Businesses are facing their most formidable challenge in decades: a shift from firms to data-rich markets which, in turn, will upend traditional, money-based ones. These transformations are the focus of Reinventing Capitalism in the Age of Big Data (Basic Books / Hachette, 2018) by Viktor Mayer-Schönberger and Thomas Ramge. The authors “connect the dots between the difficulties faced by traditional online markets; the error of the stock market’s trusted pricing mechanism; and the rise of markets rich with data.” They “argue that a reboot fueled by data will lead to a fundamental reconfiguration of our economy, one that will be arguably as momentous as the Industrial Revolution, reinventing capitalism as we know it.” That’s a bold claim, one not yet borne out but here and there showing some proverbial green shoots.
Check out our H2 hedge fund letters here.
Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge
The most basic difference between markets and firms is “the way information flows and is translated into decisions, and by whom. This is reflected in their structures: the market mirrors the flow of information from everyone to anyone and the decentral decision-making by all market participants, [whereas] the hierarchical firm mirrors information streaming to its center, where leaders make the key decisions.”
Markets may offer the potential for greater information for everyone, but traditional markets tend to be reductionist. They translate the full gamut of preference information into an information trickle around price. But recent advances in data-handling, which themselves are founded on data, are improving our ability to choose based on data. For example, BlaBlaCar “allows riders and drivers to get matched along multiple dimensions, including their self-reported level of chattiness…. With less opportunity for negotiating on price, riders are more likely to take other information into account when selecting a ride.”
What will this reconfiguration of our economy mean for the financial markets? The authors argue that more money is now available for capital investments and fewer companies are looking it, which means that returns on investment will plummet. “This spells the end of finance capitalism as we know it…. The economy will thrive, but finance capital not with it; it epitomizes the shift from money-based markets to data-rich ones.” The authors continue: “data-rich markets devalue money, and investors will be paying the bill. … If there is reassurance to be had, it is that although data-rich markets will cause a drastic shock to the system, with thousands of billions of dollars in individual holdings evaporating as rates of return drop and investments lose their value, this shock will likely be one-time, rather than recurring. Once capital has been devalued and our expectations of the anticipated returns from it are reset, capital’s value will likely hold steady, rather than continue to slide.” And “in the long run, … data-rich markets will help investors to better identify opportunities that match their preferences and are less clouded by human bias. … We’ll still need financial advice, but it will likely come from a machine rather than a human being.”
Whether or not you follow the authors all the way to financial Armageddon (I personally find their hypothesis about finance capital unconvincing), their book is a stimulating read.
Article by Brenda Jubin, Reading The Markets