Napoleon Bonaparte, the Emperor of France, is considered one of the greatest commanders in history, and his wars and campaigns are studied at military schools worldwide. But in 1809, he was defeated. Not in a war but in a game of chess. Bonaparte was a military leader, not a chess grandmaster so his defeat in chess shouldn’t have come as a surprise except that he lost against Mechanical Turk — an Automaton Chess Player.
Mechanical Turk was the brainchild of Wolfgang von Kempelen. The Turk won most of the games played during its demonstrations around Europe and the Americas for nearly 84 years, playing and defeating many challengers including statesmen Benjamin Franklin.
For onlookers, it was an unnerving experience to see a mechanical device trouncing humans in a game. And the fear was justified. Since the onset of Scientific revolution in 14th century, humans have harboured the dread of a future when machines will take over the reins. Arrival of the Mechanical Turk poured the fuel on the fire of that anxiety.
So when it was eventually revealed that the automaton was an elaborate hoax, the world heaved a sigh of relief. The Turk was a mechanical illusion that allowed a chess savant to tuck inside the wooden cabinet and operate the machine secretly.
But in 1997, when IBM’s Deep Blue supercomputer defeated world chess champion Garry Kasparov, it rekindled the memories of the Turk and brought back the sinking feeling — “It’s finally happening. Machines are rising.”
In his book Smarter than You Think, Clive Thompson recounts the incident —
Faced with a machine that could calculate two hundred million positions a second, even Kasparov’s notoriously aggressive and nimble style broke down. In its final game, Deep Blue used such a clever ploy — tricking Kasparov into letting the computer sacrifice a knight — that it trounced him in nineteen moves…Riveted, the journalists announced a winner. The cover of Newsweek proclaimed the event “The Brain’s Last Stand.” Doomsayers predicted that chess itself was over. If machines could outthink even Kasparov, why would the game remain interesting? Why would anyone bother playing? What’s the challenge?
In spite of the widespread incredulity about Deep Blue’s feat, some experts weren’t worried. They argued that chess is a game of fixed rules and Deep Blue muscled its way with sheer computational horsepower.
Then, in 2015, Google’s DeepMind AlphaGo defeated the world’s number one Go player. Go is considered more complicated than chess. A mere brute force approach, like in case of Deep Blue, isn’t sufficient for a computer to win a game of Go against a human. DeepMind’s artificial intelligence allowed it to observe the opponent’s moves and learn while the game is on. This ability to adapt and improvise proved the superiority of computers in the intellectual standoff between man and machine.
Marc Andreessen, founder of the first internet browser Netscape and now a billionaire venture capitalist, wrote an essay in 2011 titled “Software is Eating the World.” He argued that in the next few decades there wouldn’t be any industry that will not be disrupted by software. His claim is unsettling and undeniable.
Google’s driverless car project WayMo is already operational on California roads. In spite of the threat of millions of humans drivers becoming unemployed, the promise of reducing road fatalities by 90% has made proliferation of autonomous cars inevitable.
In the medical industry, computer-powered robots have been performing complicated surgeries for quite some time. And now, IBM’s Watson is outsmarting experienced doctors in making the diagnosis.
So what does this mean for the financial services industry?
The financial services industry has been visibly transformed by software over the last 30 years, wrote Andreessen, “Practically every financial transaction, from someone buying a cup of coffee to someone trading a trillion dollars of credit default derivatives, is done in software. And many of the leading innovators in financial services are software companies.”
Today, an investor can start investing in mutual funds within few minutes with as low amount as Rs. 100. A whole gamut of intermediaries including brokers and agents have already been made redundant by the technology. AI-powered investing solutions are crowding the smartphone app market. Not a week goes by without an announcement of a new startup raising funds to build platforms that will democratize the investing solutions for small investors.
Chatbots have already started replacing a large part of the customer support teams across the industries. Will chatbots replace your investment advisor too? Will fund management industry be disrupted like digital cameras disrupted Kodak?
Based on my line of argument so far, the obvious (and easy) answer is yes. But let me give you another point of view — an alternate future which is a little hard to defend but equally probable. But to make my point, I’ll have to take you back to Gary Kasparov’s defeat against Deep Blue.
“I lost my fighting spirit,” Kasparov said after his match with Deep Blue, pronouncing himself “emptied completely.” But then instead of harping on his loss, Kasparov proposed an audacious idea. Thompson writes —
What would happen if, instead of competing against one another, humans and computers collaborated? What if they played on teams together — one computer and a human facing off against another human and a computer? That way, he [Kasparov] theorized, each might benefit from the other’s peculiar powers. The computer would bring the lightning-fast — if uncreative — ability to analyze zillions of moves, while the human would bring intuition and insight, the ability to read opponents and psych them out. Together, they would form what chess players later called a centaur: a hybrid beast endowed with the strengths of each.
In 2005, the most powerful chess computer in the world — Hydra (an advanced version of Deep Blue) — was trounced by a team of two amateur chess players, Steven Cramton and Zackary Stephen. They did it using regular personal computers running inexpensive chess related software.
Human strategic guidance combined with the tactical acuity of a computer, Kasparov concluded, “was overwhelming.”
Computers are tools not rivals, argues Peter Thiel in his book Zero to One, “As computers become more and more powerful, they won’t be substitutes for humans: they’ll be complements.”
Thiel again —
Think of what professionals do in their jobs today. Lawyers must be able to articulate solutions to thorny problems in several different ways—the pitch changes depending on whether you’re talking to a client, opposing counsel, or a judge. Doctors need to marry clinical understanding with an ability to communicate it to non-expert patients. And good teachers aren’t just experts in their disciplines: they must also understand how to tailor their instruction to different individuals’ interests and learning styles. Computers might be able to do some of these tasks, but they can’t combine them effectively. Better technology in law, medicine, and education won’t replace professionals; it will allow them to do even more.
Investment advisory is a profession tightly coupled with human expectations from two directions. First, finding investment opportunities in businesses run by humans. And the source of investment capital is again from humans, i.e., clients who entrust their money with the investment advisors. And at the intersection of humans and money, you’d find strong emotions — fear, envy, greed.
How will an artificial intelligence algorithm wrap its head (or rather bytes) around the unpredictability arising out of irrational human behaviour? Sure, the computer algorithm can detect patterns and raise flags but taking the final call whether to accept or reject that flag will require human intervention.
So yes Mr. Andreessen. The software is indeed eating the world including the finance industry. But when it comes to investing, technology would rather augment than disrupt.
There certainly will be a class of money managers and investors who would continue to see the computers as competitors rather than collaborators. As a result, those who choose to compete will be disrupted. But those who would be intelligent enough to learn to collaborate with the technology will become the investing centaurs.
The investing centaurs will understand this nuance. They will know when to trust the insights spit out by an algorithm and when not to leave it to the computer.
There’s another aspect of professional money management where modern automatons can’t match human talent. Communication.
Investing is not the study of finance. It’s the study of how people behave with money. And the gap between what people know about money and what they eventually do with their money could be mile wide.
The secret to long-term superior performance of an investment manager isn’t always tied to his stock-picking skills. If his clients pull out the money at the wrong time, there isn’t much he can do. Which means a more important factor in determining the long-term success of a money manager is the quality of the client he attracts. And how does one attract the right client? By being good at communicating his investment philosophy and setting the right expectations. I am not sure how well an artificial intelligence can do that job.