2. 1 Barter, Auction and Technology Campbell R. Harvey Duke University, Durham, NC USA National Bureau of Economic Research, Cambridge MA USA http://www.duke.edu/~charvey Global Asset Allocation and Stock Selection

3. 2 Future of Asset Management: ----- Technology 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

4. 3 Future of Asset Management: ----- Technology New growth factors: “Pipelining” -- Multiple calculations performed at the same time (parallel processing) Hence, conservative forecast would be to slow to exponential growth

5. 4 Future of Asset Management: ----- Technology Human brain: 100 billion neurons 1000 connections between each neuron 100 trillion connections, each capable of simultaneous calculation

6. 5 Future of Asset Management: ----- Technology 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.

7. 6 Future of Asset Management: ----- Technology Human brain: At 200 calculations per second and 100 trillion connections, implies 20,000 trillion calculations per second.

8. 7 Future of Asset Management: ----- Technology Currently, we can do 3.4 billion calculations per second for about $1000 (Intel 3.4Ghz Pentium 4)

9. 8 Future of Asset Management: ----- Technology Accelerated Strategic Computing Initiative (ASCI) has a supercomputer capable of 12.8 trillion calculations per second with plan for 100 trillion by 2004 At this rate, 28,000 trillion by 2016

10. 9 Future of Asset Management: ----- Technology

11. 10 Future of Asset Management: ----- Technology ASCI Q, named to follow LANL's tradition of alphabetical names for computers, will have 11,968 processors, 12 terabytes of memory and 600 terabytes of disk storage. Goal of reaching 100 teraFLOPS in 2004. The Los Alamos ASCI supercomputer, Q, is now being installed in its new facility, the Nicholas C. Metropolis Center for Modeling and Simulation, dedicated in May 2002.

12. 11 Future of Asset Management: ----- Technology NEC Earth Simulator, March 2002

13. 12 Future of Asset Management: ----- Technology NEC Earth Simulator, November 2003 This is the world’s fastest supercomputer configured with 640 nodes (64GFlops node, 5,120 CPUs in total), each of which consists of eight vector processors (8GFlops/CPU). Achieves the peak performance of 35.86 TFlops

14. 13 Future of Asset Management: ----- Technology

15. 14 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100 10 40 10 35 10 30 10 25 10 20 10 1510 10 5 10 10 -5 10 -10 Calculations per second per $1000 Mouse Brain Human Brain All Humans’ Brains Insect Brain Computing and the Human Brain Source: Ray Kurzweil, updated from various sources

16. 15 Future of Asset Management: ----- Technology Forecasts: 2016 Achieve capacity of human brain (based on extrapolation of Lawerence Livermore National Laboratories ASCI) 2025 Achieve the same capacity for $1000 2060 Achieve the capacity of 1 trillion humans

17. 16 Future of Asset Management: ----- Technology 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

18. 17 Future of Asset Management: ----- Organzational Structures 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.

19. 18 Future of Asset Management: ----- Organzational Structures 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.

20. 19 Future of Asset Management: ----- Organzational Structures Impact for the Corporation? Need to look hard at what are the advantages that a large corporation in this future landscape. Micro-specialization and growth of outsourcing.

21. 20 Future of Asset Management: ----- Organzational Structures Impact for the Consumer? More information, more competition, more value. Evolution from mass marketing, to segments, to individuals.

22. 21 Future of Asset Management: ----- Impact for Finance Major driving forces AI/Pattern recognition integrated into management C2C will greatly reduce role of corporation that are facilitators Sharp growth in reverse auction Barter

23. 22 Future of Asset Management: ----- AI Pattern recognition We have seen very crude neural net applications fail. In the future, much more complexity is possible.

24. 23 Future of Asset Management: ----- AI Example: Next generation of pattern recognition Consider a string of numbers 0100101010001010111101011010101010 Could represent graphics, words. Let’s represent this in a binary tree and use the theory of data compression.

25. 24 0100101010001010111101011010100101

26. 25 0100101010001010111101011010100101 IIIII Only 20% probability of drawing a 1

27. 26 Future of Asset Management: -----C2C Client to Client? Cuts the role of the middle person (or redefines role). Efficient collection of information Growth in validators, new form of insurance

28. 27 Future of Asset Management: -----Auction Auction? We have seen dramatic growth in consumer auctions. Next we will see growth in B2B and C2C auctions

29. 28 Future of Asset Management: -----Barter Barter? Logic of currency: Unit of account Eliminates transactions costs of barter

30. 29 Future of Asset Management: -----Barter 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)

31. 30 Future of Asset Management: -----Barter Implications for currency Large B2B barter market Forward barter could reduce much of the need for working capital Rethink the need for debt

32. 31 Future of Asset Management: -----Global finance Implications for global finance Currency less important Shorter term: Three currency zones Shortly after: One world unit of account

33. 32 Future of Asset Management: -----Global finance 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

34. 33 Future of Asset Management: -----Next A look at the changing landscape of FX management Competitive landscape Specific C2C method Implications for Asset Management