team together with the robot/indicator/algorithm.
Robots work best when there is little or no thinking involved. There is a lot of thinking involved with investment management and financial planning. A lot of nuance. Shades of gray. Robots don’t work as well in shades of gray, or where there is nuance. I think I look good in gray – at least as good as I can look. Humans don’t work as well either by themselves, but paired with a robot, humans make better logic or mathematics-based decisions while at the same time recognizing the nuance. A combination of Captain Kirk and Mr. Spock. I believe Cyborg advisors and Cyborg hedge funds are the true way of the future. Although I don’t want to call myself a Cyborg just yet, I do partner with my robot friends. Contact me if you want to learn more.