I have a new piece out with Ashby Monk on the appropriate role of technology in investment processes. This was fun to write, and hopefully serves to bust the hype a little bit.
Here is an excerpt:
Read the whole thing for free on the Enterprising Investor.Technology will upend the way investment decisions are made.
How should investment decision makers respond?
This conversation has a tendency to assume an emotional tone even before it gets existential. For instance, you hear genuine angst over Microsoft Office’s new layout, and that’s just a redesigned application. Innovation has cumulative effects though, and after more than 50 years of Moore’s law and numerous other advances, algorithmic decision making fits too tightly into investment processes to be ignored.
That doesn’t mean it’s perfect. One purpose of this essay is to invite you into friendly competition with an algorithm designed by Ashby Monk and his colleagues at Stanford University. Their process can select managers with limited information and little time. You may be able to predict a team’s success more effectively.
Whether or not you feel like you beat the machine today, it’s worthwhile to have a plan for what happens next so that your organization can fully capitalize on its native strengths.
In our imagination, the word “algorithm” tends to evoke fast-paced and high-stakes processes.
The mundane truth is that the word refers only to a process or set of rules that describe how to accomplish a task. There is no naturally associated time horizon or risk appetite.
And that’s good, because most public pension funds, endowments, and sovereign wealth funds wouldn’t count speed or agility among their strengths.
Our goal here is to underscore that they don’t need to, and explore what a technological transformation looks like when its primary purpose is to reinforce risk-aware patience at institutions that may outlast many of their assets.