Saturday, October 17, 2009

Personal Experiences - the next big financial market?

"Everything that can be invented has been invented." - Charles H. Duell, Director of U.S. Patent Office, 1899

I am sure Mr Duell would disagree, 110 years later.

Throughout history, as needs and technology have evolved, financial markets have also developed seeking to derive returns from any asset possible. This has been particularly true in the last two centuries.

Futures developed in the 19th century as a means of hedging against price fluctuations in agricultural commodities.

From there, the evolution of financial markets has borne a fanciful resemblance to Maslow's Hierachy of Needs.

They have become more and more ideated and less tangible.

Commodities, equities, bonds, art, water, power, carbon credits all are traded.

One of the latest things in this list is death. (Read this: )

Another brilliant financial innovation has been options. Essentially, people had actually figured out a way to price probabilistic rights!

There are assets which generate intrinsic returns. A business is one of them. A business adds value to a certain set of raw materials, profitably sells them to customers and hence grows and generates returns.

Then there are assets which generate returns because the price which people are willing to pay for them increases. One example would be Art.

With the advent of the Internet, a very powerful set of tools have developed which enable people to construct and disseminate personal experiences. Its a second Renaissance of sorts with the available media of information dissemination being directed towards individuals and their experiences. Blogging, Youtube, Facebook, Orkut, Gmail, Twitter, so on and so forth.

Marketing has and will continue to become person centric. In that sense, the set of personal experiences as encapsulated by a person will become an asset that yields returns. It will be possible, before long, to monetize personal experiences.

Which begets the question in my mind - how long will it be before the army of financial engineers and quantitative wizards turn their attention towards developing a financial market out of personal experiences?

How long will it be before they figure out how to price how much personal experiences would be worth in the future?

If this sounds ridiculous, read on.

I base the idea on two key things.

The first is the possibility of standardization and packaging of personal experiences from a financial view point, in terms of risks and returns.

The second is the set of tools which will enable it to be done.

Anyone who has read about the subprime crisis of 2007 and the subsequent 2008 bust would have read the term Mortgage-Backed Securities etc

Without getting too technical, I would say that MBSs refer to investment assets in which the returns were obtained from the people who had availed of loans to buy homes with the homes themseleves as collateral. Several thousand mortgages could be packaged together and sold to investors who had money to put in.

This was a paradigm shift in financial markets. As beautifully described by Michael Lewis in "Liar's Poker", for the first time the asset side of the balance sheet could be tapped into. As long as the home loans could be standardized and packaged, they could be sold to investors.

I am confident that mathematics will evolve to the point where in it is able to price personal experiences in such a collective pool and turn it into an investment.

Coming to the tools which will enables this to happen.

The Internet is the bane of Classical Economists. This is because of two features that it has: One is what is called " positive network externality". That is, higher the number of people that use the Internet, the more is the benefit that each user can derive.

The second, more importantly, is Zero Marginal Cost (not for the Internet in itself, but for products or services that are sold and disseminated through the Internet). Zero marginal cost means that the cost for producing an additional unit of the product or service is zero.

This causes problems because classical economics state that in perfect competition, demand and supply match off at the point where Marginal Cost equals the Market Price.

This can obviously not work for Internet based Products / Services, since Market Price will not be zero.

The Market Price, then, must be the price that people are willing to pay.

And people are willing to pay for personal experiences.

Naturally, WHAT they are willing to pay will change over time. This is where financial markets will step in.

I must emphasize - personal experiences have been marketed and sold since times immemorial. Paintings, books, music, photos, blogs, journals, newspapers - all of these capture them.

My point is that financial innovation will ultimately end up intersecting with technology to create the next big punter's paradise in this field.

Google, that mecca of innovation, for example, has come out with Wave (no I do not have an invite)

To quote Google:

"Google Wave is an online tool for real-time communication and collaboration. A wave can be both a conversation and a document where people can discuss and work together..."

How long will it be before some financial whizkid figures out how to package a set of Google Waves and sell it to a Japanese pension fund which thinks this set of experiences may be worth more in the future?

Not too long, is my guess...


  1. An ethereal idea...if ever there was. I wonder if ideas can be patented? If yes, then you ought to apply for one pronto. Ideas can be stolen in a jiffy, see?

    Would really like to know...what inspires you? Or for that matter, any genius?

  2. I am not sure whether ideas can be patented, but this is just a train of thought, which may or may not get realised. It is a pleasure if people accept it as possible.

    I don't know what inspires geniuses, what inspires (and give me pleasure) is thinking for the sake of thinking!

  3. Here's a thought for good writers like you...

    "Put it before them briefly so they will read it, clearly so they will appreciate it, picturesquely so they will remember it and, above all, accurately so they will be guided by its light."