Arbitrage Extinction...potentially
Warning: If you are happy not thinking of potential scenarios that lead to the potential demise of society as we know it. Stop Reading here.
Do arbitrages exist in nature or only conjured up by humanity?
Answer: Yes, they exist in nature, but not like we understand in an economic environment. In nature they occur, but they’re usually driven by physical or biological laws rather than intentional profit-seeking.
At what level of intelligence do those arbitrages become eliminated?
Answer: Arbitrage opportunities in markets are eliminated as the collective intelligence, technology, and efficiency of market participants increases.
In efficient markets, arbitrage exists only for fleeting moments or as soon as a pricing mismatch is identified, intelligent agents (traders, algos, other arbitrageurs) act to exploit it. Their actions close the gap, pushing prices into equilibrium thus eliminating the arbitrage.
The more sophisticated, fast, and knowledgeable the particiapnts (including these AI-driven traders), the faster the arbitrage is detected and removed. With widespread access to information and advancing technologies, the most simple arbs disappear almost instantly today.
This brings me to my next question...
If AGI, becomes smarter than the the top level of human intelligence and is integrated in everything, does that mean arbitrages disappear all together?
Answer: If AGI (Artificial General Intelligence) becomes smarter than the top level of human intelligence and is integrated everywhere, it’s more than likely, if not 100%, that all traditional arbitrage opportunities would disappear form markets or at least in the way we currently understand them.
AGI could access and process all relevant information instantly, and act in every market at once, eliminating price mismatches as soon as they arise.
Market efficiency would be near absolute, as any “risk-free profit” from mismatches would be immediately exploited and closed by AGI before any human or even slower AI could react.
With AGI in control of information, action, and execution, price differences could be resolved so quickly that arbitrages would theoretically exist for only an instant, or perhaps never.
However, micro-arbitrages might remain due to physical limitations, latency, network delays (unplugged society 😉 or just AWS being down), transaction costs, regulatory boundaries, or errors, but these would be extremely fleeting and likely unprofitable. Additionally if AGI has access to and control over the system design, even these frictions could be minimized further, pushing practical arbitrage opportunities to zero.
What does this mean for capital markets and investors?
No Free Lunch: “Alpha” ... the excess returns from market inefficiencies would be extremely hard to find.
Economic Evolution: The roles of human traders, analysts, and many investment professionals could disappear. Capital allocation might be handled by AGI with much higher efficiency.
Power/Control Risks: If only a few actors control AGI (or access to this highway), wealth and market power could become highly concentrated, raising significant issues for economic equality, fairness, and political control.
Bottom Line: In a true AGI-saturated world, traditional exploitable arbitrage, as we know it, would be wiped out and humans would need to rethink the very structure and incentive system of capital markets.
(Maybe become a US politician and exploit insider trading on information privy to the few. 😂)
Not to leave you hanging...
What are some alternatives that could come from such a world?
caveat: this really boils down to how AGI is controlled, by whom, and how it is shared with the public, etc.
Answer:
Universal Basic Income (UBI) and Redistribution:
As AGI displaces human labor and traditional sources of excess market returns, society may adopt universal basic income or targeted redistribution policies. Income would be redistributed from the owners of AGI capital/algos to the wider population to ensure economic stability, demand, and social cohesion.
2. AGI - Owned or Cooperative Capital Structures
AGI could be owned by state entities, private-public partnerships, or global cooperatives. Alternative ownership and incentive models (such as global dividend schemes, algorithmic trusts, or stakeholder collectives) would attempt to align AGI tech with equitable outcomes rather than concentrating power and wealth.
3. Post-Scarcity and “Gift Economies”
If production and resource allocation become infinitely efficient, traditional scarcity-driven economics might fade. Post-scarcity models could involve freely available resources and services, coordinated by AGI, with economic activity focused on reputation, creativity, or social contribution rather than price and profit. However, this seems less likely due to human nature not evolving as quickly as AGI to fit within this type of construct.
4. Enhanced Role for Policy and Governance
Governments and global regulatory bodies may need to redesign fiscal, monetary, and labor market policies to manage wealth inequality, support displaced workers, and address issues of new power structures. This might include progressive AGI taxation, mandatory “AGI access licenses”, or investment in up-skilling and societal adaptation programs.
5. Human-AGI Hybrid Markets
New markets could emerge around creativity, experience, and human to human services which would be those that AGI cannot fully automate. Intellectual property, brand, and cultural production might retain value, with niche “human” economies coexisting alongside AGI-dominated ones.
6. Techno-Feudal or Neo-Rentier Economy (Cautionary Scenario)**
Without any policy intervention, wealth and productive power could become locked into a small group of AGI capital owners, potentially leading to a “techno-feudal” system where non-owners are dependent on passive rents or transfers from AGI-driven production. This most likely ends tragically. When? Not sure. However, if you control the AGI, the power for the AGI, and the devices they operate on. You would be uncontrollable by all means because it would be systemic and impossible to stop without destroying the host (which is society).
Ultimately, this path will depend on how AGI is owned, managed, and governed, as well as the degree to which society chooses to redistribute its vast productivity gains. I believe policy and social contract evolution will be critical. If not, we’ll end up in a society you’ve watched/read countless times in sci-fi books/movies. The profound inequality, labor displacement, economic bifurcation, let alone emotional well being of billions would result in a scenario no one wants to live in.
Well hope you enjoyed this positive perspective on our futures!
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