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5 - Computational Asymmetry

from The Second Era

Published online by Cambridge University Press:  24 March 2022

Seth C. Oranburg
Seth C. Oranburg
Affiliation:
Duquesne University, Pittsburgh
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Summary

This Chapter examines the American economy during World War II, with a particular focus on the emergence of computer technologies and its impact on financial markets. The Investment Company Act of 1940 originally sought to regulate “actively managed” mutual funds; soon, however, computer technology enabled a new financial product, the “passively managed” fund. Investment advisors increasingly were replaced by computers that managed and balanced funds more rapidly and efficiently. Computer-managed index funds that trade based on a static algorithms are not subject to the typical agency problems that arise when humans make decisions on behalf of others. However, algorithms may be subject to bias when their code is created by imperfect human beings. Software is only as good as its design. This technology spawned a host of new risks. Algorithms failed spectacularly in instances such as the Flash Crash. In response, regulators instituted new securities regulations, including Regulation NMS .Computers networked on the new internet helped the American economy recover from yet another financial crisis as public attitude towards corporations and “Trickle-Down Economics” began to sour.

Keywords

Investment Advisors Act of 1940Investment Company Act of 1940actively managed fundpassively managed fundindex fundElectronic Numerical Integrator and Computer Project (ENIAC)Flash Crash
Type
Chapter
Information
A History of Financial Technology and Regulation
From American Incorporation to Cryptocurrency and Crowdfunding
 , pp. 51 - 66
Publisher: Cambridge University Press
Print publication year: 2022

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  • Computational Asymmetry
  • Seth C. Oranburg, Duquesne University, Pittsburgh
  • Book: A History of Financial Technology and Regulation
  • Online publication: 24 March 2022
  • Chapter DOI: https://doi.org/10.1017/9781316597736.006
Available formats
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  • Computational Asymmetry
  • Seth C. Oranburg, Duquesne University, Pittsburgh
  • Book: A History of Financial Technology and Regulation
  • Online publication: 24 March 2022
  • Chapter DOI: https://doi.org/10.1017/9781316597736.006
Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

  • Computational Asymmetry
  • Seth C. Oranburg, Duquesne University, Pittsburgh
  • Book: A History of Financial Technology and Regulation
  • Online publication: 24 March 2022
  • Chapter DOI: https://doi.org/10.1017/9781316597736.006
Available formats
×