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When Will Financial Markets Become More Intelligent Than Henry Paulson

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by Kevin Maney
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Oct 01 2008 10:28am EDT

When Will Financial Markets Become More Intelligent Than Henry Paulson?

Kevin Maney writes: More government regulation of financial markets? Fugetaboutit. The real question about financial markets going forward might be whether we're willing to let the markets run themselves. In other words, Will we humans let machines take charge of the global money game? Because at some point soon, they will be able to run it better than we can.

Back in 2001, I had a conversation in Toronto with a quite-prescient Thomas Homer-Dixon, who had just published a book called The Ingenuity Gap. His basic premise: Humans are building systems as complex as weather, and human brains can't keep up. People can no longer understand and control the globally-networked technology we're creating. Amazingly, one of the examples he used that day was the global financial system - proclaiming that a meltdown was coming that no one would understand or know how to stop.

Homer-Dixon didn't offer a solution, short of saying humans should stop creating so much technology - which is about as helpful as saying an overweight person should stop eating.

Flip back, though, to a book published in 1997: George Dyson's Darwin Among the Machines. Dyson's theory starts with Darwin's observations about the evolution of life - mainly, that life and intelligence coalesced out of unintelligent elements. Dyson carries that ahead to look at other emergent intelligences, including our actual brains, which create intelligence out of a bunch of neurons that by themselves are no smarter than an amoeba.

And then Dyson carries that ahead one more step, to the near future. Humans aren't yet smart enough to build a single machine that's smarter than a human. But millions or billions of machines connected to each other over the Internet have the capacity to collectively be smarter than a human. These systems are quickly getting more intelligent and increasingly running themselves. In the financial markets, much is dependent on software that automatically tracks positions and makes trades - because no human could possibly keep up with the speed and complexity of what's happening.

So at some point, Dyson argues, the collective system will emerge as a self-aware intelligence - possibly whether we want it to or not. One of these days, a lone trader sitting at a desk at Goldman Sachs or in Hong Kong or London is going to try to execute a derivatives swap that would have a catastrophic global impact, and the system is going to say, "Sorry, but you can't do that."

I know, I know - it sounds like a bad riff on 2001: A Space Odyssey. But it's not. A whole lot of big thinkers believe that the Internet will eventually give rise to an emergent intelligence. Kevin Kelly posted a terrific essay this week about this argument, saying: "My current bet is that this smarter-than-us intelligence will not be created by Apple, or IBM, or two unknown guys in a garage, but by Google; that is, it will emerge sooner or later as the World Wide Computer on the internet."

Now, about the financial markets: We keep hearing that they are out of control. Financial mechanisms like credit-default swaps have gotten so complex that hardly anyone truly understands them. And those are just the tip of the ol' iceberg. The interconnection of markets and banks and industries and nations makes the entire system more complex than ANY human can understand. Part of the problem with the $700 billion bailout is that no one can foresee whether it will work, or if it's even necessary.

There's probably only one way to truly regulate the financial markets, and that's to let the global system do it by itself. But, no, I can't imagine how that would work. Maybe the key isn't a bunch of legislation and rules, but a piece of software that, when inserted into the system, gives it a kind of moral code. Like, the markets are there to give economies liquidity and benefit everyone - and are not to be manipulated for individual personal gain. (I'm sure that's extremely naïve of me, but we're blue skyin' it here.)

On smaller scales, humans happily give way to machines all the time. Jet pilots let computers do most of the work, and the jets are too complex to be flown without the computers. We let machines choose our music on Pandora and throw certain e-mails into our spam folders.

But are we willing to let that happen in big ways that really matter? Is there any other way? Or, more provocatively, we might wake up one day and find we've already done it.

Footnote from Kevin: Some of you may have spotted a headline that was momentarily different from the one above. It read: "When Will Financial Markets Become More Intelligent Than Ken Paulson?" You might think that this was just a slip-up -- that I actually thought the Treasury Secretary's name was Ken. But it's better than that. Ken Paulson is the editor of USA Today, where I used to work. So, maybe my brain just associated "Paulson" with "Ken" automatically. Or maybe it was more of a Freudian thing...

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