Humans and Machines Both Reign Supreme: Takeaways from the Battle of the Quants

As markets gyrate, investors continuously hear two diverging voices in their heads.

Matt Dillon (voice of Confidence): Yo, Johnny.  My strategy rocks and I’m in it for the long hall.  I’ve looked over my allocations and they make sense.  I mean, I know what I’m doing here and everything is under control.

Woody Allen (voice of Self-Doubt):  When I began implementing my strategy, I was sure.  Oh, was I sure.  But now?  I dunno.  Am I headed in the right direction? Is volatility too much for me?

Well, the investing kings of the universe also suffer from these opposing forces.  Put differently, quants need to balance the confidence needed to put millions of dollars behind an algorithm they’ve designed and think works versus the fear that if things hit the fan, they’re just a congressional meeting away from notoriety.

Luis Lovas had a great article recounting a meeting that occurred last week, The Battle of the Quants.

The afternoon’s main battle was a panel that pitted a quant team dedicated to automated algorithms against a team that (presumably) considers human discretionary decision making as a better tool for alpha. In other words, like the Jeopardy challenge of IBM’s Watson, it was human vs. machine. That particular event I was completely fascinated by.  An interesting pre-game commentary relates the Jeopardy match to the Singularity by author Ray Kurzwell, a convergence of human and machines.  In the battle pitting algo’s against humans the outcome was decided by an audience vote.  The voting was not simply two choices: “for the machines” or “for humans”, but a third choice was offered more aligned with Ray Kurzwell’s Singularity – “a combination of human and machine decision making”.  As you might have guessed, that third choice was the overwhelming favorite. I believe the majority have the confidence to let machines decide many things but are wanting of human intuition or that proverbial finger on the button as a measure of risk control so fear does not overwhelm.

Kinda like me flying in an airplane.  I know the technology has been good enough for decades to replace a human pilot.  But I’m happy that someone is sitting there.  Just in case.

And hopefully it’s Sully.

And hopefully the pilot is sober.


Confidence and Fear: Why Quantitative Models Win (High Frequency Traders)