Fifty years ago, the efficient market hypothesis emerged as a cornerstone of modern finance. Introduced by Professor Eugene Fama at the University of Chicago, the efficient market hypothesis (EMH) states that prices reflect all publicly-available information, and in particular, past prices cannot predict future prices. Stronger forms of the hypothesis state that prices even reflect fundamental and private information. A consequence of the EMH is that active investing is useless and index investment is the way to go. Since then, finance theory has made some advances, finding new anomalies (value effect, momentum, and long-term mean-reversion, etc.) and proposing some plausible theories (behavioral finance, learning in financial markets, and new systematic factors, etc.). The most striking puzzle that casts doubt on the EMH is the occurrence and frequency of financial bubbles (in technology stocks, in real estate, and in commodities, etc.). If markets are efficient, how can so much irrationality persist and end up costing so much to investors and taxpayers?
We conjecture that finance theory in 2050 will be vastly different than it is today. Finance will be more closely integrated with cognitive sciences such as psychology, artificial intelligence, neuroscience, and sociology. As more data become available, we will be better able to understand the human brain and how investors process information. A unified theory of human behavior will form a new foundation for finance theory.
A major breakthrough will occur when machines become smarter than men, when super intelligent computers can deal with problems that humans cannot solve. In finance, it will be the “Financial Singularity,” the day when the most consistent investors are relying mostly on investment supercomputers (ISC) and no longer on humans. We expect ISCs to beat 99.99% of human investors. For most investors, investing will be a futile activity as the chance of success will be so slim. An ISC will be able to go over financial statements (published in real time twenty-four hours a day by 2050) to evaluate the current performance and predict future performance, to interact with other super computers managing company inventories, shipping, and finances, to anticipate market trends, to look at price patterns in all markets, and to build and back-test investment theories in real time.
Increased computational power, new artificial intelligence algorithms, massive real-time databases of all material events affecting financial securities will lead to close to market efficiency once all investors are relying on ISCs. Markets will, however, be punctuated with financial crises triggered by ISCs competing to gain an edge in investing.
Because understanding these crises will be beyond the capabilities of humans, the only solution will be to have a non-human financial regulator. The super supervisory computer commission (SSCC) will supervise markets on the behalf of investors and governments. Attempts to include human regulators will have failed as they would have been proven to be subject to political pressure and to hinder progress on topics that they failed to understand. SSCC will make sure that there are proper risk limits imposed on ISCs, that the algorithms used by the ISCs are sound and do not generate dangerous externalities on the other ISCs such as negative feedback loops or liquidity runs. ISCs’ returns and investment positions will be observable by the SSCC in real time and stored in a central database. ISCs that generate very high returns will be as closely examined as ISCs that generate poor returns. In the case of a failing ISC, the SSCC will audit the failure to learn lessons about the sound design and best practices for future ISCs. The SSCC will be able to issue “cease and desist” orders to ISCs that take too much risk, that illegally gather information, or that undertake criminal activities such as money laundering or corrupting company officers.
In 2050, a new way to regulate the ISCs will be to impose taxes on financial transactions and holdings. The taxes will reflect the negative externalities caused by the investments of the ISCs. In particular, investments that present a risk of bubbles will be penalized. The SSCC will be responsible for calculating these taxes in real time. All the ISCs will know the exact formula for these calculations.
The Future of Banks
In this world of ISCs, we envision lending supercomputers (LSCs) that will replace banks and will work as agent to provide loans to individuals and companies. The loans will originate from the ISCs. The LSCs will just be agents who monitor the borrowers and constantly assess their credit risks in real time. LSCs will be specialized by markets, collateral, and borrowers. There will be LSCs for consumer finance, real estate, and commercial loans. Banks will either disappear or become LSCs. They will no longer take deposits as all deposits will be managed by ISCs. A special class of low-risk ISCs will be closely supervised by the SSCC for investors who seek preservation of capital and low investment risk.
The Future of Money
Will there be any use for money in 2050? We believe that money will still be used but just as a tool for transactions and storing wealth. Monetary policy will be a relic of the earlier 21st century as governments will have come to the conclusion that it is a very ineffective and coarse tool to solve economic problems. Economic historians will have found that the effect of monetary policy has too much lag and relies too heavily on monetary illusions that have been addressed a long time ago by the ISCs. By 2050, monetary authorities can no longer fool investors, making them believe that nominal price or wage increases were real.
The Future of Central Banks
Increased computing power should allow all prices to be monitored in real time and the supply of money should exactly match the demand generated by increased transactions. Monetary policy will be run by a monetary supercomputer (MSC) in charge of matching the supply and demand of money. Central Banks will become MSCs but will not have any discretionary authority for economic policies.
The Future of Economic Governance
Economic governance by 2050 will consist of performing three tasks: encouraging wealth creation by coordinating the production of public goods (investments in infrastructure, transportation, the environment, fundamental research, defense, and production of economic information and statistics, etc.), redistribution of wealth so that everyone faces equal opportunities and can benefit from some minimal safety net, and economic risk management so that the occurrence of economic crises becomes less frequent and less damaging to society overall.
One challenge of economic governance will be rapid technological progress that renders the skills and knowledge of workers obsolete. The trade-off between socializing economic progress and empowering individuals will be the key determinant for the shaping the economies of 2050.
This short outlook is, of course, very speculative. We have to assume that the world is still at peace and that we do not run out of the resources needed to provide well-being to the world population. Many market mechanisms would have been introduced through 2050 to solve for these complex problems. This is obviously beyond this current letter.
One puzzling question remains with the future of ISCs. With the exponentially increased sophistication of ISCs, would it be possible for one single ISC to replace all the ISCs? A single ISC could hypothetically perform the optimal allocation between risk and return of all financial securities. It will need to know the financial objectives of borrowers, lenders, investors, and entrepreneurs. It will be the brain of the financial system. In theory, it would be very unlikely as market allocation reveals information and allows the decentralization of financial decision-making. In practice, for a simple financial decision such as pension investing or asset-liability investments, a single ISC or super financial planner could become a credible alternative to markets.
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