Sunday, February 17, 2013

Aging and Technology

            Let’s start with a thought experiment, which I admit sounds like a B science fiction movie, but illustrates an important point.  Assume that everyone is identical and that they are educated until 21, work until they retire at 65, and die at age 70.  What’s more, the world is the same every year.  There is no population growth or increase in productivity.

            Into this world introduce a genetic miracle that extends the life span to 85 while maintaining the same level of health.  What is the economic impact?  If people still retire at 65 the result is that everyone is 17.6% poorer.  The reason is that the working population, and thereby the national pie, stays the same but it now has to be divided among more people – specifically all the new seniors between 70 and 85.

            In this simplified world, there basic only two alternatives.  The first is to accept a lower standard of living.  This is not especially attractive to the working generation who are putting in the same effort as their predecessors and coming away with 17.6% less.  The second is to find a way to make the elderly productive.  If the elderly were to work until age 80, and then retire for five years, the standard of living would be maintained.

            Fortunately, technology has already gone a long way toward promoting productivity in later life.  Machines have taken over much of the back breaking work that was common in the 19th century.  The question is what about mental work?  It is an unfortunate fact that as you age the intelligence measured by IQ tests falls, particularly after 60.  More specifically, thinking slows, memory becomes more fragile, and logical problem solving is more difficult.  On the other hand, there is much to be said for the wisdom of age.  I look back on decisions I made in my early 20’s, the peak time for IQ type skills, and say, “How could I have been so stupid?”  The trick is to pass some of the mental quickness tasks to machines so as to help older people take full advantage of the wisdom.

            In this respect, the elderly are a prime challenge for our most innovative technology companies.  It is one thing to write game software and make cool devices that cater to young people, but an intriguing, socially beneficial, and potentially immensely profitable opportunity is helping the ever growing population of elderly become more involved, productive members of society.  As an early baby boomer, I am thankful for the medical advances that are helping me live a longer, healthier life, but I look just as forward to the new tools that technology can provide to help my “golden years” productive ones as well.

Tuesday, February 5, 2013

Market Efficiency and Individual Investors

            There is an old joke about two hikers who come across a bear.  One turns to run and the other says, “It’s no use, people can’t outrun bears.”  To which the first replies, “I don’t have to outrun the bear.  I just have to outrun you.”  This story has an application to investing and the concept of market efficiency.

To review, an efficient market is one in which market prices reflect all publicly available information.  In such a market, it makes no sense for an investor, particularly an individual investor, to try to beat the market by finding under- or over-valued securities because there aren’t any.  It should come as no surprise, therefore, that advocates of active investment management are always on the lookout for evidence of market inefficiency.  Quite frankly, there is a good deal of such evidence in published academic research.  There are even papers that prove, from a theoretical perspective, that stock markets can never be fully efficient.  So, does that evidence imply that investors ought to try to beat the market?

The joke about the bear serves as a warning.  To make active trading a folly for an individual investor, it is not necessary that the market be fully efficient, it is just necessary that the market processes information more efficiently than the individual who is trying to beat it.  (Remember that investors trying to beat the market can also run up significant transaction costs.)  And that is very likely to be the case.  The market may experience bouts of irrationality and over-reaction, but individuals are far more likely to fall prey to such foibles.  In short, the market may not be perfect, but it is almost certainly more perfect than you are.