Categories

Dialogue with Sviatoslav Rosov for CFA Institute Magazine

 

Why is an expert on disruptive technology “worried” about financial innovation?

 

Excerpt from “Chaos Is Hard to Predict”

Does technical innovation always end in displacement/ replacement?
The professions being challenged include physicians, lawyers, consultants, and analysts. Algorithms and sensors could conceivably displace some subset. However, it’s not a certainty. One way to fend off automation displacement is to redefine and change the scope of the profession.

The classic example is from the birth of the Industrial Revolution. As machines replaced certain tasks, new jobs were created which required higher skills and hence edu- cation, leading to universal matriculation and eventually the popularity of higher education. Professionals need to “invent” new jobs for themselves as a means to keep disruption at bay.

Read more: CFA Institute Magazine.

 

  • Jeff G

    The issues with trusting technology are many. There’s little evidence of any program, trading module, or investment scheme that can be automated and do much more successfully than re-allocate or track indices (which is fine for some people).

    Mutual Funds were supposed to be that same kind of investment cruise-control. “Just park your money in a fund while diversification and professional management are taken care of for you.” Dalbar and associates has done numerous studies all with the same results. The average mutual fund investor actually manages to underperform the average mutual fund! It’s one thing to park money in an investment. It’s another thing to let it sit there while headlines of bear markets, bankrucptcies, recession or financial crisis push peoples’ emotional fear-buttons.

    To think that robo-advisors will somehow keep investors out of bear markets is pretty unrealistic. And to beat the markets is also unrealistic. So, with roboadvisors being relatively new & we being 7-years into the current Bull market – it will be very interesting to see not only how roboadvisors perform during the next bear, but how investors who have hired roboadvisors react (or respond) to market declines. If I had an iPhone for every time I heard something was going to be disruptive I’d have such a large iPhone portfolio I’d have to hire a roboadvisors to manage it! – Jeff

    • Jeff

      I would also say having worked in the wealth management industry since 1990 that relationships are essential. Study after study shows that clients value contact with her advisor highly. Strangely they value it so highly it can often even be prioritized over performance. People who had numerous contacts with their advisor throughout the years reported higher satisfaction rates and higher retention rates than people who got little or no attention from their advisers even if their performance was better.

      My own experience backs this up. Anecdotally, when I moved from one state to another and did not provide the same kind of service to a particular client that he had been used to – he transferred to another adviser because he and his wife, “wanted someone who would come over and meet with them in person.” When I demonstrated for him conclusively that we have been beating the market by +7% PER YEAR during the time he had been my client it still did not mean enough to him to stay on with me. Lesson learned.

      And of course, there are always other alternatives to advisers. For example you could become part of the largest co-op in the world which is what I call Apple Inc. If you are a product user, as long as you own shares in it.

  • Panos

    Great staff.One remark.

    Comparing your three conditions that characterize disruption, with Michael Raynor’s conditions, I can see a subtle difference that could be interesting.

    Horace Dediu :
    1. Entry into a market where products are over-serving or in non-consuming segment.
    2. A technological core that allows the challenger to rapidly improve.
    3. Asymmetry of motivation.

    Michael Raynor (https://soundcloud.com/a16z/what-disruption-is-and-is-not):
    1. Where you start (Low end – new market competing with no consumption).
    2. Fundamentally different business model that allows you to serve profitably..
    3. Enabling technology: something that allows you to, now, take that same business model and begin to serve the mainstream market…

    Horace, in your three parameters you seem to define technology as a very important condition but in a way you are diminishing the role of business models. Whereas Mr. Raynor is focusing on the core role of (profitable) business models in disruption and is using technology as merely an “expansion vehicle”. It is like a subject of different priorities. Technology vs business model.

    I understand that our professional background affects our perspective, and this in turn leads to some “issues”/misconceptions regarding disruption theory in general. Sometimes, on an engineering mind, a new/exciting technology is the core sign of disruption. Other times, for a business mindset, a “fundamentally different” successful business model (regardless technology) is the one.

    Therefore, maybe this issue (role/importance of business model and technology in disruption) should be (“again”?) further discussed or elaborated. Or define for example a set of exact common conditions (to the word-words matters) for the disruption.

    To set things straight. Based on the whole document and your overall writings, it is clear that these are nearly differences in the expressions (choice of words) that you and Mr. Raynor use, and not in the core assumptions (fundamental role of both the business models and technology) of disruption theory.

    But for us… that’s not necessarily the case.

    • hannahjs

      I’m not too sure about the “mindset” thing. Horace does bring an adjunct perspective to the table but plays on the sme field as Raynor and Christensen. All three men learnt business at Harvard.

      • Panos

        What i am trying to say is that their different professional background seem to have an influence in the words (at least) that they choose to use when they talk about disruption theory.
        I currently “study” Horace’s latest critical path-176 (focusing on the disruption theory ) which is outstanding, and it seems more aligned.
        I might have more when i finish it…