The Silicon Ball of Finance

Recently I posted a story here about complex algorithms being used to predict acts of terrorism and advise military and state leadership in the conduct of matters of diplomacy. An obvious extension of using such sets of mathematical formulas would be to predict how to win the lottery, as I mentioned in that post.

My view of the lottery, though, has changed since I devised my original concept on the matter: The lottery is a tax on poor people and those with a lesser amount of economic and financial knowledge.

What the lottery-winning seeking public should do, instead, is to use the stock market.

So, without further ado…who is better in the game of investments: A computer or a person?

Let’s start by defining a couple types of investing: There are those that believe in and practice the fundamentals: Observing P/E ratios and, essentially, applying a series of formulas to a company, an industry, their stock picks, etc. Fundamentals’ investing is in my opinion, just that: The fundamentals of investing.

Take a man like Warren Buffet: He is the epitome of someone who believes in behavioral finance. When I was much younger I remember a commercial for some large Wall Street Trading firm which stressed that after they looked at a stock, they would go and investigate it in-depth: Interview managers, examine infrastructure, and perform other in-depth activities which filled in the blanks that a fundamental stock pick couldn’t do.

The comparison and contrast is a simple one: Fundamental investing is a very logical, linear, rational method of investing. Behavioral investing, on the other hand, has a million shades of human emotion involved and, therefore, is open to the irrationalities which we are prone to as humans.

And that’s it: A computer program which attempted to account for the human aspect a investing would need to be exceedingly complex.

The odd part of this whole stock market thing? The irrationalities which incite risk in the system is why the stock market goes up as much as it does over time and is why any money put into the stock market as a portion of Gross Domestic Product adds to GDP by factor of 400 percent; in other words, when constructing the value of GDP if you put $100 into it as a form of investments—anything in the stock market—it is calculated to increase as a portion of GDP at a rate of 4 to 1, making that $100 investment worth $400 in terms of GDP; contrast that against the 1:1 ratio of government spending.