In some sense, markets have a particular built-in interpretability: for any trade, someone made that trade, and so there is at least one person who can explain it. And any larger market move is just a combination of such smaller trades.
This is different from things like the huge recommender algorithms running YouTube, where it is not the case that for each recommendation, there is someone who understands that recommendation.
However, the above argument fails in more nuanced cases:
Just because for every trade there’s someone who can explain it, doesn’t mean that there is a particular single person who can explain all trades
Some trades might be made by black-box algorithms
There can be weird “beauty contest” dynamics where two people do something only because the other person did it
Good point, though I think the “more nuanced cases” are very common cases.
The 2010 flash crash seems relevant; it seems like it was caused by chaotic feedback loops with algorithmic components, that as a whole, are very difficult to understand. While that example was particularly algorithmic-induced, other examples also could come from very complex combinations of trades between many players, and when one agent attempts to debug what happened, most of the traders won’t even be available or willing to explain their parts.
The 2007-2008 crisis may have been simpler, but even that has 14 listed causes on Wikipedia and still seems hotly debated.
In comparison, YouTube I think algorithms may be even simpler, though they are still quite messy.
In some sense, markets have a particular built-in interpretability: for any trade, someone made that trade, and so there is at least one person who can explain it. And any larger market move is just a combination of such smaller trades.
This is different from things like the huge recommender algorithms running YouTube, where it is not the case that for each recommendation, there is someone who understands that recommendation.
However, the above argument fails in more nuanced cases:
Just because for every trade there’s someone who can explain it, doesn’t mean that there is a particular single person who can explain all trades
Some trades might be made by black-box algorithms
There can be weird “beauty contest” dynamics where two people do something only because the other person did it
Good point, though I think the “more nuanced cases” are very common cases.
The 2010 flash crash seems relevant; it seems like it was caused by chaotic feedback loops with algorithmic components, that as a whole, are very difficult to understand. While that example was particularly algorithmic-induced, other examples also could come from very complex combinations of trades between many players, and when one agent attempts to debug what happened, most of the traders won’t even be available or willing to explain their parts.
The 2007-2008 crisis may have been simpler, but even that has 14 listed causes on Wikipedia and still seems hotly debated.
In comparison, YouTube I think algorithms may be even simpler, though they are still quite messy.