Will trading technologies oust humans from the UK's banks?

This week a Government report has called for senior bankers who are guilty of reckless misconduct to be jailed. But will banks even need human beings in future? The Independent’s Tom Peck asks Greg Davies, Barclays Wealth’s Head of Behavioural and Quantitative Finance, if he thinks digitised traders are the future.

Tom Peck: Computers don’t make decisions. They follow instructions. But banks are increasingly interested in whether human beings might be, in matters financial, intrinsically poor decision-makers. And if they are, how do you nullify the risks?

Greg Davies: You have to put the humanity back into finance. If you don’t consider human factors in decision-making, you’ll get to the wrong answer. If you don’t embrace the knowledge of how people make decisions – to insert psychology into finance theory – you’ll end up selling to an investor a solution that might be technically real but, in practice, unobtainable.

TP: It will always be difficult for humans to accept that machines can outsmart them. How do you manage those human urges, so that they act for humankind’s own good?

GD: It’s difficult. Classical finance theory is clear that what people need is simply the best-adjusted returns to meet their personal needs. But you shouldn’t give someone a portfolio of investments, put together by the mathematical whizz-kids who’ve worked it all out, and then say: ‘This is your problem too.’

I may give you this perfect portfolio, but you will have emotional responses along the journey, as things go up and down. Most of us, when we’re faced with discomfort, especially that which relates to a large part of our wealth, will feel the need to act in ways that reduce our anxiety.

When things are comfortable, when there is certainty in the markets, we will buy. But that can mean we’re buying high. Or in moments of crisis, we sell at the bottom because it’s too emotionally discomforting to hold on to the stocks.

TP: In the future, will computers really know best?

GD: Well, more and more companies that are trading their own money are starting to do so with trading technologies. There are examples, but we probably know less about the risks of algorithmic trading, as compared to the mistakes humans make.

At the height of the tech bubble, for example, people thought companies that were yet to make a single cent were worth billions. At the bleakest point of the global financial crash, people thought perfectly decent companies were worth nothing.

Telling someone to ‘buy low, sell high’ might seem like very obvious advice. But our innate psychology inclines us to do the opposite. We get in when times are good, and flee when times are bad.

It’s not irrational to sell at the bottom. You get emotional comfort, you get relief. Classical finance says you should ignore those human impulses. But I know you can’t, and it’s not irrational. But it can be very expensive.

Tom Peck is a news reporter at The Independent.