Democratization of finance

February 25, 2021

A lot has been written recently to explain and clarify the GameStop rally. The important reasons are clear: a bunch of new retail investors and young traders were welcomed on financial markets last year. Furthermore, the pandemic breeds boredom and the lockdown forced savers to stockpile money. An already famous revolt against financial elites is what followed. But more important is that these events should be seen in the context of an underlying long-term trend: the democratization of finance. As a consequence of financial innovations (since the 80s), securities have become increasingly easy to access and tradeable with (almost) zero transaction costs.This has upsides and downsides. More inclusion, liquid stocks and a power shift away from intermediaries have some clear benefits. However, those who think the defeat and big losses of some hedge funds are a prefiguration of the New Financial World, may be in for a disappointment. In the long run, financially illiterate persons will most likely bear the most risk and collect the most losses. Furthermore, if the product is free (trading), you are the product. If there is one important lesson to be drawn from recent events, it would be that the democratization of finance should comprise more than easy access, low fees, and playful interfaces. The challenge ahead will be to create new forms of protection and regulation without being paternalistic.

Burning questions:
  • Is the GameStop Rally ultimately a consequence of animal spirits, mass hysteria, market manipulation or imperfect market structure?
  • Where are we to look for protection of retail investors and regulation of democratized markets: central or decentral governance?
  • At which point do the downsides of extreme liquid markets and zero commission trading (e.g. order flow, investor sentiment, speculation, etc.) outweigh the clear benefits?
  • How can finance be responsibly and durably democratized?

Series 'AI Metaphors'

1. The Tool
Category: Objects
Humans shape tools.

We make them part of our body while we melt their essence with our intentions. They require some finesse to use but they never fool us or trick us. Humans use tools, tools never use humans.

We are the masters determining their course, integrating them gracefully into the minutiae of our everyday lives. Immovable and unyielding, they remain reliant on our guidance, devoid of desire and intent, they remain exactly where we leave them, their functionality unchanging over time.

We retain the ultimate authority, able to discard them at will or, in today's context, simply power them down. Though they may occasionally foster irritation, largely they stand steadfast, loyal allies in our daily toils.

Thus we place our faith in tools, acknowledging that they are mere reflections of our own capabilities. In them, there is no entity to venerate or fault but ourselves, for they are but inert extensions of our own being, inanimate and steadfast, awaiting our command.
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2. The Machine
Category: Objects
Unlike a mere tool, the machine does not need the guidance of our hand, operating autonomously through its intricate network of gears and wheels. It achieves feats of motion that surpass the wildest human imaginations, harboring a power reminiscent of a cavalry of horses. Though it demands maintenance to replace broken parts and fix malfunctions, it mostly acts independently, allowing us to retreat and become mere observers to its diligent performance. We interact with it through buttons and handles, guiding its operations with minor adjustments and feedback as it works tirelessly. Embodying relentless purpose, laboring in a cycle of infinite repetition, the machine is a testament to human ingenuity manifested in metal and motion.
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About the author(s)

Economist and philosopher Sebastiaan Crul writes articles on a wide range of topics, including rule of law in digital societies, the virtualization of the lifeworld and internet culture. He is currently working on his doctoral degree on the influence of digitalization on mental health and virtue ethics, having previously published dissertations on the philosophy of play and systemic risks in the finance industry.

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