On the Mercury Space Program and Active Management

I’m down in Orlando for FinCon 2018 which is a gathering of personal finance writers, bloggers, YouTubers, and everyone that supports them in their efforts. A little out of my comfort zone but I’m quickly realizing that people here understand marketing, social media, and audio/video production way better than I do.

I’m very encouraged by attendees in their 20’s and 30’s, over half of which are women, all trying to help individuals grow their wealth, live within their means, and retire gracefully (and early!). Most importantly, this group makes finance interesting, engaging and accessible. Inspiring!

Sitting at the conference center coffee shop, I find myself thinking about the future of the financial industry, specifically active management.

On the plane ride down, I read an article from The Behavioral Scientist on the positives and negatives of relying on algorithms.

They discuss the Mercury space missions and the struggle between the astronauts (aka the active managers) and mission control (the “quants”) on who would have ultimate control- the pilots or the computers?

 Source: Pixabay

Source: Pixabay

There are certain things that computers do better than humans (calculating return trajectories), and there are things that pilots do better than computers (reacting quickly to new inputs that are outside of the modeled conditions).

Sound familiar to anything in the financial markets?

An investor who ignores any quantitative or systematic computations in their process is sort of like Gus Grissom prematurely opening the capsule hatch on the second Mercury mission. You make a poor decision based on your emotional state.

An investor who relies too much on quantitative models is prone to curve fitting, data mining, sample bias, and other issues that lead to overconfidence. Basically, you prevent yourself from taking control of the spacecraft when it’s necessary to do so.

People are better at identifying patterns, articulating relationships, and empathizing with one another.

In the end, what did the Mercury program do? A mix of both.

The pilots had some control over certain systems, but the computer was the default decision maker. The astronaut could step in to override the controls when they felt it was necessary.

A savvy investor uses systematic approaches to understand what’s happening around them, but also takes control of their portfolio to make the ultimate decisions.

Computers are better at calculations, modeling, and processing large amounts of data into digestible results. People are better at identifying patterns, articulating relationships, and empathizing with one another.

Make sure you are using yourself and your computer for what you are both best equipped to handle!

RR#6,
Dave


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