Contributed By: K. Prasad
Edited By: Karthick Selvan
Dr. Raghavendra Rau, Director of Cambridge Center for Alternative Finance, visited the campus on 31st December 2018 for a talk on technology and the disruption in the field of finance. The session was filled with a lot of information and wit.
In his inimitable style, Dr. Rau started the discussion with a familiar question: what is the best way to coordinate people on a large scale? There are two ways: first is using Markets, which facilitate a voluntary exchange of goods and services, with the price being the coordinating mechanism. The second is using a firm or an organization, where the command is the coordinating mechanism because of the hierarchy. The choice between them depends on multiple dimensions, such as transaction costs.
Within a firm, there are three problems – assignment problem (who gets to make the decisions), incentive problem (how to compensate the people), and evaluation problem (how to measure performance). Dr. Rau went on to discuss the three major problems in a market – imperfect information, asymmetric information & behavioral biases of market players. Technology is changing how we deal with all of these problems.
The talk focused on the role of AI, Automation, and Blockchains in how we deal with these problems. Technology has changed the way we consume information, and we have more information in our hands than any other time in history. However, is it necessarily good? One can argue that information abundance will solve the first two problems, but it will fuel the behavioral bias. The reason is that the human brain is capable of processing only six or seven pieces of information at a time, too much information will make human beings irrational. Hence, all the information usually gets condensed to one measure which is the price.
The natural question arises: how do we organize all this information and make rational decisions? There are three aspects needed:
- A standard language to compare different products on the same set of attributes (for example, for a phone – one can compare memory, RAM, display etc.), which should be available for all products.
- A method to match the product to preferences (traditionally it has been price, but now all the attributes come into play)
- A method to capture individual preferences (which is through AI, which requires large amounts of data and frequent feedback, and hence is difficult).
However, human behavior is unpredictable. But technology is making progress on that front too. There are various personality-analyzing apps on Facebook, which give a surprisingly accurate picture of one’s personality (second only to the user’s spouse) based on the comments. A microfinance app called “Tala” uses data from smartphones to predict creditworthiness before giving small loans with minimal procedures (it takes only a few seconds). This model has turned out to be very successful. Another example of using technology to solve problems would be smart contracts which use blockchain technology to execute contracts between two individuals.
Dr. Rau provided insights on the rapidly evolving field of technology and how it is actively changing the way we interact with each other in a marketplace. And more importantly, how it is changing our daily lives.
K. Prasad is a student of PGP 2018-2020 batch of IIM Bangalore.