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Artificial Intelligence, Chess, and the Stock Market


In 1997 chess grandmaster Gary Kasparov met the Singularity. And the Singularity won.

In 1985 Kasparov easily beat a chess-playing computer, even though he resorted to a trick to out-Kasparov the machine’s Kasparov program. Eleven years later, though, the chess legend struggled with Deep Blue, a computer with even more powerful processing power. But even Kasparov couldn’t compete with Deep Blue once its development team doubled the processing power a few years later.

Kasparov was beat, but he drew new lessons from the run-in that he details in New York Review of Books. These lessons might help you become a smarter–and less anxious–trader.
According to Kasparov, the exponential gain in technology didn’t ruin the game; it actually had some surprising aftershocks.

First, the game became more global. With access to computer programs that could train students available anywhere and everywhere, students far from the chess epicenter of Russia began to crop up.

Kasparov says:

“With the introduction of super-powerful software it became possible for a youngster to have a top- level opponent at home instead of need ing a professional trainer from an early age. Countries with little by way of chess tradition and few available coaches can now produce prodigies.”

Another interesting side effect: players became more disciplined. It became far less about style and more about pragmatism–plain old winning and losing

“It is entirely free of prejudice and doctrine and this has contributed to the development of players who are almost as free of dogma as the machines with which they train. Increasingly, a move isn’t good or bad because it looks that way or because it hasn’t been done that way before. It’s simply good if it works and bad if it doesn’t. Although we still require a strong measure of intuition and logic to play well, humans today are starting to play more like computers.”

This brings me to speculation about the future of investing. AI and other forms of advanced technology are already making plays in the market–some speculate that AI plays part in 30 percent of the trades today. Others say that figure is too low.
Traders, like the chess masters who saw the great Kasparov go down in defeat to a computer, may hypothesize similar doom and gloom endings for the stock market. It will be the realm of machines, not man.

But, like the “unintended consequences” of Deep Blue,  trading could evolve into unexpected territories. Will trading become more disciplined? Will humans and machines interface to make an even more efficient market? Will Automated Trading, once the realm of hedge funds and big banks become more democratized and give everyone the ability to trade like a master?

It’s hard to tell. But AI doesn’t mean checkmate for investing just yet.

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  1. January 26th, 2010 at 05:34 | #1

    One thing that worries me, as an automated trading developer, is the emergence of automated trading platforms.
    I believe most of automated trading strategies exploit behavioural biases, which prevent market movements to be truly random (ie theory of the semi-efficiency of the markets).
    If more in more people have access to AI technologies, a possibility is that all market action becomes more rational as driven by computers and not human emotions…

    Not sure how long the transition will take and if it will take place, but the more automated, emotion-less trading takes place, the more random the markets might become, in my opinion…

  2. January 26th, 2010 at 07:05 | #2

    That’s a good point, Jez. I wonder, though, if that behavioral bias doesn’t become somehow embedded in the strategy creation. Plus, I think the random-esque nature of the economy, among other factors, would continue to create an elastic market. So, I wouldn’t be too worried.

  3. January 26th, 2010 at 07:54 | #3

    Hi Jez,

    I don’t know. I think the argument can go both ways. Simple Automated Trading systems have increased volatility of the markets. And increased volatility means that trend following systems work better. Also, as more people use Automated Trading systems, I think that the patterns will become simpler and clearer. This will make the systems more profitable. It is a virtuous circle.

    But it is really a question of philosophy…it’s hard to say either view is correct. It will be interesting to see how it turns out.

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