As someone who follows the data warehousing or big data scene, you're probably familiar with some of the decisions that algorithms are now making, based largely on the increasing volumes on information that we have been gathering, particularly over recent years. We all know by now that online retailers and search engines use sophisticated algorithms to decide what we see when we go to a web page. Mostly, we're pretty pleased that what comes up is well-matched to our expectations and that we don't have to plow through a list of irrelevant suggestions. We're thankful for the reduction in information overload.
But, there are a few downsides to our growing reliance on algorithms and the data they graze upon...
But there's a much more subtle downside, and one that has been of concern to me for years. Just because we can do some particular analysis, does it really make sense? The classic case is in the use of BI and data mining in the insurance industry. Large data sets and advanced algorithms allow insurers to discover subtle clues to risk in segments of the population and adjust premiums accordingly. Now, of course, actuaries have been doing this since the 18th and 19th centuries. But the principal driver in the past was to derive an equitable spread of risk in a relatively large population, such that the cost of a single event was effectively spread over a significantly larger number of people. However, data mining allows ever more detailed segmentation of a population, and insurers have responded by identifying particularly high-risk groups and effectively denying them insurance or pricing premiums so high that such people cannot insure their risk. While in some cases we can argue that this drives behavior changes that reduce overall risk (for example, safer driving practices among young males), in many other instances, no such change is possible (for example, for house owners living on flood plains). I would argue that excessive use of data mining to segment risk in insurance eventually destroys the possibility to spread risk equitably and thus undermines the entire industry.
In a similar manner, the widespread use of sophisticated algorithms and technology to speed trading seems to me to threaten the underlying purpose of futures and other financial markets, which, in my simplistic view, is to enable businesses to effectively fund future purchases or investments. The fundamental goal of the algorithms and speedy decision making, however, seems to be to maximize profits for traders and investors, without any concern for the overall purpose of the market. We've seen the results of this dysfunctional behavior over the past few years in the derivatives market, where all sense of proportion and real value was lost in the pursuit of illusory financial gain.
But, it gets worse! The BBC article reveals how a British company, Epagogix, uses algorithms to predict what makes a hit movie. Using metrics such as script, plot, stars, location, and the box office takings of similar films, it tries to predict the success of a proposed production. The problem here, and note that the same applies to book suggestions on Amazon and all similar approaches, is that the algorithm depends on past consumer behavior and predicts future preferences based upon that. The question is: how do new preferences emerge if the only thing being offered is designed solely to satisfy past preferences?
I would argue that successful business strategy requires a subtle blend of understanding past buyer behavior and offering new possibilities that enable and encourage new behaviors to emerge. If all that a business offers is that which has been successful in the past, it will be rapidly superseded by new market entrants that are not locked into the past. The danger of an over-reliance on data mining and algorithms is that innovation is stifled for business. More importantly, for civilization, imagination is suffocated and strangled for lack of new ideas and thoughts.
Do you want to live in such an algorithm-controlled world? As Wakefield puts it so well: "In reality, our electronic overlords are already taking control, and they are doing it in a far more subtle way than science fiction would have us believe. Their weapon of choice - the algorithm."
Posted August 25, 2011 6:19 AM
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