1 Technology’s Impact on Asset Management Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA

2 Technology and Finance: Plan Brainstorming of the future landscape in which asset management firms will operate. Forecasting technological change and its impact A Reassessment of the Role of the Corporation The Individual as the Market Money, Debt and Barter in the New Economy

3 Technology and Finance: Forecasting Change Jack Welch Q: Where do you think we are as an economy as far as e-business goes? A: “First inning.” Fortune, May 1, 2000

4 Technology and Finance: Forecasting Change Scott McNealy “We are just 0.5% into the e-commerce revolution. This has just started.”

5 Technology and Finance: Forecasting Change Lou Gerstner “It will have implications for the nation-state, for the ways we organize around the world.”

6 Technology and Finance: Forecasting Change Peter Drucker “Distance has been eliminated. There is only one economy and one market.” Atlantic Monthly, October 1999.

7 Technology and Finance: Forecasting Change What does this mean? What are the implications?

8 Technology and Finance: Forecasting Change We have seen exponential growth in exponential growth of computing! Growth factors: Shorter distance for electrons to travel (transistor die size gets smaller) Greater number of transistors

9 Technology and Finance: Forecasting Change New growth factors: “Pipelining” -- Multiple calculations performed at the same time (parallel processing) Hence, conservative forecast would be to slow to exponential growth

10 Technology and Finance: Forecasting Change Human brain: 100 billion neurons 1000 connections between each neuron 100 trillion connections, each capable of simultaneous calculation

11 Technology and Finance: Forecasting Change Human brain: Strength: Massively parallel Weakness: Very slow, only 200 calculations per second. Explains why brains does a great job at operations that require massively parallel, such as pattern recognition.

12 Technology and Finance: Forecasting Change Human brain: At 200 calculations per second and 100 trillion connections, implies 20 million billion calculations per second. Today, we can do 2 billion calculation per second. Let’s forecast!

Calculations per second per $1000 Mouse Brain Human Brain All Humans’ Brains Insect Brain Computing and the Human Brain

14 Technology and Finance: Forecasting Change Ray Kurzweil’s Forecasts: 2020 Will achieve capacity of human brain 2025 Will achieve the same capacity for $ Achieve the capacity of 1 trillion humans

15 Technology and Finance: Forecasting Change What about memory? Brain capacity is 100 trillion synapse strengths which is approximate 1 million billion bits 1 billion bits (128 megabytes) today costs less than $100. Reasonable forecast would be the memory equivalent of the brain by 2020 for $1000

16 Technology and Finance: Forecasting Change Impact for the Corporation? Corporations mainly evolved in the late 19th century as a way to reduce transactions costs (including limited liability) The forces that created the environment for the corporation to thrive seem to be working against the corporation in the future.

17 Technology and Finance: Forecasting Change Impact for the Corporation? Transactions costs are dramatically lower (this includes barriers to entry, cost to reach consumer, etc.) The logic of centralized control has given way to a decentralized entrepreneurial type of capitalism.

18 Technology and Finance: Forecasting Change Impact for the Corporation? We see glimpses of this in some recent spinoffs: BCE and Nortel as well as AT&T. Need to look hard at what are the advantages that a large corporation in this future landscape.

19 Technology and Finance: Forecasting Change Impact for the Consumer? More information, more competition, more value. Evolution from mass marketing, to segments, to individuals.

20 Technology and Finance: Forecasting Change Impact for Finance? Stock exchanges as we know them today will disappear. Trading will be computer versus computer - there will be little role for humans

21 Technology and Finance: Forecasting Change Impact for Finance? We have seen very crude neural net applications fail. In the future, much more complexity is possible.

22 Technology and Finance: Forecasting Change What about currency? Transactions cost of barter have dramatically decreased with Internet In the future, money will be a unit of account - and it is not even clear that is necessary (unit of account could be anything)

23 Technology and Finance: Forecasting Change Implications for currency Large B2B barter market Forward barter could reduce much of the need for working capital Rethink the need for debt

24 Technology and Finance: Forecasting Change Implications for global finance Currency less important Shorter term: Three currency zones Shortly after: One world unit of account

25 Technology and Finance: Forecasting Change Implications for finance Currency hedging will be less important - if it exists at all Implications for interest rate management –Debt will not be in traditional currency but goods