Man versus machine

11 September 2013

In the latest edition of Global Horizons Standard Life Investments, the global investment manager, examines how investors can use behavioural finance to improve their understanding of markets and enhance decision making.

Standard Life Investments' report focuses on the insights provided by behavioural finance into collective decisions in the context of financial markets, describing how investors interact with machines, using them to improve the quality of trading decisions in applications of artificial intelligence or to speed up the execution of trades in algorithmic trading. Global Horizons then considers how to promote robust decisions in a committee context, applying some of the lessons from behavioural finance to build a robust scenario process.

Frances Hudson, Global Thematic Strategist, Standard Life Investments, said:

Frances Hudson

“Humans and machines bring different strengths to the table. Humans score more highly on innovation, interpretation, adaptation and judgement while machines are consistent, quick, tireless, agnostic and able to cope with complexity. Taking a multi-layered approach to investment decisions allows us to develop an enriched understanding of the instincts that govern investor behaviour and incorporate different factors into decision making. For instance, Standard Life Investments has sought to combine human expertise and judgement with advanced computer applications in areas such as risk management and scenarios. Artificial intelligence applications have enhanced our understanding and analysis of financial market behaviour, adding to the range of predictive tools.

“The opportunity offered by increases in computational power has been exploited in different ways by diverse market participants. High frequency traders focus on speed of execution, sometimes sacrificing complexity in their algorithms in order to reduce latency. A note of caution is sounded where computers become the major drivers of markets, resulting in increased systemic risk. At the other end of the spectrum, long-term investors can benefit from computers’ consistent application of collective intelligence to financial markets. Sound analysis of the complex relationships that characterise markets can complement traditional methods and judgement in stock selection, asset allocation and risk management.”