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creative destruction
Will Algorithms Swallow the Financial Industry?

One of the major big-picture stories of 2016 is the way that technological disruption has threatened the social status of working and middle class workers the Western world, creating the conditions for widespread populist rebellions on Left and Right.

The next round of tech-fueled creative destruction, however, looks likely to impact people higher up on the socio-economic ladder. Information technology has the potential transform the legal sector, reducing the number of seven-figure jobs available to New York City corporate lawyers. And as Noah Smith observes in a new column at Bloomberg, the ruthless logic of algorithmic efficiency is starting to threaten traditional Wall Street business models as well:

The biggest force putting pressure on asset management is new technology. Electronic trading has made it easier to exchange assets in bulk and manage diversified portfolios such as exchange-traded funds. Cheaper diversification means more investors will diversify — a move aided by the general shift to passive investing. Instead of picking stocks, many asset managers will now just stick their clients’ money into a basket of ETFs and index funds, and let it stay there. […]

Fee compression will drive asset managers to become larger-volume, lower-margin businesses—a common result in many industries disrupted by technology and restricted by regulation. That implies a lot of wealth management firms bite the dust as the industry consolidates.

Bernie Sanders might not like to acknowledge it, but in the long run, technological innovation and entrepreneurship is the most powerful force working against the relentless expansion of the finance as a share of the U.S. economy. The competitive market is likely to shrink banks’ profit margins on its own. In some cases, financial regulations have the unintended effect of stymieing this process by raising barriers to entry to new firms.

The trends in the financial sector are a reminder that full impact of the information revolution is only beginning to be felt in the U.S. economy. So far, new technologies are associated with weakening the position of workers in less-skilled industries even as the upper-middle class does better than ever. In the long run, however, algorithms are likely reduce the market power of industries like finance, law and consulting while reducing costs for consumers. The next information age may turn out to be more democratic than previously thought.

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  • Josephbleau

    Data science will replace professional workers of all stripes and their rents slowly but surely. The only ones left who have a job will be the “Rock Stars” of each profession providing SME to the analysts. As in Mark Twain’s small town where everyone makes a living taking in each others laundry, how will money be multiplied to form a traditional economy, you ask? Either drastically reduce population to form an idyllic life of the elite few, or send the surplus 90% minus to the stars to heroically clear land on virgin exoplanets for independent sustenance farming as foretold by Heinlien. Or pay out to all non-workers a “Reparation” for the injustice of being dull and have them live short lives in ghettos as foretold in “Escape from New York.”

    • FriendlyGoat

      I wonder if young people know the older people talk like this about their prospects. Off to virgin exoplanets you say?

      • Jim__L

        Beats the future of welfare peonage the Left has in store for what few children survive the culture of death that is third-wave feminism.

        • FriendlyGoat

          No, Jimmy, it doesn’t “beat” anything—-because it is unreal snark.

          • Josephbleau

            snark is as snark does (Tom Hanks, 1998.)

          • FriendlyGoat

            I was “sort of” going with the joke until Jimmy jumped in with his usual nutball commentary. I really DO wonder, though, if there are any young people who think it’s funny to theorize on sending the newest (youngest) “surplus 90%” to some impossible-to-reach place in space.

          • Josephbleau

            All theorizing must be shut down immediately.

          • Jim__L

            It takes roughly as much energy to launch one person (plus life support equipment) into orbit as it does to power the average American household for a year.

            The goal of the current generation of rocketeers is to develop technology to support a business model that mimics airlines — where fuel (energy) costs are the biggest driver of the cost of transit. So — if you’re wondering how much a ticket into space is going to cost in the next few decades, look at your energy bill for a year and maybe double it.

            They’ve brought costs down by an order of magnitude already — rockets used within the last ten years to launch certain military birds were more than ten times as expensive as the SpaceX rockets used recently to launch commercial communication satellites of the same class.

            We’re not going to have colonies on the moon by the end of the decade. Elon Musk is notoriously late on delivering his promises — but deliver he does. The capabilities available to humanity are expanding steadily even if livestock can’t look up high enough to notice.

          • Jim__L

            Drastically reducing population through Planned “Parenthood” is actually pretty real here in Silicon Valley.

            But then, based on your comments here, you see nothing wrong with that because to you the Democrats’ party platform (which, again based on your comments here, you apparently hold to be infallible) supersedes all those inconvenient parts of Scripture.

      • Josephbleau

        I don’t think they will be going next week.

  • rpabate

    Another profession that should eventually feel the effects of artificial intelligence is the medical profession. Big data should do a far better job of matching symptoms with maladies and what tests and remedies are most effective than any doctor could ever hope. Then all it should take is someone who makes certain the patient is being honest about their symptoms. For years now I have been telling the doctors what blood tests I would like to have done and even what medications I would like to take, and for the most part they comply. The only time a doctor is thinking about you is when you are sitting in front of them. I am thinking about me all the time. This should free up talent for medical research that is far more productive for those smart enough. Those who aren’t smart enough should become nurses.

  • FriendlyGoat

    The same kind of technology which will supposedly be “reducing costs for consumers” will actually be mostly busy out-trading consumers in the markets.

  • Jim__L

    Shall we count the number of stock market crashes that have been caused by computers doing something very stupid very quickly?

    Having people in the loop is a good thing.

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