Why are Algorithms better investors?

There are wild speculations on what percentage of trading is done by Algorithms.

Technically most orders are initiated by algorithms as brokers use algorithms to get you the best outcome. However, about half of all trades are initiated by Algorithmic trading strategies and another 30% are caused by rebalancing algorithms.

Twenty years ago that was close to zero. So how do we get such a shift? Algorithms must be better at trading than humans…

Why would that be?

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Algo’s are never on holiday and have no emotions

They read emotions, but
they don’t get emotional

People like you and me are emotional beings. We love a laugh, a cry and a sulk.

Research has shown that some emotions are very influential when it comes to investing: We are afraid to lose as losing hurts more than winning gives joy ( This is called the Loss-aversion bias).

Most humans also resist change. They rather not do anything if it’s not completely broken (This is called the Status quo bias).

This is mostly caused by the emotion of attachment. When people own a stock they attach more positive feelings to the stock than when they don’t own the stock ( also called Endowment bias)

Algorithms don’t have those biases and they are designed to take 100% logical and high probability trades.

Algorithms can however use emotions: they can read the emotions in a Twitter stream or in articles and annual reports.

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