Efficiency Is Ruining Hedge Funds

What if the stock market was solved? Like what if someone made a robot that could just tell you the right price for any public stock at any time? Presumably a lot of people would invest their money with the robot, and the robot would buy and sell stocks until they reached the right price, and then the prices would be right. People would be able to invest in the stock market and get a stable return on their investment corresponding to the long-term growth of the economy; companies with good projects would be able to finance those projects while companies with bad projects wouldn’t. No one would get super rich by buying stocks at the wrong price, because the robot would make sure all the stocks had the right price.

It would be good, but in a boring way. It would efficiently support economic growth and saving, but it wouldn’t be very exciting. A certain sense of adventure and artistry would go out of the market. Out of the public stock market, I mean. Presumably the robot would not solve all financial markets, at least not immediately, and the adventurers and artists would migrate to private markets or collateralized loan obligations or wherever they didn’t have to compete with the robot. But there would be a lag, and the generation of humans who grew up in imperfect unsolved stock markets—and who became rich and successful by buying stocks at the wrong prices—would keep trying to make a go of it, and be frustrated, and get mad at the robot for making all the prices right. There would be sympathetic profiles of those humans in the press, nostalgic appreciations for their devalued skills and vanishing way of life. “They got so rich by buying stocks at the wrong prices,” people would think; “it is unfair that they cannot continue getting richer by doing that.”