Silicon Shadows Part I
The Digital Detachment Of Economics & Finance
New to the series? Start with our foundational posts on Hyperreality and the Financial Matrix for essential context, or explore the full Table Of Contents.
Part of the Sorcerer’s Apprentice series, originally published privately on January 13, 2021. Updated, revised and expanded for public release on September 22, 2024.
“We shape our tools, and thereafter they shape us.”
Father John Culkin on Marshall McLuhan’s Understanding Media
The days when money meant gold and markets were bustling physical locations populated by humans have faded into history. In their place, we’ve embraced a future envisioned by Snow Crash—a world where technology mediates money and markets. From the flickering reds and greens on Bloomberg terminals to the frictionless swipes of mobile banking and trading apps, from high-frequency trading algorithms to the instant gratification of one-click Amazon purchases, our digital tools scaffold our reality—imperceptibly molding our perceptions, behaviors, and societal structures.
Like Mickey as the Sorcerer’s Apprentice bewitching brooms, we’ve summoned financial forces that now operate beyond our full control or comprehension. Our progressive abstraction of money and markets from direct human actions and the physical world has birthed the Financial Matrix. We’ve conjured a realm where our brooms—digitized financial constructs—have taken on a life of their own, programming a hyperreal simulation that not only overshadows but increasingly supplants the real world it was meant to represent.
Ten Milestones On The Road To Hyperreality
1. The Metamorphosis Of Money
2. Keynes' Kaleidoscope
3. Central Banks’ Money Printer Go BRRRR
4. Silicon Shadows <== YOU ARE HERE
5. The Institutionalization Of Finance
6. The Rise of Skynet: The Algorithmization Of Finance
7. The Symbolic Alchemy Of Risk
8. “We’re All Quants Now”
9. Social Media & “The Ecstasy Of Communication”
10. The Consumerification of FinanceIt is no longer a question of imitation, nor duplication, nor even parody. It is a question of substituting the signs of the real for the real
—Jean Baudrillard, Simulacra and Simulation
Money’s Digital Veil
Money is society’s operating system; as money has progressively lost touch with reality through its metamorphosis—partially through the digitization and abstraction of money, wealth, and transactions—so too has everything else.
The psychological impact of digital finance has been profound, casting a virtual veil over the tangible consequences of our actions. Where relinquishing a gleaming gold coin once evoked a palpable sense of loss, tapping a “buy” button in an iPhone app now triggers an emotional rush.
Like players immersed in a video game, we casually tap and swipe through financial transactions, racking up points and unlocking achievements. But just as harvesting pixelated crops bears no resemblance to the grit and grind of actual farming, our digital transactions are divorced from the sweat and toil driving real economies—severing our visceral connection to the repercussions of our decisions and obscuring the complex realities that underpin them.
Even more critically, however, digital money enables methods and magnitudes of currency debasement that would have been inconceivable to our ancestors. Infinite currency can now be instantaneously conjured into existence merely by altering a virtual ledger. The past decade’s speculative frenzies, “meme stock” manias, and other market and societal distortions are but symptoms of a deeper malaise: the corrosive effect of monetary debasement on our sense of reality—a topic that we will explore in greater detail in future installments.
Through the Looking Glass: When Screens Become Reality
But the computerization of finance has not only transformed the way money is created, manipulated, and perceived. The widespread adoption of computer technology—for example, replacing human traders and open-outcry auctions with digital interfaces, digital finance, virtual markets, and algorithms—fundamentally changed how we interact with and conceptualize the economy and markets, and played a pivotal role in the emergence of the Financial Matrix.
For decades, investors, economists, and policymakers have made decisions based on the information gleaned through computer screens, Bloomberg terminals, Excel models, and applications—interfaces which appear to provide an objective, data-driven window into reality. However, this veneer of objectivity obscures a deeper truth: these interfaces have abstracted away the messy, qualitative and physical realities of human economic activity, and further divorced financial activity from the real world. The flickering numbers on the screen, the charts and graphs and algorithmic projections, have become the primary reality—or rather, hyperreality.
Imagine you’re a chef-investor evaluating restaurants as potential opportunities. In the past, you’d visit each eatery, sample the food, observe the staff, interview customers, and pore over years of financial records to gain a true sense of the business’s health and potential. Now, you can simply pull up a digital dashboard that shows flashy charts and key financial metrics for hundreds of restaurants at once. With a few clicks, you can screen for the restaurants that meet your criteria and see projected earnings and valuations for the next year—all neatly packaged and color-coded with a sense of precision and certainty.
These digital representations become more “real” to us than the actual businesses they represent. It’s not unlike judging a restaurant solely by its Yelp rating without ever tasting the food. The ease of access to and manipulation of these metrics has made many financial professionals—and more recently, their automated algorithms—overly reliant on them. After all, why spend weeks doing due diligence in the real world when a computer can give you a seemingly perfect answer in seconds?
Investors can customize their dashboards, create watchlists, and set alerts for specific metrics or thresholds. This customization—while undoubtedly useful—can easily create echo chambers, reinforcing specific behaviors and perceptions in much the same way that social media algorithms do. Focusing on certain watchlists or metrics will tend to amplify an investor’s biases and narrow his financial worldview.
The widespread adoption of similar dashboards and data visualization tools across the financial industry has led to collective herding behavior. When most investors view data through similarly structured lenses—dashboards and key metrics, even if “individually customized”—it can result in homogenized decision-making. These digital representations—the financial world’s equivalent of aggregate Yelp ratings—have become more influential than the underlying economic realities they attempt to measure.
Further compounding this issue, companies have come to understand these digital representations and often prioritize hitting the KPIs that they know investors (and algorithms) scrutinize—sometimes “by any means necessary”. This creates a feedback loop where the digital abstraction reflexively shapes real-world business decisions.
Virtualized Mindsets
This virtualization, intertwined with the scientism prevalent in the financial and economic disciplines—a phenomenon itself enabled and amplified by computerization—has profoundly modified our mindset. A hedge fund manager—while lounging on a beach—can with a few taps on an iPad set in motion trades that buy quantities of commodities that would take months or years to physically produce and transport, while remaining blissfully unaware of the logistical difficulties involved.
With the rise of trading apps like Robinhood, even the most casual retail investor can now participate in this abstracted economy. A teenager can click a button on their phone and be greeted with animated bursts of confetti to celebrate their “investment”. They can choose to participate in the GameStop meme stock frenzy or play it “safe” and buy an ETF— all without needing to know what assets are in the ETF, what the underlying companies do, or even what the letters ETF stand for.
Digitization hasn’t only impacted trading and investing. Junior bankers can—from across the country, and without meeting the borrower in person or evaluating the old-fashioned 5 C’s of credit—query an automated FICO score, click a mouse and create a million-dollar mortgage without giving any thought to what that number means in the real world or what can go wrong.
Similarly, our computational power allows financial engineers to package thousands of these mortgages or other loans into complex securities—making billion-dollar decisions based solely on computer models and risk metrics—without ever seeing a single home or meeting any borrowers. This abstraction obscures the real-world implications of these financial instruments and creates a false sense of precision and control—increasing speculative and risky (or outright fraudulent) activities.
Up Next: Algorithmic Alchemy & The Encoded Economy
In the next installment, we’ll explore how this digital revolution allowed us to hack reality like Neo in the Matrix.