Raghavendra Rau – Disruption with Technology
Prof Rau started his seminar by asking the question, “What is the best way to coordinate an activity or transaction? Market or Firm”. He said that markets are where someone is hired to do a job and once the job is done, the transaction is complete. However, in Firms, the relationship persists over a period of time. The choice between market and firm depends on multiple dimensions. He pointed out that one key difference between the two is voluntary exchange. In the case of the market, there is no compulsion to buy or sell.
Everything is driven through prices. It is a coordinating mechanism. In firms, participation is partly through command.He surmised that there are three problems to handle when we deal with transactions. They are Imperfect information in which one does not have enough information to transact. The next one is Asymmetric information in which one party has less information than the person on the other end. The last one being behavioural biases where you do not know how to use the available information.
He added that imperfect information and asymmetric information related issues can be solved by gathering more information. For instance, organizations listed in stock market submit mandatory quarterly financial reports to the regulators and public. Other industries such as pharmaceutical and healthcare provide additional information. However, too much information can lead to behavioral biases. Prof. Rau mentioned that economists believe that humans always make rational decisions. But this has been proven incorrect as seen in the case of the bottomless bowl. This can also lead to too many choices.
In continuation, he pointed out that techniques such as of Artificial Intelligence, Automation and Blockchain help solve the problems of transactions. Artificial Intelligence is assisting in finding patterns in data. Automation is used for several jobs such as general accounting. But risk management, auditing, business development and external relationship are difficult to automate, even though robo-advisers are being used these days. Here, the advanced matching algorithms find optimal transactional partners.
His fascination towards Fintech brought us to the solutions to the dealing with problems in transactions. Some of the solutions that were pointed to were:
- Standard Language/Data Ontology: Sorting, labelling all the data in specific categories helps in managing the data better and cataloguing. It could be on a specialized platform where there is an obvious ontology about the product. It could also be in the general market place where it is a concept like a somersault on YouTube. Improving methods of data ontology is helping in tracking valuable data from a huge stream of data and categorizing into different classes or directions.
- Finding a match on distinct categories/preference based on their previous activities. This is applied on several platforms from Airbnb to Netflix.
He quoted the example of Tala, a fintech company from Kenya that gives loans to people using the same principle. With the user’s permission, the app taps into the data of phone usage and behaviour within the app to provide unsecured credit to customers within 3 seconds. Data considered for granting loan are- checking how long the phone call lasts. Very interestingly, if the call lasts for more than 4 minutes and if the user communicates with more than 58 contacts every single day, the user has a wider network to depend on and hence a better borrower. If the contact list has both first and last name then, the user is 16 times more reliable in paying back the loan.
In conclusion, in this talk Prof Rau said that technology is changing the way we coordinate. Boundaries between Market and firm are moving. New Ontologies to classify data are being formed. New models to identify new preferences are being made and techniques such as Automation, AI and Blockchain play a big role in eliminating behavioural biases by predicting preferences from human behaviour.