Human beings are emotional creatures, especially when it comes to money. There’s an old traders saying that if you trade on your emotions, you won’t be trading very long because you’ll lose all your money. However hard we may try though, human beings are not able to leave all emotions at the door. Just like markets have cycles of growth and shrinkage, so do human emotions within the market with regards to risk.
There was a famous economist named Dr. Hyman Minsky who believed that financial booms and busts were unavoidable because of basic human emotions. His idea was that over long periods of time, traders and investors would slowly become more comfortable with higher levels of risk until it got to a point where overleveraging would cause markets to crash. Then with a newly restored sense of risk, the cycle would reset and continue over again and again. Minsky believed that these were primarily the reasons why we saw cycles in economies, almost at a rate and certain periods that could be predicted. Later economists called the point in time where the economy reset, a “Minsky Moment”. The ideas that Minsky explored were just as much psychological as they were economical , but most importantly showed the flaws in human trading and risk assessment.
This brings me to my idea that as long as human beings run the markets, we will continuously see periods of high volatility in markets. With the use of computers that can control the markets and work as a market maker we could see much healthier and stable market growth over long periods of time. If computers have algorithms built in that don’t adjust for risks and bring emotion into trading, like human beings, there could a large benefit if we put them to work. Even now trading bots and algorithms are getting more advanced in order to make profit and supply stability to markets. There have been market maker bots on Wall Street for some while now, but we are currently seeing a rise of High Frequency trading bots that can do a massive amount of trades in a short period of time, while also potentially supplying stability.
The future I see is eventually having traders phased out of trading daily on the market, just like we have seen with the brokers on the trading floors in the past few years. Once AI bots can do all the same work as the human traders can do, with better results and with less risk, there will only be jobs available for the bot managers.
Overall if we can get to this point with some market stability as today, and avoid a total market collapse, we can move to a future where financial crises and over leverage will be a thing of the past. We would still have to worry about the government’s financial policies and how they leverage debt, but the private sector would be much safer in the long run. Let me know what you think in the comments, I look forward to seeing what you think will happen.
-Calaber24p