Algorithms Open Door for Ol’ Man Trouble

In 1930, George Gershwin got rhythm, singing “Ol’ Man Trouble, I don’t mind him. You won’t find him ‘round my door.”

Guess you call that wishful singing? In 1930 the Great Depression was just cranking up following the 1929 stock market crash. Ol’ Man Trouble sure got through that door.

In 2010, our “recovery” is cracking up after the 2009 market crash. The difference in 2010 is we dance to a different drummer. Instead of rhythm, we got algorithm.

For everything from weather forecasts and cell phones to data encryption and major weapons systems, we depend on algorithms. So, what are they?

They are mathematical constructs based on logic that function inside computers to organize data, solve problems, make decisions, and manage complex systems. They can make decisions in nanoseconds regarding huge amounts of data that a human would take hours or sometimes weeks to review and act upon.

Some algorithms require human interaction. Many, however, just run until stopped. Apparently, the only law governing use of and reliance upon algorithms is Murphy’s Law.

That should concern us, as it does former Federal Reserve chairman Paul Volcker. Algorithms manage large, high-frequency trades in microseconds, making money off blips in stock, currency, and commodity markets. Volcker laments algorithm usage has turned traditional investment banks into “trading machines”

Designed by what Volcker calls “not well-managed financial engineers,” algorithms calculated values for complex credit swaps and derivatives of mortgage-backed securities that proved unreliable when markets collapsed. That led to the credit crisis, recession, and untold financial losses.

Just last Friday, the Securities and Exchange Commission issued a report revealing that one investor using a “trading algorithm” opened the door to the “brief-but-historic stock market ‘flash crash’ on May 6.”

Have no doubt, algorithms can do all sorts of wonderful things. But, they cannot incorporate judgment or common sense into their processes. So, it is with some Orwellian angst that I observe firsthand our growing dependence upon algorithms and mathematical constructs and less on judgment and common sense.

Yes, even here in Mississippi.

Been denied a bank loan lately? Bank regulators are placing more emphasis on credit and valuation algorithms for loan decisions than on a lender’s judgment, making character loans a thing of the past.

Told you couldn’t get your prescription paid for? Insurers are starting to rely more on analytical algorithms than doctors to determine eligibility for medical procedures or prescriptions.

Algorithms beat open the door to Ol’ Man Trouble, welcoming in our “Great Recession,” our “flash crash,” and even the Washington, D.C. Metro rail crash. The beat goes on.

Yep, Gershwin had rhythm. We got algorithm. “Who could ask for anything more?”

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