While both culture and structure clearly subordinated computer “techies” to investment professionals in every investment organization when this piece was written over 50 years ago, it was possible to ponder a revolution even though the term Artificial Intelligence had only just been coined.
C.P. Snow found this some years ago and wrote about it in his book, The Two Cultures: and a Second Look, from which came: “There have been plenty of days when I have spent working hours with scientists and then gone off at night with some literary colleagues … It was through living among both of these groups—and much more, I think, through moving regularly from one to the other and back again—that I got occupied with the problem of the ‘two cultures.’”
There's been a lot of fancy talk over the years about the tremendous impact computers were going to have on the investment management business. The fruits of multimillion dollar investments by senior executives at banks, brokers, mutual funds, and the like would be harvested and the rewards would be abundant.
Maybe so. But what's holding it all up is the fact that Computer People and Investment People usually don't work well together. They may well be employed by the same companies and go to the same office buildings, but they don't work together. This is particularly true among the nation's investment institutions where Computer People and Investment People work on very different kinds of problems, have wholly different ways of defining what they are trying to accomplish, and go about their work almost oblivious to their economic coexistence.
Computer People develop sophisticated programs to identify any repetitive patterns of behavior in stock prices and offer elaborate and extensive testing of many hypothetical patterns. They conclude that the stock market is like a random walk. Prices have no pattern. Nothing that is past is predictive of future prices. Meanwhile, Investment People draw lines with oyster forks on the damask tablecloths at Oscar's to show themselves why Wigitronics looks like a breakout on the upside.
Computer People develop models to measure the real diversification in stock portfolios and graph on N-dimensional space the optimum mix of a particular group of stocks while Investment People tell one another: “You've got a good list” and a senior trust officer—axiomatically not a CP—admits to a pal that he had always thought Markowitz was a left-wing political columnist syndicated by the Washington Post.
CPs prove to their satisfaction that pershare earnings estimates have bimodal distributions and that their sample means do not meet the test of doing unbiased estimates, while IPs discourse with considerable erudition about the sociology of Avon Ladies and what a change in the selling cycle means for earnings in 1972.
Not only are they working in completely different worlds and with incompatible methods, when they do come together to work cooperatively on a problem, they speak different languages. The IPs will ask: “What stocks should we be buying?” And the CPs will answer in equations full of sigmas and primes and figure eights lying on their sides. In other words and terms, they are not all together. The IPs do not use what the Computer People do and the CPs do not do what the IPs can use. And they don't seem to care. In fact, they seem just as happy that they don't have to work together because they really don't want to work together.
As a result, Computer People have not had much impact on Wall Street. On the other hand, this unhappy experience is not really unique. For instance, here is a comment on the tangible results of six years of publishing articles in Operations Research magazine by C.W. Churchman in the California Review in 1964: “In no case was there sufficient evidence that the recommendations derived from O.R. projects were … carried out by management.”
Certainly, the companies in the investment business are spending an awful lot of money on computers and computer people and the top people all talk about the future role of computers. And annual reports always show the newest computers. Why then don't the Investment People make more use of computers? The basic reason for this pervasive failure to use is that Investment People and Computer People come from two very different cultures. They are strangers to each other.
Optimists and skeptics will say it is nonsense to claim that Investment People do not and will not take full advantage of the concepts, techniques, programs and skills of Computer People. Yet those who believe this simply do not understand how truly different IPs and CPs really are. I am no anthropologist, but here are some of the more obvious differences which I have observed:
While not all my observations may jibe with yours, it is safe to conclude that noncommunication and cultural alienation have so far resulted in a social standoff that gives the false appearance of stability in the situation. Such is not the case. The technology of computer hardware and the techniques of advanced programming are being applied with increasing effectiveness both at the institutions of higher finance and at institutions of higher learning.
While Investment People are standing pat (and providing a fixed target), Computer People are doing three things to achieve ultimate primacy. First, they are systematically testing the statistical validity of every proposition that IPs have put forth to explain why they do what they do. So far, although only a few have been completely tested, no IP theory has survived the full testing process. So, CPs are learning what most of IPs do that doesn't make sense.
Second, the CPs are analyzing the actual results achieved over the years by IPs and have developed some very powerful; albeit preliminary, evidence that despite all their marvelous role-playing and their elaborate dramas and their dedicated efforts to make money for their clients, the Investment People as a group and individually have failed to contribute much of anything to higher profits. In other words, what IPs do doesn't work over the long term.
Third, some CPs are trying to develop entirely new approaches to solving the investment management problem. They talk quietly and earnestly together as revolutionaries always seem to do just before their movements really get going. They concede that the investment problem will not be easy to solve, but then note that it is not as difficult as a moon landing or a missile defense system. And they have plenty of time.
Computer People are beginning to be quite confident that, with time, they will succeed in their collective efforts to understand the stock market and that their programs will truly revolutionize the investment management field. Investment People maintain that this is surely not realistic, but they are beginning to be less and less confident that they can safely ignore the rumblings from below. And once in a while they ponder privately: “What would happen if one of those guys actually got a computer program that worked? Like, what would happen to all of us?”
Source: Institutional Investor, December, 1970.