Increasingly, markets are composed of both humans and their semi-autonomous agents. Currently the latter are comprised of algorithms coded to perform extremely limited, rigid trading activities. The market prominence of such agents will dramatically expand as AI enables the creation of more flexible and smarter nonhuman agents functioning with greater autonomy and even 'minds of their own'.

This is not a new idea, but could you please provide a single example where an AI based (or any other "nonhuman") algo is used by those market participants that actually may affect the price, and not only by those that consume as much liquidity as presently available.

Whether a human is trading or an algorithm, each participant will have their own utility and their own value (implicit or explicit) for the worth of an asset. The market price is the net result of their trades and at any moment, each participant will have their own view of whether the asset is under-priced or over-priced and by how much. The differing psychological bias of traders determines only their differing utilities and the shape of the future price probability distribution. The psychological bias of the herd, coupled with economic events, determines the primary moments (mean, variance) of the distribution.

behavioral finance - math is pure and true, people are not - however people are consistent in nature. therefore if you can model that rather than hard math rules, you will have an adaptive system that will hold up pretty well.

Of course, the algorithms were designed and programmed by humans.....So does the set of all sets contain itself?

My own experience shows that there's no need to find a model which explains all market processes, nor is it necessary to find a model which explains the result process (as a composition of all processes). It's sufficient to have 4-5 models which explain different market processes in different markets to be very consistent.

Hello Alex. Let's talk about the humans, not the AIs, that populate the market. Indeed the number of wishes, desires and goals random human participants bring into the market approaches infinity. However, specific subsets of investors have very different and very specific patterns of activities. One such subset of investors that do not act as the general random population of investors act when playing he market are the fund managers. Institutional investors do not act like random investor at all. They have investment rules and restrictions that they have to live up to and maintain, they control a lot more funds than the average investor does, and their level of information and expertise is much greater than what the average random investor commands.

Yet another broad subset of investors are the owners of significant private capital, either their own or money owned by family firms. This subset of investors seek totally different types of investments that are generally not available to random investors (and in some cases they are also not available to institutional fund managers). The market for private capital, the so called dark pools of capital, is vast and extremely variable. The risks are great but so are the rewards when a well planned transaction occurs. And so on and so forth.

I agree in general with you latest post, but it must be understood that the capital markets you refer to in this post are essentially the markets available to random investors. These are markets that, as you say, essentially follow some kind of generalized processes or models. The markets played by institutional investors, private capital owners, large firms doing algorithmically controlled HFT, and assorted other groups of players investing in specialized corners of the market may be governed by very different kinds of processes or models, only some of which may be similar to the market played by random investors.

For example, activist investors (Icahn and similar outfits) work in a way that is vastly different to the way that random individual investors will work. The rules and processes change when these types of investors are involved in the equation.

The complexity of the market is indeed huge. The moral of this story is that individual investors need to be aware of what types of investors are the players in the market they wish to invest in. The rules and models for such markets which attract specialized subsets of investors will be different. Individual investors need to pay attention and change their processes or models investing in specific markets.