Artificial Intelligence and the Stability of Markets

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Artificial intelligence (AI) is useful for optimally controlling an existing system, one with clearly understood risks. It excels at pattern matching and control mechanisms.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”Given enough observations and a strong signal, it can identify deep dynamic structures much more robustly than any human can and is far superior in areas that require the statistical evaluation of large quantities of data. It can do so without human intervention.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”However, the very same qualities that make AI so useful for the micro-prudential authorities are also why it could destabilise the financial system and increase systemic risk, as discussed in Danielsson et al. (2017).”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”In successful large-scale applications, an AI engine exercises control over small parts of an overall problem, where the global solution is simply aggregated sub-solutions. Controlling all of the small parts of a system separately is equivalent to controlling the system in its entirety.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”The first step in risk management is the modelling of risk and that is straightforward for AI. This involves the processing of market prices with relatively simple statistical techniques, work that is already well under way. “][tm_spacer size=”xs:30;lg:68”]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”The next step is to combine detailed knowledge of all the positions held by a bank with information on the individuals who decide on those positions, creating a risk management AI engine with knowledge of risk, positions, and human capital.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”While we still have some way to go toward that end, most of the necessary information is already inside banks’ IT infrastructure and there are no insurmountable technological hurdles along the way.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”All that is left is to inform the engine of a bank’s high-level objectives. The machine can then automatically run standard risk management and asset allocation functions, set position limits, recommend who gets fired and who gets bonuses, and advise on which asset classes to invest in.”]
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Silicon Valley Rejects Shareholder Value Theory

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”I’ve written about problems with Shareholder Value Theory (SVT). The constant need to pump an ever-appreciating stock price to anonymous shareholders, the vast majority who contributed nothing to a company, rewards short-term thinking. Buybacks and other financial tricks tower over innovation and growth initiatives.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”Social Capital is founded and managed by Venture Capitalist Chamath Palihapitiya. Their portfolio includes Slack, Forge, Box, Brilliant, and a sizable group of unusually high-quality companies. Palihapitiya sounds like somebody you’d want to stranded on an island with: he’s be interesting company and probably figure a way off. He tends to make a lot of money for himself and the people he works with.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Less is known about co-founder Hedosophia, a venture firm founded in 2012, that filings state has over $1 billion in holdings. The firm’s webpage is retro 1990’s, appearing on the second page of a Google search for the company name and referencing a street address which, on Google Maps, is a nondescript building with no signage. “][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”Hedosophia’s founder is 34 year-old Ian Osborne, of Osborne & Associates and Connaught. These firms have apparently acted as financial advisers “for eight of the fifteen most valuable private companies in the technology sector.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”The purpose of SCH is to to enable flexibility in the cumbersome IPO process. On one hand, it’s impossible to feel bad for 30-something tech executives flying private jets and repeating the same Power Point dozens of times to potential investors.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Especially since, absent a disaster, they will reap a fortune at the end of the process. But those rules can also harm ordinary employees who are subject to rules, because of their tiny stock grants, that are meant for Masters of the Universe.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”I watched this happen with a number of companies during the first dot-com boom. Regular employees held locked out stock and watched their chance to finally buy a house or pay off student loans vaporize. Many were taxed on phantom income that never materialized under rules I won’t pretend to understand much less explain.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”These were not top-tier b-school alum; they were writers, computer programmers, online forum moderators — people who knew nothing about capital markets — and ended up owing a fortune. Their bad for not studying the rules more? Maybe, but since the rules exist to protect the clueless those same rules could have done more to protect them.”]
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Private Equity Firms Sued Over Retailer Bankruptcies

[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Private equity firms are seldom sued for their practice of levering companies for fun and profit and not caring much if they leave smoldering wreckage in their wake.” line_height=”1.4″][tm_spacer size=”lg:25″][tm_heading tag=”div” custom_google_font=”” text=”One big reason has been that it takes a lot of time and effort to prove fraudulent conveyance, which is layperson terms means continuing to bleed cash out of a company into your own pocket when you know it is a goner. And to discourage these suits, private equity general partners go into the legal version of scorched earth mode to deter other bankruptcy victims from getting bright ideas.”][tm_spacer size=”lg:63″]
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[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Use psychological pricing methods.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Today, the Wall Street Journal reports on the outburst of litigation over bankruptcy restructuring plans for private-equity-damaged retailers like Payless Cashways. We’ve discussed how private equity set many retailers up for failure by selling off their real estate at rich, asin inflated prices, giving themselves a nice big payout, and saddling the operator with high lease payments.”][tm_spacer size=”xs:30;lg:35″][tm_heading tag=”div” custom_google_font=”” text=”But in the cases the Journal highlighted, the private equity owners resorted to a strategy that had been discredited, that of the so-called dividend recap. The poster child was when Clayton & Dublier acquired Hertz in 2006, loaded it with debt, and made a big dividend payment with the proceeds.”]
[tm_spacer size=”xs:30;lg:52″][tm_heading tag=”div” custom_google_font=”” text=”Mind you, the reason these chains had owned their own stores in the first place was that retail is a cyclical business. Owning a lot of the property you used was a way to reduce overheads and increase odds of survival.”][tm_spacer size=”xs:30;lg:68″]
[tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Demonstrate the differences” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Payless ShoeSource Inc., Gymboree Corp., rue21 Inc. and True Religion Apparel Inc. were all acquired by private-equity firms during the past decade. Now, lawyers for creditors have questioned whether private-equity firms share blame for the retailers’ financial collapse, in some cases by loading debt on the companies.”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Offer a money-back guarantee” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”In the case of Payless, investors Golden Gate Capital and Blum Capital, after a leveraged buyout in 2012, over the next two years paid themselves $350 million in dividends—in total putting more than $700 million in debt on the company. In 2016, Payless said in court papers, it had about $2.3 billion in global net sales, and nearly $840 million in debt…”][tm_spacer size=”sm:30;lg:68″][tm_heading tag=”h5″ custom_google_font=”” font_weight=”600″ text=”Test your offer and price, and be creative.” line_height=”1.4″][tm_spacer size=”lg:23″][tm_heading tag=”div” custom_google_font=”” text=”Gymboree’s June bankruptcy filing occurred days after it couldn’t make a semiannual interest payment on debt dating back to Bain Capital’s $1.8 billion 2010 buyout. Public filings show Bain also received fees from Gymboree in the years after the buyout.”]
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