Latest / Masters in Business / Campbell Harvey on the Future of Finance (Podcast)

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Campbell Harvey on the Future of Finance (Podcast) · Masters in Business

• 0:00
  Speaker 1: M. This is Mesters in Business with Very Renaults on
• 0:06
  Speaker 1: Bluebird Radio this weekend. On the podcast, I have a
• 0:10
  Speaker 1: special guest. His name is Campbell Harvey and he is
• 0:14
  Speaker 1: a professor at Duke University School of Business. He's also
• 0:18
  Speaker 1: the author of a fascinating book co author really of
• 0:22
  Speaker 1: a fascinating book called Defy and the Future of Finance.
• 0:26
  Speaker 1: And if you are at all crypto curious, if you're
• 0:29
  Speaker 1: wondering why bitcoin is near sixty dollars, why n f
• 0:33
  Speaker 1: t s have gone crazy, and while lots and lots
• 0:37
  Speaker 1: of banks and financial institutions have been embracing crypto, well,
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  Speaker 1: then you're going to find this conversation absolutely fascinating. Um.
• 0:49
  Speaker 1: Campbell Harvey is a traditional finance professor, or at least
• 0:53
  Speaker 1: that's how he presents to the outside world, studying behavioral finance, uh,
• 0:58
  Speaker 1: the yield curve and recessions and separating luck and skill
• 1:02
  Speaker 1: and investment decisions. All this stuff sounds pretty run of
• 1:06
  Speaker 1: the mill, middle of the road sort of stuff. But
• 1:09
  Speaker 1: then back in he was crypto curious and started doing
• 1:14
  Speaker 1: some research and ended up doing a presentation to one
• 1:18
  Speaker 1: of his classes, and really it had a massive impact
• 1:23
  Speaker 1: on him because you know, at the end of the period,
• 1:26
  Speaker 1: he expects the whole class to get up and leave,
• 1:28
  Speaker 1: and you know, spoiler alert, nobody leaves, and half the
• 1:33
  Speaker 1: class rushes the podium to ask him a bunch of
• 1:36
  Speaker 1: questions about this, and he, you know, really comes to recognize, Oh,
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  Speaker 1: so this is striking a chord with students. There's something
• 1:46
  Speaker 1: here I need to spend some more time and effort
• 1:49
  Speaker 1: going into it. Um That part of that part of
• 1:52
  Speaker 1: the interview was really fascinating. He tells about what he
• 1:56
  Speaker 1: does with crypto, where he was giving bitcoin away to
• 2:00
  Speaker 1: each of his students um so that they had to
• 2:02
  Speaker 1: set up a coin base account and you know, make
• 2:05
  Speaker 1: a promise to return the coin at the end of
• 2:08
  Speaker 1: the term and what ends up happening is pretty pretty
• 2:12
  Speaker 1: hilarious and fascinating. Anyway, if if you're remotely interested in
• 2:16
  Speaker 1: anything from the world of defy, from crypto, n f T,
• 2:20
  Speaker 1: stable coins. God, I could have spoken to him for
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  Speaker 1: another three hours. I kept this fairly um accessible. I
• 2:28
  Speaker 1: had lots and lots of deeper, wonkier questions, but as
• 2:32
  Speaker 1: we were going on through this, it really became clear
• 2:34
  Speaker 1: to me, Oh, this is a great primer for people
• 2:37
  Speaker 1: who really wanna put a toe in the water of crypto.
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  Speaker 1: I found it fascinating and I think you will also so,
• 2:45
  Speaker 1: with no further ado, my conversation with Duke University's few
• 2:51
  Speaker 1: Quass School of Business Professor Campbell Harvey. This is Mesters
• 2:57
  Speaker 1: in Business with Very Results on Bloomberg Radio. My extra
• 3:03
  Speaker 1: special guest this week is cam Harvey. He is a
• 3:06
  Speaker 1: professor at Duke University's Fuquas School of Business. He's best
• 3:11
  Speaker 1: known for his work on yield curve inversion and recessions,
• 3:15
  Speaker 1: as well as the thorny problem of separating luck from
• 3:19
  Speaker 1: skill in investing. He is a research associate at the
• 3:24
  Speaker 1: National Bureau of Economic Research, as well as a partner
• 3:27
  Speaker 1: and see in your Advisor at Research Affiliates. He is
• 3:31
  Speaker 1: the author of a brand new book titled Defy and
• 3:35
  Speaker 1: the Future of Finance. Campbell Harvey, Welcome to Bloomberg. It's
• 3:40
  Speaker 1: great to be on the show. It's great having you.
• 3:42
  Speaker 1: So you're a pretty traditional finance guy, Duke n b R.
• 3:48
  Speaker 1: How did you get interested in Defy? When did this
• 3:50
  Speaker 1: start and what prompted it. I'm not too sure. I'm
• 3:55
  Speaker 1: a traditional of finance guy. Uh. Indeed, uh five years
• 4:00
  Speaker 1: ago I announced that half of the empirical research and
• 4:05
  Speaker 1: finance was likely false. So I don't think I'm traditional
• 4:09
  Speaker 1: in any way, but I totally agree that decentralized finance
• 4:15
  Speaker 1: seems far away from inverted deal curves and luck versus
• 4:20
  Speaker 1: skill and back testing and things like that. So let
• 4:23
  Speaker 1: me let me tell you the story about how I
• 4:26
  Speaker 1: got involved in this space. And I've been involved in
• 4:29
  Speaker 1: this space quite a while. I was on a seven
• 4:32
  Speaker 1: year teaching hiatus because I was editing the Journal of
• 4:37
  Speaker 1: Finance and it was a full time job. When I
• 4:39
  Speaker 1: came back to my asset management course after seven years,
• 4:44
  Speaker 1: I decided to scrap the syllabus and and basically start over.
• 4:49
  Speaker 1: But certain topics I had to include, like four X
• 4:55
  Speaker 1: and I wanted to do the leading edge stuff, and
• 4:59
  Speaker 1: I thought, well, there's this new thing I've heard of
• 5:02
  Speaker 1: called bitcoin. And this isn't two thousand fourteen, so it
• 5:09
  Speaker 1: was below the radar screen definitely, but I'd heard about it,
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  Speaker 1: and I just said, well, if I'm doing the euro,
• 5:16
  Speaker 1: the pound, the dollar again, one not at a cryptocurrency.
• 5:22
  Speaker 1: So that's where I actually started. And I began to
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  Speaker 1: research this idea, and the more I researched it, the
• 5:30
  Speaker 1: more I realized that this was something really big, and
• 5:36
  Speaker 1: they spent a lot of time, and it was a single,
• 5:38
  Speaker 1: like two hour lecture in my course. Uh And I
• 5:42
  Speaker 1: spent more time preparing that lecture than the sum of
• 5:47
  Speaker 1: all of the other lectures in my course. And I
• 5:50
  Speaker 1: was nervous because, and as I management, I've researched this
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  Speaker 1: stuff for a long time. I've been very fortunate to
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  Speaker 1: have real relationships with some of the leading edge firms.
• 6:03
  Speaker 1: Uh So I kind of what goes on in the
• 6:05
  Speaker 1: practice also, and very comfortable fielding questions from my students.
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  Speaker 1: And of course I can't answer every single question, but
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  Speaker 1: I I'm confident I could find somebody very quickly that
• 6:17
  Speaker 1: could help me with the answer. But with this crypto stuff,
• 6:21
  Speaker 1: I'm in the position where I'm giving a lecture and
• 6:25
  Speaker 1: as possible, some of the students know far more than
• 6:29
  Speaker 1: I do. So I sought some help. Um and I
• 6:33
  Speaker 1: practiced the lecture all this stuff, and then I gave
• 6:37
  Speaker 1: this lecture, and again it was probably the most stressful
• 6:43
  Speaker 1: lecture I've ever given. Uh And and you know the
• 6:47
  Speaker 1: way it is at at college where rate at the
• 6:52
  Speaker 1: end of the lecture everybody gets up and leaves rate
• 6:56
  Speaker 1: on the minute that is supposed to end. Nobody the
• 7:00
  Speaker 1: stays late. They just get out of there. And you know,
• 7:05
  Speaker 1: I've taught for many years that's exactly what happens. But
• 7:09
  Speaker 1: after giving this talk on crypto, people were just sitting there,
• 7:14
  Speaker 1: and I thought, oh, well, maybe I ended the lecture
• 7:18
  Speaker 1: like a way before I should have. But I looked
• 7:21
  Speaker 1: at the clock and we were exactly at time, people
• 7:24
  Speaker 1: just sitting there, And I said, oh, I must have
• 7:28
  Speaker 1: really bombed this lecture. It was a disaster, I guess.
• 7:31
  Speaker 1: And and and I'm standing there shell shot because it
• 7:35
  Speaker 1: worked so hard and and for it to fail it
• 7:40
  Speaker 1: was very disappointing. But then students started to come to
• 7:43
  Speaker 1: the front to talk to me, and and they said,
• 7:46
  Speaker 1: but we are shell shocked, like this is a transformational
• 7:51
  Speaker 1: topic that and and I numbered them said this was
• 7:55
  Speaker 1: the most important lecture of their education, and that this
• 8:00
  Speaker 1: cannot be just one lecture. It needs to be a
• 8:04
  Speaker 1: broader learning experience and uh and and so it deserves
• 8:10
  Speaker 1: at least a full course. And that's where I started.
• 8:13
  Speaker 1: So um I developed the next year into a full course,
• 8:18
  Speaker 1: which was the first blockchain based course taught at a
• 8:23
  Speaker 1: leading school, and then I've just continued it and uh
• 8:27
  Speaker 1: and one thing with the space, uh is changing all
• 8:31
  Speaker 1: the time. So what I was teaching seven years ago
• 8:35
  Speaker 1: was much different than what I teach today. So let's
• 8:38
  Speaker 1: let's go back to that first lecture where where the
• 8:41
  Speaker 1: students were pretty um enthusiastic and and maybe even dumbfounded. First,
• 8:47
  Speaker 1: did anybody come to the podium and say, Hey, I
• 8:50
  Speaker 1: own a bunch of bitcoin and I don't know what
• 8:52
  Speaker 1: to do with it? And be were you buying bitcoin
• 8:55
  Speaker 1: all the way back in? So no student had any bitcoin? Um,
• 9:02
  Speaker 1: but I actually bought some, and I bought them I
• 9:07
  Speaker 1: think a three a coin. Uh And and this is
• 9:11
  Speaker 1: one of the greatest investment mistakes of my life, um,
• 9:15
  Speaker 1: I decided. I was on the phone with a reporter
• 9:20
  Speaker 1: from a leading media outlet who was covering crypto also,
• 9:25
  Speaker 1: and I asked him whether he owned any bitcoin, and
• 9:30
  Speaker 1: he said, well, just a small amount, because I'm worried
• 9:32
  Speaker 1: about conflict of interest. And I was thinking, made the
• 9:35
  Speaker 1: same thing. If I'm teaching it, I'll have a small amount.
• 9:39
  Speaker 1: And indeed, um, I was giving it out. So my student,
• 9:44
  Speaker 1: when what do you mean giving it out? Giving it
• 9:45
  Speaker 1: to students. Okay, yeah, so let me tell this story.
• 9:50
  Speaker 1: Uh an interest. Wait, so you're paying them to go
• 9:52
  Speaker 1: to school. What I did was to give ten dollars
• 9:57
  Speaker 1: words of bitcoin to everybody. Ended deal was the following Uh.
• 10:01
  Speaker 1: They had to set up an account and at that
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  Speaker 1: time it was the coin base. I would give ten
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  Speaker 1: dollars and then at the end of the course, um,
• 10:11
  Speaker 1: they would send it back to me, and then I
• 10:14
  Speaker 1: would donate it to the university. So that would donation
• 10:19
  Speaker 1: my annual donation to the university. So it was basically
• 10:22
  Speaker 1: just to get them set up with something in their wallet.
• 10:26
  Speaker 1: So I discovered this one complication and and that is
• 10:32
  Speaker 1: that once you give a crypto to somebody, there's no
• 10:36
  Speaker 1: way to enforce giving it back. So many of the
• 10:40
  Speaker 1: students didn't give that because it had Yeah you know
• 10:49
  Speaker 1: where I'm going, Like sometimes I get an odd email
• 10:53
  Speaker 1: or oh, um, I remember you gave me, uh whatever,
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  Speaker 1: it was like point one of a big coin um
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  Speaker 1: back in two thousand and fourteen, I forgot to give
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  Speaker 1: it back and yeah, here it is and it's you know,
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  Speaker 1: four thousand dollars so um. So basically what's happened is
• 11:15
  Speaker 1: a lot of students didn't give back, and uh, and
• 11:20
  Speaker 1: we're trying to remind them to do that because it's
• 11:24
  Speaker 1: a couple of hundred thousand dollars and and kind of
• 11:27
  Speaker 1: lost donations to the school. So it's not that they
• 11:31
  Speaker 1: didn't give it back because it had appreciated so much.
• 11:33
  Speaker 1: At the end of the semester, they just like, it's
• 11:36
  Speaker 1: ten dollars and who's who wants to bother and they
• 11:38
  Speaker 1: just got lazies. Is that what I'm hearing? Yeah, that's
• 11:41
  Speaker 1: what I think. So many of them just forgot about it.
• 11:45
  Speaker 1: But again, that ten dollars is massively appreciated. That's unbelievable.
• 11:52
  Speaker 1: So we're gonna talk in more detail about the book
• 11:56
  Speaker 1: Defy in the Future of Finance, but just of us
• 12:00
  Speaker 1: a broad overview. What's the basic premise And I get
• 12:03
  Speaker 1: the sense you're going to talk about how transformational this
• 12:08
  Speaker 1: technology is. Yeah, it's kind of interesting to me that
• 12:14
  Speaker 1: the financial system really isn't that much different today than
• 12:19
  Speaker 1: it was a hundred years ago, Like the the exception
• 12:22
  Speaker 1: is digitization, but the basic infrastructure is the same. And
• 12:29
  Speaker 1: I don't think that it's specific to finance. We kind
• 12:32
  Speaker 1: of know that technology will transform a number of businesses.
• 12:38
  Speaker 1: And right now, the way that we interact and finances
• 12:42
  Speaker 1: with um a brick and mortar intermediary. So you've got
• 12:48
  Speaker 1: a bank in the middle, you've got a broker in
• 12:51
  Speaker 1: the middle, and uh, that middle layer leads to transactions
• 12:58
  Speaker 1: that are more expensive. So so think of putting your
• 13:02
  Speaker 1: money in the savings account, that rate is maybe lower
• 13:07
  Speaker 1: uh than if you didn't have all of that middle layer, um,
• 13:11
  Speaker 1: the back office and all of this stuff. And the
• 13:14
  Speaker 1: same with the lending that the rates are are higher
• 13:19
  Speaker 1: and there's a spread that's effectively taken by the centralized player.
• 13:24
  Speaker 1: So what the centralized finances about is essentially returning to
• 13:31
  Speaker 1: where we began in market exchange. And that's barber and
• 13:37
  Speaker 1: it's peer one on one and yeah, and that's the key.
• 13:41
  Speaker 1: So you're you're dealing with your peer uh directly or
• 13:46
  Speaker 1: a portfolio peers and through an algorithm, and that's the key.
• 13:52
  Speaker 1: So the algorithm basically takes the place of the functioning
• 13:57
  Speaker 1: of a bank or a broke her And when you
• 14:01
  Speaker 1: do this, when you've just got an algorithm out there,
• 14:04
  Speaker 1: it makes things much more efficient. So without that middle layer, uh,
• 14:11
  Speaker 1: you're able to get this efficiency gain that's very important,
• 14:15
  Speaker 1: uh for the economy. So as many different aspects of this,
• 14:19
  Speaker 1: but the key idea is, let's deal with the algorithm directly.
• 14:24
  Speaker 1: And when we do that, it's going to reduce costs.
• 14:28
  Speaker 1: It's gonna make transactions uh much more transparent, secure, efficient,
• 14:33
  Speaker 1: all of these things. So so let me push back
• 14:37
  Speaker 1: a little bit. And and by the way, we'll talk
• 14:39
  Speaker 1: about a c H in a minute. We'll talk about
• 14:41
  Speaker 1: credit cards in a minute. But let me for a
• 14:43
  Speaker 1: moment take the other side of the argument that nothing's
• 14:47
  Speaker 1: changed in finance over a century. Today, I could trade
• 14:50
  Speaker 1: stocks effectively for free. I'm rebuilding a Tyhota FJ in
• 14:55
  Speaker 1: South America. I ship cash down using an app. It
• 15:00
  Speaker 1: costs me three dollars every time I want to send
• 15:02
  Speaker 1: three thousand dollars to South America. That used to be impossible.
• 15:05
  Speaker 1: I could get cash out of a machine seven. I
• 15:08
  Speaker 1: don't even have to go to the bank to deposit
• 15:10
  Speaker 1: a check. I take a photo with my phone and
• 15:13
  Speaker 1: and that's a deposit. And if we go to dinner
• 15:16
  Speaker 1: and we want to split the tab, I could venmo
• 15:18
  Speaker 1: whoever else is at dinner back and forth. It's like
• 15:21
  Speaker 1: so easy. I think about what technology lets me do
• 15:25
  Speaker 1: today versus I was in college when they first put
• 15:29
  Speaker 1: an a t M in the student union. It feels
• 15:33
  Speaker 1: to someone like me that the past forty years has
• 15:38
  Speaker 1: seen an endless array of incremental improvements in the financial system,
• 15:44
  Speaker 1: and then the Great Financial Crisis comes along and everybody
• 15:47
  Speaker 1: seems to lose their minds. Aren't we overstating it when
• 15:51
  Speaker 1: we say there's been no improvements in the world of finance. Well,
• 15:58
  Speaker 1: I did make an option with the digitization, but I
• 16:03
  Speaker 1: think there's been improvements digitization. Yeah. Look, you say, let
• 16:11
  Speaker 1: me go through your list that you can practice the
• 16:14
  Speaker 1: trade for free. So that is it is true that
• 16:20
  Speaker 1: transaction costs have a decreased. It is not true to
• 16:25
  Speaker 1: believe that if you trade on robin Hood you're trading
• 16:28
  Speaker 1: for free. It's just not the case. And then number two,
• 16:31
  Speaker 1: more importantly, for me to take ownership of a share
• 16:35
  Speaker 1: of stock, because the transfer the ownership that takes two days.
• 16:41
  Speaker 1: So even in this age of the Internet, in the
• 16:45
  Speaker 1: age of digitization, it takes two days to transfer the
• 16:49
  Speaker 1: ownership of let's say a hundred chairs of IBM. It's
• 16:54
  Speaker 1: just completely unsatisfactory, unrealistic and uh yet better in nineties,
• 17:01
  Speaker 1: it was like five days, um, and we've had a
• 17:06
  Speaker 1: change the three days and two days. But that's just
• 17:11
  Speaker 1: to me totally offside. So as for the cash apps, yeah,
• 17:16
  Speaker 1: there's many, uh, many things that have happened to make
• 17:21
  Speaker 1: it a little more efficient to actually do the transactions.
• 17:25
  Speaker 1: But uh, and I point this out in the book, UM,
• 17:30
  Speaker 1: the current wave of fintech largely uses the banking infrastructure
• 17:37
  Speaker 1: that exists today, the centralized banking infrastructure. And to make
• 17:41
  Speaker 1: the case in the book that look the traditional financial institutions,
• 17:46
  Speaker 1: they are being continuously disrupted and one wave of that
• 17:51
  Speaker 1: disruption is the fintech. So the neon banks, things like that, um,
• 17:57
  Speaker 1: that make it much more friendly for the user. But
• 18:01
  Speaker 1: given that they are using the same centralized infrastructure, in
• 18:07
  Speaker 1: my opinion, the current wave of fintech is fleeting. I
• 18:13
  Speaker 1: had a speaker in my course, UM, very prominent person
• 18:18
  Speaker 1: in the world of of DeFi who basically at the
• 18:23
  Speaker 1: end of his talk to my course, he said that
• 18:28
  Speaker 1: the current wave of fintech is like putting lipstick on
• 18:32
  Speaker 1: a pig. And if you think about it, what he's
• 18:36
  Speaker 1: saying is, yeah, it's an improvement, um, but you've got
• 18:42
  Speaker 1: the same constraints of that centralized infrastructure. And what DeFi
• 18:47
  Speaker 1: is doing is not doing an incremental improvement on the
• 18:53
  Speaker 1: current infrastructure, is actually building something that's fresh and new.
• 18:59
  Speaker 1: So I see looking forward that a fintech will definitely
• 19:05
  Speaker 1: disrupt the current financial system, but then eventually the centralized
• 19:12
  Speaker 1: fintech will be disrupted by decentralized algorithms. So so let's
• 19:18
  Speaker 1: talk about what I think is the most expansive part
• 19:22
  Speaker 1: of centralized finance. Personally, I could care less if a
• 19:26
  Speaker 1: h takes two days to clear stock trade. It doesn't
• 19:29
  Speaker 1: make any difference to me. I could buy and sell
• 19:31
  Speaker 1: that stock a thousand times before the first trade settles
• 19:35
  Speaker 1: and it doesn't cost me anything. But in the book
• 19:38
  Speaker 1: you use the specific example of credit card transactions and
• 19:43
  Speaker 1: that a hundred years ago there was about a three
• 19:46
  Speaker 1: percent cost to send money by wire, and today using
• 19:50
  Speaker 1: credit cards, a century later, it's still a three percent
• 19:54
  Speaker 1: credit card fig So why does that exist? Why hasn't
• 19:59
  Speaker 1: it been competed down yet? And what will DEFY do
• 20:04
  Speaker 1: about that three big which is the bane of retailers everywhere? Yeah,
• 20:12
  Speaker 1: it's it's remarkable. Uh, the example I use on my
• 20:16
  Speaker 1: book is not one hundred years. It's a hundred and
• 20:21
  Speaker 1: fifty years. And I show this Western Union wire transfer
• 20:26
  Speaker 1: from seventy three and it's for three hundred dollars. And
• 20:32
  Speaker 1: then there's another line for the fees, and the fees
• 20:35
  Speaker 1: are nine dollars. So it's like and I tell my
• 20:40
  Speaker 1: students that basically nothing has changed in this particular example,
• 20:46
  Speaker 1: nothing has changed. Uh, it's a three percent fee. So
• 20:51
  Speaker 1: the reason that the fees for credit cards are so high, Um,
• 20:58
  Speaker 1: there's many reasons. The leading reasons are the lack of security.
• 21:04
  Speaker 1: So if somebody steals your credit card, then the credit
• 21:08
  Speaker 1: card company is good for it, right, so you're not
• 21:11
  Speaker 1: gonna lose anything that cover um and all the chargebacks.
• 21:16
  Speaker 1: So uh that that's expensive. The security mechanisms are expensive,
• 21:22
  Speaker 1: and then of course just the brick and mortar back office,
• 21:27
  Speaker 1: all the systems, all of that is expensive. So um,
• 21:33
  Speaker 1: you put that together, it's three percent. We have had,
• 21:37
  Speaker 1: again with fintech, some some competition here. Uh that's driven
• 21:42
  Speaker 1: that three percent lower because credit cards offer cash back
• 21:48
  Speaker 1: and all of these other deals, and we've had innovations
• 21:52
  Speaker 1: like let's say Apple Pay, which is a great deal
• 21:56
  Speaker 1: for the credit card company. So instead of getting three percent,
• 22:00
  Speaker 1: they get two point five, and Apple gets point five.
• 22:03
  Speaker 1: But it's massively more secure really when you use that.
• 22:08
  Speaker 1: Oh yeah, because to pay with Apple Pay, um, you
• 22:11
  Speaker 1: do the facial recognition. If you're just swiping a credit card, um,
• 22:16
  Speaker 1: there's no pin, right, So in the United States we
• 22:20
  Speaker 1: don't use the pin for the credit cards. In Europe
• 22:23
  Speaker 1: a different story, but it's really much more secure. So
• 22:28
  Speaker 1: we see the fees being bid down a little bit,
• 22:32
  Speaker 1: but that that's the reason. So so let me let's
• 22:35
  Speaker 1: stay with Apple Pay for a second, because it's such
• 22:38
  Speaker 1: an interesting um example. As a user, I have no
• 22:44
  Speaker 1: insensive really to use Apple Pay over a credit card,
• 22:48
  Speaker 1: but it would It sounds like the credit card companies
• 22:51
  Speaker 1: have a massive incentive to have me use Apple Pay.
• 22:55
  Speaker 1: Why hasn't there or a similar biometric um security system.
• 23:01
  Speaker 1: Why hasn't there been a bigger push in that direction
• 23:05
  Speaker 1: by the credit card companies. So at the beginning, it
• 23:12
  Speaker 1: wasn't clear that they really understood. So it seems like, well,
• 23:16
  Speaker 1: instead again three we got to take a haircut to
• 23:19
  Speaker 1: two point five. And and maybe there was an expectation
• 23:24
  Speaker 1: that the regular credit card would have better biometrics or
• 23:29
  Speaker 1: or a minimum a pin. But given that we don't
• 23:32
  Speaker 1: have that, uh, it is way more secure to use
• 23:36
  Speaker 1: something like Apple Pay, where you were to use a
• 23:39
  Speaker 1: pin or use the facial recognition. So it's much more
• 23:43
  Speaker 1: difficult to to use like Apple pay, uh if you're
• 23:52
  Speaker 1: if you've stolen somebody's phone for example. So the security
• 23:58
  Speaker 1: cost um that's attributed to those that use the credit
• 24:03
  Speaker 1: card that Apple pay is way lower. So we have
• 24:06
  Speaker 1: seen a lot of growth. This is not my area
• 24:09
  Speaker 1: of expertise, uh, like credit card uh, you know, mechanics
• 24:14
  Speaker 1: and and the amount of sales that's Apple Pay or
• 24:17
  Speaker 1: uh Android versus just a regular swipe. But but it
• 24:24
  Speaker 1: is much more secure and and that's a major cost.
• 24:27
  Speaker 1: The insecurity is a major issue with not just credit
• 24:33
  Speaker 1: cards but banking in general. We were discussing what makes
• 24:38
  Speaker 1: decentralization so desirable um and so valuable in so many cases,
• 24:44
  Speaker 1: But the counter argument is centralization allows us to put
• 24:49
  Speaker 1: legal protections into place and security and anti money laundering.
• 24:54
  Speaker 1: How do we manage those around decentralization? What what's the advantage?
• 24:59
  Speaker 1: So it is a tradeoff, and I think that people
• 25:06
  Speaker 1: in decentralized finance understand uh these tradeoffs and there's nothing
• 25:13
  Speaker 1: that's perfect. There's always going to be some risk. But
• 25:17
  Speaker 1: decentralization is again putting people together, so you deal peer
• 25:26
  Speaker 1: to peer without this thick middle layer, and there's some
• 25:30
  Speaker 1: advantage to doing that. Um, you're correct that centralization does
• 25:37
  Speaker 1: have some advantages. So one advantage is that you can
• 25:42
  Speaker 1: move very quickly, whereas a decentralized protocol, if there's a
• 25:48
  Speaker 1: change the necessary and that protocol, that's got to go
• 25:51
  Speaker 1: to a vote of of the users or the owners
• 25:55
  Speaker 1: of the governance, so that could take a longer period.
• 26:00
  Speaker 1: At a time, Uh, the throughput in terms of the
• 26:04
  Speaker 1: number of transactions per second much greater if you've just
• 26:07
  Speaker 1: got one centralized clearinghouse. So there there are trade offs here.
• 26:14
  Speaker 1: But with centralization, uh, these institutions can do what they want.
• 26:21
  Speaker 1: And we were talking in the previous segment about credit cards. Um,
• 26:28
  Speaker 1: well what about like a wire transfer? I did one
• 26:32
  Speaker 1: last week and I had to send um some euros
• 26:37
  Speaker 1: to Europe for uh, you know, for for some repair bill.
• 26:43
  Speaker 1: And UH my bank said, oh, well you're a good customer,
• 26:48
  Speaker 1: We're gonna wave the wire transfer fee. But then they
• 26:52
  Speaker 1: quoted me the rate and I said, well that rate
• 26:57
  Speaker 1: is two point five off the market and it's a sorry,
• 27:01
  Speaker 1: that's the best we can do. So to send the
• 27:04
  Speaker 1: wire transfer was like swiping a credit card, no difference.
• 27:09
  Speaker 1: And they think, you know, they're convincing the customer that, oh, well,
• 27:13
  Speaker 1: this is a favor that we're doing it. No, so
• 27:15
  Speaker 1: they have got control, they've got market power. So these
• 27:19
  Speaker 1: large financial institutions, it doesn't matter who I go to,
• 27:23
  Speaker 1: it's going to be the same thing where they're going
• 27:25
  Speaker 1: to quote two point five percent off the market rate
• 27:28
  Speaker 1: and and I gotta pay it. So it's very direct
• 27:33
  Speaker 1: and very large cost. So they've got the power to
• 27:37
  Speaker 1: actually do that. When you go peer to peer, it's
• 27:41
  Speaker 1: nothing like that at all. UM, you're just interacting with
• 27:45
  Speaker 1: your peer. Somebody is buying, somebody is selling, and and
• 27:48
  Speaker 1: we're done. There's no spread. So again, the advantage of
• 27:55
  Speaker 1: UH centralized is that we're familiar with it. UH. It
• 27:59
  Speaker 1: appears to work, it does work to some degree with
• 28:03
  Speaker 1: our system, but it imposes these costs, and these costs
• 28:09
  Speaker 1: lead to, in my opinion, UM, opportunities that are not
• 28:17
  Speaker 1: pursued that we really need to pursue. And if I
• 28:20
  Speaker 1: could give an example of debt, you're a small entrepreneur.
• 28:25
  Speaker 1: You've got a great idea, you think the return on
• 28:28
  Speaker 1: investment is going to be percent a year, and you
• 28:32
  Speaker 1: go to your bank and basically asked for a loan
• 28:37
  Speaker 1: to get this going, and the bank says, well, you're
• 28:42
  Speaker 1: too small. We prefer larger customers. So we prefer one
• 28:45
  Speaker 1: large customer to a hundred customers like you. Um, so
• 28:49
  Speaker 1: we're not going to do the loan, even though we
• 28:51
  Speaker 1: like the idea. But oh here, here's a credit card
• 28:56
  Speaker 1: and we've extended the credit limit on it, and you
• 29:00
  Speaker 1: can just borrow on your credit card, and we know
• 29:03
  Speaker 1: what those rates are, so the rate right, the project
• 29:11
  Speaker 1: isn't pursued. And when the project isn't pursued, you've got
• 29:15
  Speaker 1: like a high growth project that isn't pursued. That's exactly
• 29:19
  Speaker 1: what our economy needs. We're stuck in two real GDP
• 29:25
  Speaker 1: growth and given the size of the obligations that the
• 29:29
  Speaker 1: government has taken on UM, there are not many good options.
• 29:35
  Speaker 1: So you could inflate by increasing the money supply. You
• 29:40
  Speaker 1: could tax, and that's not great for growth, but the
• 29:44
  Speaker 1: best way out is to increase growth. And given the
• 29:49
  Speaker 1: situation that we're facing today where we've got so many
• 29:52
  Speaker 1: people under banked. So under banking is the example I
• 29:57
  Speaker 1: gave where you're not able to get that loan even
• 30:00
  Speaker 1: though you've got a good idea. Uh that that is
• 30:04
  Speaker 1: a drag on economic growth. So in my opinion, if
• 30:08
  Speaker 1: we take these frictions out or reduce the frictions and
• 30:13
  Speaker 1: allow people to be treated equally and the judgment is
• 30:18
  Speaker 1: basically on the quality of the idea rather than how
• 30:22
  Speaker 1: much you've got, then that opens up the possibility of
• 30:27
  Speaker 1: substantially increased growth in our economy, and we really need that.
• 30:34
  Speaker 1: So so let's stick with unbanked. And it's funny what
• 30:38
  Speaker 1: you mentioned about doing the wire to Europe. I mentioned
• 30:41
  Speaker 1: the app that I can send money around the world
• 30:44
  Speaker 1: and it costs me nothing, but I'm limited to sending
• 30:47
  Speaker 1: three thousand dollars that's the cap. I think it's every
• 30:52
  Speaker 1: seven days or every five days, or and I think
• 30:55
  Speaker 1: that is a nod to the money launching rules. Let's
• 30:58
  Speaker 1: talk about how much of the world is unbanked and
• 31:02
  Speaker 1: what DEFY can do to give them access. There was
• 31:06
  Speaker 1: a giant story on sixty Minutes a couple of years
• 31:09
  Speaker 1: ago about some person who set up a way to
• 31:12
  Speaker 1: move money around by phones. In Africa, there's you know,
• 31:16
  Speaker 1: a huge swath of people who are in bank there
• 31:19
  Speaker 1: and and that technology has been making improvements. Tell us
• 31:23
  Speaker 1: a little bit about UM how defy can help people
• 31:27
  Speaker 1: who don't have access to centralized banking. So in the
• 31:31
  Speaker 1: world today, there are one point seven billion people that
• 31:35
  Speaker 1: are unbanked, and there's probably we don't have the exact
• 31:40
  Speaker 1: number on this, Probably more are underbanked. And my example
• 31:45
  Speaker 1: that I gave you with the entrepreneur, that entrepreneur had
• 31:47
  Speaker 1: a personal bank account, but they they were not able
• 31:52
  Speaker 1: to get alone that and that again is under banking.
• 31:55
  Speaker 1: So it is a very large proportion. Uh. One example
• 32:01
  Speaker 1: I'd like to give UM, and a lot of the
• 32:04
  Speaker 1: action here is happening outside of the US. So think
• 32:09
  Speaker 1: of a country like Venezuela that's in a hyper inflation
• 32:14
  Speaker 1: a situation. If you're really well off in Venezuela, that
• 32:19
  Speaker 1: hyper inflation really doesn't impact you that much because you've
• 32:24
  Speaker 1: got a US dollar bank account in Miami or somewhere
• 32:29
  Speaker 1: outside of Venezuela. So who is hit the hardest. It's
• 32:35
  Speaker 1: the the average person uh in Venezuela where they don't
• 32:41
  Speaker 1: have the opportunity to set up that bank account outside
• 32:46
  Speaker 1: or the amount of money that they've got isn't that large.
• 32:50
  Speaker 1: So again the world that decentralized finance comes in very
• 32:55
  Speaker 1: conveniently here where if you've got a mobile phone, a smartphone,
• 33:01
  Speaker 1: then that serves as your bank and you can hold
• 33:07
  Speaker 1: UH token, and you might choose to hold token that
• 33:11
  Speaker 1: is backed by U S dollars and effectively you've done
• 33:16
  Speaker 1: the same thing that you've protected yourself against a hyper
• 33:21
  Speaker 1: inflation in that country. And effectively, what will happen if
• 33:26
  Speaker 1: that country continues on its course is that people will
• 33:31
  Speaker 1: essentially abandon the native currency. So why do I need it?
• 33:36
  Speaker 1: I can pay with a US dollar token and it
• 33:39
  Speaker 1: doesn't have to be U S dollars. It could be anything.
• 33:41
  Speaker 1: It could be a traditional currency like the dollar or
• 33:45
  Speaker 1: the euro, but it could be a token that's back
• 33:47
  Speaker 1: by gold. So as many possibilities here, and this is
• 33:51
  Speaker 1: just an example of how to effectively bank UH the
• 33:56
  Speaker 1: unbanked and the underbanked. So let's talk a little bit
• 34:01
  Speaker 1: about the terminology in the space. So much of it
• 34:04
  Speaker 1: is so confusing block chains and forking and protocols and
• 34:10
  Speaker 1: n f t s and d os. For someone who's
• 34:13
  Speaker 1: interested in learning more about this ecosystem, where do they
• 34:17
  Speaker 1: even begin? So it is confusing right now, and this
• 34:23
  Speaker 1: is a one of the reasons that I'm doing what
• 34:28
  Speaker 1: I'm doing, so I teach this. I think it's important
• 34:33
  Speaker 1: for the future. But it's very confusing, And initially it
• 34:37
  Speaker 1: was even more confusing because very little material other than
• 34:41
  Speaker 1: some computer scientists writing about various protocols. Today there's a
• 34:48
  Speaker 1: huge amount of information on the internet about this, but
• 34:51
  Speaker 1: you need to be very careful because some of the
• 34:54
  Speaker 1: information is basically selling our product. You need to go
• 34:59
  Speaker 1: somewhere are that's kind of highly rated. I know. I'm
• 35:04
  Speaker 1: working on UM a fourth course sequence UH for corse
• 35:10
  Speaker 1: Era that takes UM takes the viewer or the student
• 35:17
  Speaker 1: through four different stages of understanding decentralized finance from the infrastructure,
• 35:24
  Speaker 1: the primitives, and then a deep dive on some of
• 35:27
  Speaker 1: the key protocols and decentralized finance and go through the
• 35:31
  Speaker 1: mechanics of those, and then the fourth courses about the
• 35:35
  Speaker 1: risks and opportunities in the space. So it is difficult,
• 35:39
  Speaker 1: and I kind of um come to the realization that well,
• 35:45
  Speaker 1: I might have a couple of hundred students at Duke University. Uh,
• 35:50
  Speaker 1: I want to have a broader impact, so also putting
• 35:54
  Speaker 1: this stuff up um for everybody to learn from. Let's
• 36:00
  Speaker 1: walk professor a little bit about your new book, Defy
• 36:02
  Speaker 1: in the Future of Finance. Give us an overview of
• 36:07
  Speaker 1: the basic premise. What will readers get from this book?
• 36:12
  Speaker 1: So the book is written for the millions of people
• 36:17
  Speaker 1: that either work in the field of finance or are
• 36:21
  Speaker 1: interested in that field. And they've heard of crypto, maybe
• 36:28
  Speaker 1: they own UH some crypto, maybe they don't, but they
• 36:33
  Speaker 1: want to learn more. And indeed, the motivation for actually
• 36:39
  Speaker 1: reading this book is something that I tell my students
• 36:44
  Speaker 1: at the end of my crypto course, And basically I
• 36:49
  Speaker 1: say to them that I want them to be disrupt ors,
• 36:56
  Speaker 1: not disrupt ese. And this is a highly disruptive technology.
• 37:03
  Speaker 1: It will change finance as we know it. And and
• 37:09
  Speaker 1: I thought it was important to take that message outside
• 37:14
  Speaker 1: the confines of a single university and put a book
• 37:19
  Speaker 1: together that is accessible to anyone. The language is somewhat
• 37:26
  Speaker 1: different than the language of traditional finance, but but everybody
• 37:32
  Speaker 1: going through the book can figure out the linkages between
• 37:37
  Speaker 1: some of the things that I talked about and UH
• 37:41
  Speaker 1: and in traditional finance and and see the advantages. And
• 37:45
  Speaker 1: of course it's also crucial with any new technology for
• 37:52
  Speaker 1: the reader to be fully versed on the risks. Uh.
• 37:57
  Speaker 1: This is definitely not a risk free as a situation.
• 38:00
  Speaker 1: This is disruptive, there's going to be many ups and downs.
• 38:05
  Speaker 1: But it's important to go in with your eyes wide open,
• 38:09
  Speaker 1: recognizing the sort of risks that you face. But this
• 38:13
  Speaker 1: is basically my way of trying to explain what's going on.
• 38:21
  Speaker 1: And when you're early in on the technology, it is
• 38:26
  Speaker 1: difficult to see what's really going on. And people in
• 38:31
  Speaker 1: the media often see bitcoin or doge coin and things
• 38:38
  Speaker 1: like that. It's all about the price of those two tokens.
• 38:42
  Speaker 1: And and decentralized finance has very little to do with bitcoin.
• 38:47
  Speaker 1: So let's focus on decentralized finance. In the book, you
• 38:51
  Speaker 1: talk about the five various flaws of traditional centralized finance.
• 38:57
  Speaker 1: What do you think define most successfully attacks UM in
• 39:02
  Speaker 1: terms of traditional centralized finance. Well, there are five things
• 39:08
  Speaker 1: that I mentioned in the book UM Centralized control, so basically,
• 39:13
  Speaker 1: you're at the mercy of your bank because they are
• 39:20
  Speaker 1: holding your funds uh. And and there's various other aspects
• 39:25
  Speaker 1: whereas decentralized, you are in total control. You own the bank. Effectively,
• 39:31
  Speaker 1: the bank is in your pocket and you can do
• 39:34
  Speaker 1: what you want. UH. Limited access we've already talked about
• 39:38
  Speaker 1: where this is a technology of financial democracy. Doesn't matter
• 39:43
  Speaker 1: who you are, you're treated equally as a peer. There's
• 39:47
  Speaker 1: no retail customer, broker, banker, uh sort of relationship. Everybody
• 39:53
  Speaker 1: is the same. It might be a banker, but that
• 39:55
  Speaker 1: bankers appear. It might be a retail customer, you're a peer. Uh.
• 40:00
  Speaker 1: Inefficiency we've talked about also with this two point five
• 40:03
  Speaker 1: or three percent all over the place, a ridiculous uh,
• 40:08
  Speaker 1: you know, lending rates on credit cards. Uh. There's definite
• 40:12
  Speaker 1: progress that decentralized finance makes. What we haven't talked about
• 40:17
  Speaker 1: is lack of interoperability as a problem in our current system,
• 40:22
  Speaker 1: where for me to transfer some funds to my broker, Uh,
• 40:28
  Speaker 1: that could take two or three days from my bank
• 40:30
  Speaker 1: to my broker. Uh. So and that delay doesn't make
• 40:35
  Speaker 1: any sense in the age of the internet and dig
• 40:40
  Speaker 1: a bit, uh, you know broadband. So Uh. With the
• 40:45
  Speaker 1: centralized finance, everything is linked together and it's seamless. Uh.
• 40:49
  Speaker 1: In terms of the transfers are are pretty well immediate.
• 40:54
  Speaker 1: And number five issue is uh opacity that you're dealing
• 41:00
  Speaker 1: with the bank. You don't really know UM the health
• 41:04
  Speaker 1: of the bank. You're relying upon the government the f
• 41:07
  Speaker 1: d i C to basically ensure you, but there's limits
• 41:12
  Speaker 1: to that insurance. And UH, the f d i C
• 41:16
  Speaker 1: and the regulators have a checkered record of detecting problems
• 41:20
  Speaker 1: in advance, whereas in decentralized finance, everything is open, so
• 41:27
  Speaker 1: you can see the balances of the people doing transactions,
• 41:31
  Speaker 1: you can see the code that is the algorithm that
• 41:36
  Speaker 1: you're trading with, you can see the liquidity. It is
• 41:40
  Speaker 1: completely transparent. So these five problems I think decentralized UH
• 41:47
  Speaker 1: finance deal with, and probably if you're asking me to
• 41:50
  Speaker 1: pick one, I would pick the inefficiency that because of
• 41:55
  Speaker 1: the thick layer of middle people in centralized finance, UH,
• 42:01
  Speaker 1: the probably the primary advantage is to get rid of that,
• 42:05
  Speaker 1: and when you're trading with an algorithm, it's much more efficient.
• 42:08
  Speaker 1: That's really interesting. I'm quite intrigued by the concept of
• 42:13
  Speaker 1: smart contracts. Let's discuss that a bit tell us what
• 42:17
  Speaker 1: smart contracts are and how they can be used. So
• 42:21
  Speaker 1: this is one of the main differences between Bitcoin and Ethereum.
• 42:26
  Speaker 1: So Bitcoin you can just transfer funds from one person
• 42:33
  Speaker 1: to another, whereas in the Theoryum there's another possibility. Uh,
• 42:39
  Speaker 1: in the theorem you can actually have an algorithm run
• 42:44
  Speaker 1: in the Ethereum blockchain. So the Theorium blockchain is more
• 42:48
  Speaker 1: like a computing platform, whereas the Bitcoin platform is just
• 42:53
  Speaker 1: purely for transactions. So in the Theoryum, you can actually
• 42:59
  Speaker 1: send funds, not just to another person, which of course
• 43:04
  Speaker 1: you can, but you can send them to an algorithm.
• 43:08
  Speaker 1: And that algorithm might actually uh be what's known as
• 43:13
  Speaker 1: a decentralized exchange or our decks uh the x and
• 43:18
  Speaker 1: that allows me to trade let's say, one token for
• 43:24
  Speaker 1: another token within that algorithm. So I send one token
• 43:28
  Speaker 1: to the algorithm, and the algorithm sends me another token.
• 43:32
  Speaker 1: It's a beautiful idea, and it's uh and it's remarkable
• 43:38
  Speaker 1: that the algorithm doesn't care who you are, how much
• 43:42
  Speaker 1: you're actually trading, and it doesn't care if you're a
• 43:45
  Speaker 1: buyer or a seller. In in addition, it is running.
• 43:51
  Speaker 1: So this is a very significant idea and uh and
• 43:55
  Speaker 1: and will be definitely disruptive. I'm kind of intrigued by
• 44:01
  Speaker 1: the concept of smart tickets for live events that that
• 44:06
  Speaker 1: really moves a lot of the control over who purchases,
• 44:10
  Speaker 1: who prices it, how much it gets marked up back
• 44:14
  Speaker 1: to the artist. Can can defy eventually create a world
• 44:19
  Speaker 1: where if Taylor Swift wants to sell tickets first to
• 44:24
  Speaker 1: her registered fans and allow them to resell it but
• 44:29
  Speaker 1: only up to a fixed price, uh, and they get
• 44:32
  Speaker 1: to split the profit between the the fan and the artist.
• 44:38
  Speaker 1: Are those sort of things feasible with with defy or
• 44:42
  Speaker 1: or are some of these really kind of futuristic pipe dreams? No?
• 44:47
  Speaker 1: And actually we talked about ticketing in my course, so
• 44:52
  Speaker 1: this is a broader application. So think of watchain technology
• 44:58
  Speaker 1: as a technology that will disrupt many areas of business
• 45:03
  Speaker 1: and that uh, the low hanging fruit is finance, but
• 45:10
  Speaker 1: we've also seen a lot of progress and other dimensions
• 45:13
  Speaker 1: like supply chain and things like that. And the supply
• 45:17
  Speaker 1: chain example is that you're shopping at your grocery store
• 45:22
  Speaker 1: because they had to let us with the q R
• 45:24
  Speaker 1: on it. You scan it. You know where that lettuce
• 45:27
  Speaker 1: was picked, the day it was picked, every whether the
• 45:31
  Speaker 1: farm is organic, every single hop on the supply chain,
• 45:34
  Speaker 1: and how long it's been on the shelf at the
• 45:38
  Speaker 1: grocery store. So that's what blockchain can do. And ticketing
• 45:42
  Speaker 1: is a great example. It's very similar. The dynamics are
• 45:45
  Speaker 1: similar that uh, you know, firms like Ticketmaster and stub
• 45:49
  Speaker 1: Hub they take of the ticket. Yeah, so it's very
• 45:56
  Speaker 1: little leftover for the artist. And there's something else that
• 46:02
  Speaker 1: happens that is really important to understand. It's not just
• 46:09
  Speaker 1: it's that the customer is dealing with Ticketmaster, they're not
• 46:14
  Speaker 1: dealing with the artist, So there is a separation. There's
• 46:19
  Speaker 1: no relationship between the concertgoer and the artist, just like
• 46:25
  Speaker 1: Amazon does with retail. So you buy something off Amazon,
• 46:29
  Speaker 1: you deal with Amazon, and there's no way for the
• 46:33
  Speaker 1: actual person selling the good to connect with the customer.
• 46:37
  Speaker 1: They only deal with Amazon. So you break that connection
• 46:41
  Speaker 1: and it's very very costly. Uh, particularly in the arts.
• 46:45
  Speaker 1: You can imagine a different system using blockchain technology. And
• 46:49
  Speaker 1: there are companies that actually do this. And the company
• 46:52
  Speaker 1: that I like um is called True Tickets, and I
• 46:57
  Speaker 1: believe they're sponsored by IBM right now, but they're offering
• 47:00
  Speaker 1: a solution where, uh, where you actually do have this
• 47:05
  Speaker 1: direct connection between the artist and and the just basically
• 47:11
  Speaker 1: the artist and the concert goer, and the synergies are
• 47:15
  Speaker 1: just remarkable that there could be a song that is
• 47:19
  Speaker 1: done outside of an album that's made available to the
• 47:23
  Speaker 1: people that are connected to the artist. There could be
• 47:26
  Speaker 1: information about the next tour, all of this stuff. There's
• 47:29
  Speaker 1: a direct connection with the artist, and that's what we
• 47:33
  Speaker 1: really need. Of course, you know that, uh in the
• 47:36
  Speaker 1: music industry, Uh, it's notorious for uh so little goes
• 47:43
  Speaker 1: to the artists. Really the only thing that's profitable is
• 47:47
  Speaker 1: the concert. And even the concert uh, the haircut is
• 47:51
  Speaker 1: is enormous. So there's so many layers of middle people.
• 47:55
  Speaker 1: And again you're you're onto exactly the right intuition. You
• 48:00
  Speaker 1: take that that that oligop balistic um or market power
• 48:07
  Speaker 1: out of this and connect people directly, then everybody is
• 48:13
  Speaker 1: better off. So yes, um, ticketing is low hanging fruit.
• 48:18
  Speaker 1: We will see some progress on this. But and this
• 48:23
  Speaker 1: is an important butt. The middle people are extremely powerful
• 48:28
  Speaker 1: and they will fight. Just like in the financial system, uh,
• 48:34
  Speaker 1: the banks, the exchanges, they'll try to delay this, whether
• 48:39
  Speaker 1: it's lobbying government for regulation and things like that. I'm
• 48:43
  Speaker 1: convinced that they realize what's coming. And let me just
• 48:47
  Speaker 1: give you a short story. UM this happened a little
• 48:51
  Speaker 1: before COVID happened. A major stock exchange, UM Global Stock
• 48:57
  Speaker 1: Exchange called me in to talk about crypto. It is
• 49:00
  Speaker 1: pretty vague agenda. I show up. It's their board of
• 49:04
  Speaker 1: directors and their senior management sitting in the room, and
• 49:08
  Speaker 1: they've got a single question for me. How long do
• 49:11
  Speaker 1: we have? So I think that people realize they can
• 49:19
  Speaker 1: see the trend and and ticketing is a very good
• 49:23
  Speaker 1: example of a system that it doesn't work for the artist,
• 49:28
  Speaker 1: it doesn't work for the concert goer, so we need
• 49:35
  Speaker 1: to fix it, and the technology exists to do that.
• 49:40
  Speaker 1: Let's talk a little bit about what's going on in
• 49:43
  Speaker 1: the crypto sector today. N f t s are on fire,
• 49:48
  Speaker 1: Bitcoin is approaching sixty THO. An investor who wants to
• 49:52
  Speaker 1: speculate with a little money in this area, how should
• 49:56
  Speaker 1: they put that money to work? So Number one, way
• 50:00
  Speaker 1: too much attention is paid to the price of bitcoin.
• 50:04
  Speaker 1: It goes up and down. And indeed, uh, it was
• 50:09
  Speaker 1: interesting when the price crashed in two thousand eighteen dropped.
• 50:14
  Speaker 1: What was most interesting to me was that the venture
• 50:19
  Speaker 1: capitalists that we're investing in de five there was no impact.
• 50:26
  Speaker 1: So even though the cryptos dropped by they were equally
• 50:31
  Speaker 1: as interested. And what I think are the most interesting
• 50:36
  Speaker 1: technologies are things that are below the radar screen. The
• 50:41
  Speaker 1: we hear in the news of a big clin and
• 50:45
  Speaker 1: Elon Musk tweeting about doge coin or or whatever. Uh
• 50:50
  Speaker 1: that there's a lot of other stuff that is really
• 50:54
  Speaker 1: interesting that's below the radar. In decentralized finance, it is
• 50:59
  Speaker 1: a very hot area. So for an investor, if you're
• 51:03
  Speaker 1: going to and I do encourage people to get a
• 51:07
  Speaker 1: wallet and to do some experimentation, but you need to
• 51:11
  Speaker 1: be careful that things like investing in bitcoin. The annualized
• 51:17
  Speaker 1: volatility is about nine so that's huge. So the stock
• 51:23
  Speaker 1: market is fifteen percent. Gold is let's say this is
• 51:27
  Speaker 1: an incredibly volatile asset, and then some people do margin trading.
• 51:32
  Speaker 1: So if you do margin, then the volatilities double. So
• 51:37
  Speaker 1: you need to be really careful Number one, that this
• 51:39
  Speaker 1: is an extremely volatile asset class, and you need to
• 51:44
  Speaker 1: be going into this uh without margin fully knowing that
• 51:51
  Speaker 1: we could have another situation where you lose crypto winters.
• 51:56
  Speaker 1: Is what what a lot of folks qualities? Yeah, exactly,
• 51:59
  Speaker 1: there's ups and downs and number two, you can't be
• 52:02
  Speaker 1: the so called bandwagon investor where you buy high and
• 52:07
  Speaker 1: and and sell low. So I think of those people
• 52:10
  Speaker 1: that we're buying at the peak in two thousand seventeen
• 52:15
  Speaker 1: at twenty thousand dollars and and then UH in two
• 52:20
  Speaker 1: thousand and eighteen the price crashes to five thousand. Think
• 52:23
  Speaker 1: about the people that bought at twenty and sold at
• 52:27
  Speaker 1: five thousand. The alternative, you buy at twenty and you
• 52:31
  Speaker 1: take a longer term perspective and look where you are today.
• 52:36
  Speaker 1: So so you need to have a longer term perspective.
• 52:39
  Speaker 1: That's number two. Number three and this is hopefully obvious,
• 52:45
  Speaker 1: that you should have a diversified portfolio. And that means
• 52:49
  Speaker 1: you don't don't put all your money into crypto, and
• 52:51
  Speaker 1: even within the crypto, you need to have a diversified portfolio,
• 52:56
  Speaker 1: so more than one, not just bitcoin UH And and
• 53:01
  Speaker 1: then number four is maybe the most important. You know
• 53:06
  Speaker 1: what you're investing, Understand what you're investing. You buy a
• 53:10
  Speaker 1: share of Apple, you you might have an iPhone or
• 53:14
  Speaker 1: a Mac, or you use iTunes. You understand the business
• 53:19
  Speaker 1: model and you believe that they're in a good position
• 53:23
  Speaker 1: to UH build profits in the future. You need to
• 53:27
  Speaker 1: do the same thing when you're investing in crypto. You
• 53:30
  Speaker 1: can't just take a tip from somebody, oh, well, this
• 53:33
  Speaker 1: is what I've got. You need to do your homework
• 53:36
  Speaker 1: and figure out what this token is really representing. Quite
• 53:42
  Speaker 1: interesting you mentioned earlier that you thought, um, a lot
• 53:45
  Speaker 1: of commercial banks are a bit worried about the risk
• 53:48
  Speaker 1: of defy, but we're starting to see some of these
• 53:52
  Speaker 1: giant financial institutions get involved. I think Visas spent dollars
• 53:58
  Speaker 1: on a crypto punk and some other banks have been
• 54:01
  Speaker 1: involved in fintech and and some seed companies as they
• 54:07
  Speaker 1: look to basically do an end run around around centralized
• 54:12
  Speaker 1: banking and disrupt finance. What do you think is going
• 54:16
  Speaker 1: to happen with these big financial institutions. Are they going
• 54:19
  Speaker 1: to sit on their hands and become disrupted or are
• 54:22
  Speaker 1: they going to try and muscle their way in and
• 54:25
  Speaker 1: keep a finger in the pie, so to speak. So
• 54:28
  Speaker 1: they totally understand this in my opinion, Um, they know
• 54:34
  Speaker 1: this disruption is coming and they will do what they
• 54:39
  Speaker 1: can to delay. So one thing that they can do
• 54:44
  Speaker 1: in the short term is to become more efficient. So, uh,
• 54:51
  Speaker 1: it's kind of interesting that we all heard a couple
• 54:57
  Speaker 1: of years ago Jamie Diamond saying that, uh that anybody
• 55:04
  Speaker 1: caught trading tript at JP Morgan was gonna be fired,
• 55:09
  Speaker 1: and and the reason for that is that they were
• 55:13
  Speaker 1: basically being stupid. Well, it's a completely different story today
• 55:18
  Speaker 1: where JP Morgan has got a stable coin, which is
• 55:24
  Speaker 1: a type of cryptocurrency, and they fully embraced everything about
• 55:28
  Speaker 1: this space. It's hard to ignore when the space is
• 55:33
  Speaker 1: capitalized that two trillion dollars, that this is an a
• 55:37
  Speaker 1: novelty anymore. So these banks will do a number of things,
• 55:42
  Speaker 1: so uh, they will use the space to their advantage.
• 55:48
  Speaker 1: And and these stable coins are basically hard back to
• 55:55
  Speaker 1: the era of a free banking where banks for quite
• 56:01
  Speaker 1: a while in the US, we're able to issue their
• 56:04
  Speaker 1: own currency backed by various things. So that's essentially what
• 56:09
  Speaker 1: the banks will do. They tried to do other things.
• 56:14
  Speaker 1: You mentioned crypto punk, but um Visa actually tried to
• 56:21
  Speaker 1: acquire Plaid for five point three billion dollars. And the
• 56:25
  Speaker 1: reason that they wanted Plaid was this lack of interoperability
• 56:30
  Speaker 1: that was one of the great disadvantages of centralized finance.
• 56:34
  Speaker 1: So it's really hard to move money from your broker
• 56:37
  Speaker 1: to your bank or vice versa. But that was blocked
• 56:41
  Speaker 1: um by the regulators. So so they completely get this
• 56:46
  Speaker 1: that both the combination of fintech and decentralized finance, this
• 56:51
  Speaker 1: is an existential threat to their business. So they will
• 56:55
  Speaker 1: try to do things. They'll make some investments, they'll work
• 56:58
  Speaker 1: on the politicians will try to do the maximum sort
• 57:01
  Speaker 1: of regulatory push. All of this are our tools um
• 57:07
  Speaker 1: that they will use fully, realizing that it is just
• 57:11
  Speaker 1: a matter of time. Huh, that's interesting. We haven't talked about.
• 57:15
  Speaker 1: The largest company in crypto is probably coin Base. They're
• 57:20
  Speaker 1: publicly traded, but it's kind of ironic. They're also a
• 57:23
  Speaker 1: centralized company. Tell us a bit about coin bases role
• 57:28
  Speaker 1: in the ecosystem. So coin based very important in terms
• 57:33
  Speaker 1: of the credibility of of crypto and coin Base made
• 57:38
  Speaker 1: it a lot easier for people to get into this space.
• 57:42
  Speaker 1: So instead of actually having to worry about your private
• 57:46
  Speaker 1: keys and securing them, you could use coin Base, a
• 57:50
  Speaker 1: third party to take care of that, just like we
• 57:54
  Speaker 1: use a broker um so we don't worry about the
• 57:57
  Speaker 1: actual physical ownership of a hundred chair to IBM, the
• 58:01
  Speaker 1: broker handles that for us, so a coin base was
• 58:05
  Speaker 1: very important in getting people in their fully regulated. There's
• 58:09
  Speaker 1: more than ten thousand exchanges in the world, and probably
• 58:13
  Speaker 1: more than nine of them UM are very questionable, especially
• 58:18
  Speaker 1: in terms of the volume that they report and the
• 58:20
  Speaker 1: sort of deal that you get when you're buying or
• 58:23
  Speaker 1: or selling big spreads. So coin base UM is also ensured,
• 58:29
  Speaker 1: which is interesting UM. And it is centralized. So the
• 58:36
  Speaker 1: way that I described comb base is UM, I call
• 58:40
  Speaker 1: it c defy so C E D E F HI,
• 58:45
  Speaker 1: so it's centralized centrilcement. So they deal in a lot
• 58:50
  Speaker 1: of decentralized financial protocols and tokens and stuff like that,
• 58:55
  Speaker 1: but they're centralized. And coin Base and Binance, they main
• 59:00
  Speaker 1: competition is what's known as decentralized exchange or decks. So
• 59:08
  Speaker 1: if you look at the amount of trading that's actually happening,
• 59:12
  Speaker 1: there's huge growth and this decks trading and the deck
• 59:16
  Speaker 1: is where you're trading with the algorithm, so there's no
• 59:19
  Speaker 1: mid person like coin base. The disadvantage of the decks,
• 59:24
  Speaker 1: maybe many were considered an advantage is that you hold
• 59:28
  Speaker 1: your your your private keys. Uh, there's no third party.
• 59:32
  Speaker 1: That's uh, that's actually UH in the middle UM. So
• 59:36
  Speaker 1: so let's stay with that a second, because there have
• 59:39
  Speaker 1: been all sorts of crazy stories about lost passwords, hundreds
• 59:43
  Speaker 1: of millions of individual dollars lost by some people, and
• 59:48
  Speaker 1: and I've seen estimates of of all um coins have
• 59:53
  Speaker 1: been lost due to either lost passwords or damage hard drives.
• 59:58
  Speaker 1: When you go through a coin base, they take the
• 1:00:01
  Speaker 1: liability of that off of you. In other words, you
• 1:00:04
  Speaker 1: don't have to worry about a damage drive or or
• 1:00:07
  Speaker 1: a lost password. They'll make sure you have access and
• 1:00:11
  Speaker 1: I'm assuming it's UM a very secure way to access,
• 1:00:15
  Speaker 1: as secure as a regular bank exactly. So they deal
• 1:00:21
  Speaker 1: with the custody. And this has also been a big
• 1:00:24
  Speaker 1: deal for investment funds. So they've seen the crypto complex
• 1:00:31
  Speaker 1: gro uh dramatically too, two trillion dollars, and they've been
• 1:00:37
  Speaker 1: struggling with the cost of the issue. So how how
• 1:00:42
  Speaker 1: do we secure these private keys? So the solution is
• 1:00:46
  Speaker 1: to have a custodian. And that's another thing that coin
• 1:00:50
  Speaker 1: base actually does very successfully, is that will serve as
• 1:00:54
  Speaker 1: a custodian for UH, like a hedge fund or a
• 1:00:57
  Speaker 1: mutual fund UM if they're interested investing in crypto. So
• 1:01:03
  Speaker 1: corn based. Again very important uh in terms of the evolution.
• 1:01:07
  Speaker 1: But I do see the trend, and the trend is
• 1:01:11
  Speaker 1: towards UM trading directly between peers, and then you do
• 1:01:18
  Speaker 1: need to worry about custody. Custody is a risk that
• 1:01:22
  Speaker 1: I go through in a lot of detail. UM. You
• 1:01:25
  Speaker 1: refer to kind of losing a password, and there's this
• 1:01:29
  Speaker 1: story in the New York Times where this programmer had
• 1:01:33
  Speaker 1: UM crypto in a hardware wallet, so that means that
• 1:01:38
  Speaker 1: the private keys were in the wallet, but then he
• 1:01:41
  Speaker 1: forgot the password. And the way that this hardware wallet
• 1:01:46
  Speaker 1: actually operates is that you get ten tries, and if
• 1:01:51
  Speaker 1: you fail on the tenth try, then the uh, the
• 1:01:57
  Speaker 1: hardware is physically destroyed, so you can never prepare over
• 1:02:00
  Speaker 1: what's in there. So so you basically you just tried
• 1:02:05
  Speaker 1: eight times, got two more, and over two hundred million
• 1:02:09
  Speaker 1: dollars a big coin is trapped there. So there are
• 1:02:12
  Speaker 1: other technologies today, So you can have just a regular custodian. UM,
• 1:02:17
  Speaker 1: you can have a shared KEYUH. So you split the
• 1:02:22
  Speaker 1: key into three pieces. You've got maybe one on your smartphone,
• 1:02:26
  Speaker 1: one on your desktop. UH, and then there's a custodian
• 1:02:30
  Speaker 1: that's got the other third, and you need two out
• 1:02:32
  Speaker 1: of three to reconstitute. So if you lose your mobile phone,
• 1:02:36
  Speaker 1: your computer crash is no big deal. You just put
• 1:02:39
  Speaker 1: it together. And this technology will be seamless in the future.
• 1:02:43
  Speaker 1: So right now it's a little clunky, and that's because
• 1:02:45
  Speaker 1: we're just so early in this technology, so we're less
• 1:02:48
  Speaker 1: than per cent in and there will be issues like this.
• 1:02:52
  Speaker 1: That's pretty amazing that there was another story, and I
• 1:02:55
  Speaker 1: think it was the BBC somebody throughout a drive when
• 1:02:59
  Speaker 1: they were cleaning their as didn't realize that it had
• 1:03:01
  Speaker 1: their crypto password on it. But the the bigger issue,
• 1:03:05
  Speaker 1: the longer term issue, is hey, you know, these are
• 1:03:08
  Speaker 1: really secure cryptography access keys today, but we're not that
• 1:03:14
  Speaker 1: far away from really quantum computing being more viable. What
• 1:03:20
  Speaker 1: happens in the future when we see a massive order
• 1:03:24
  Speaker 1: of magnitude improvement in computing power. What does that do
• 1:03:29
  Speaker 1: to these supposedly secure access keys. And I guess it's
• 1:03:33
  Speaker 1: as true for JP Morrigan and Wells Fargo as it
• 1:03:37
  Speaker 1: is for bitcoin and ethereum. Sure um, so let me
• 1:03:45
  Speaker 1: answer this. There's many different dimensions to your question. So
• 1:03:49
  Speaker 1: the first thing is that quantum computing isn't really a
• 1:03:53
  Speaker 1: threat to the current security in bitcoin or ethereum. So
• 1:04:00
  Speaker 1: the way that blocks are added is pretty well immune. Um,
• 1:04:06
  Speaker 1: and both bitcoin and ethereum use something that's called proof
• 1:04:10
  Speaker 1: of work, which is environmentally quite reckless. But Etheroryum has
• 1:04:14
  Speaker 1: got a strategy to migrate to a different system that
• 1:04:20
  Speaker 1: would be much more energy efficient. Uh, it would be
• 1:04:23
  Speaker 1: very energy friendly, frankly, so UM. So that's the first thing.
• 1:04:29
  Speaker 1: That The second thing is that UM it is true
• 1:04:35
  Speaker 1: that that with quantum computing in the future, it might
• 1:04:40
  Speaker 1: be possible to basically reverse engineer the private key. So
• 1:04:46
  Speaker 1: given that you've got the public address, that is possible
• 1:04:51
  Speaker 1: theoretically to go the other way. And you might think, oh, well,
• 1:04:54
  Speaker 1: that's a disaster, but it isn't. It's not really a
• 1:04:59
  Speaker 1: big deal because um already we've got quantum proof uh capabilities,
• 1:05:08
  Speaker 1: and it's really simple. When we get close. All you
• 1:05:12
  Speaker 1: need to do is to send your crypto to another
• 1:05:18
  Speaker 1: address that you own and just sign it with a
• 1:05:21
  Speaker 1: quantum proof of signature. So I'm not worried about that
• 1:05:25
  Speaker 1: at all. UM. It is kind of interesting that some
• 1:05:30
  Speaker 1: of those lost bitcoin you might be able to be
• 1:05:33
  Speaker 1: recovered with this huh really really intriguing. And I know
• 1:05:39
  Speaker 1: I only have you for a limited amount of time,
• 1:05:41
  Speaker 1: and I have to get to some of your previous
• 1:05:44
  Speaker 1: work before we get to our favorite five questions, and
• 1:05:48
  Speaker 1: I have to lean into let's talk a little bit
• 1:05:51
  Speaker 1: about yield curve inversion. What does that tell us about
• 1:05:55
  Speaker 1: the likelihood of a future recession? Well, actually was interesting.
• 1:06:01
  Speaker 1: The last time I was doing a podcast with Bloomberg
• 1:06:08
  Speaker 1: was two thousand nineteen. Uh, the beginning of July, the
• 1:06:12
  Speaker 1: eel curban inverted, and I made a recession call. For
• 1:06:18
  Speaker 1: little did I know that COVID what does strike and
• 1:06:21
  Speaker 1: and cause such an unusual recession? But this is my
• 1:06:26
  Speaker 1: dissertation work um at the University of Chicago that I
• 1:06:30
  Speaker 1: showed that eel curban versions proceed a recessions. At the
• 1:06:35
  Speaker 1: time when I'm defending my dissertation, the record was four
• 1:06:41
  Speaker 1: out of four with no fall signals that, yeah, it
• 1:06:44
  Speaker 1: could have been lucky. My committee was kind of skeptical,
• 1:06:48
  Speaker 1: but the theory behind the measure was sound. I passed.
• 1:06:53
  Speaker 1: And usually what happens after you publish an idea is
• 1:06:58
  Speaker 1: that if you're lucky, it becomes a weaker effect on
• 1:07:02
  Speaker 1: the sample and if you're not very lucky, it completely
• 1:07:06
  Speaker 1: goes away. But from my particular situation, the youth curban
• 1:07:12
  Speaker 1: versions predicted accurately the next four recessions, including the Global
• 1:07:19
  Speaker 1: financial crisis recession for a game advanced warning of a year.
• 1:07:24
  Speaker 1: So so it's eight for eight right now. I haven't
• 1:07:27
  Speaker 1: really done research in this area in quite a while,
• 1:07:31
  Speaker 1: but it's held up, and it's it's something completely unexpected
• 1:07:37
  Speaker 1: that I'd still be getting questions about my dissertation so
• 1:07:40
  Speaker 1: many years after I published it. Let's talk about another
• 1:07:44
  Speaker 1: area of research that you've you've worked in. Some people
• 1:07:48
  Speaker 1: have had outstanding investment results and they're lucky, and other
• 1:07:53
  Speaker 1: people have had an outstanding investment results because they're skillful.
• 1:08:00
  Speaker 1: How can we tell the difference when all we see
• 1:08:02
  Speaker 1: is effectively, Hey, that turned out to be a great investment. Yeah,
• 1:08:07
  Speaker 1: So this is my recent research stream is focused on
• 1:08:11
  Speaker 1: luck versus skill. And it's really hard to explain, but
• 1:08:17
  Speaker 1: I think people really want to believe in that upside.
• 1:08:21
  Speaker 1: They look at the back test and yeah, this looks
• 1:08:25
  Speaker 1: really good, and and I think that this is going
• 1:08:27
  Speaker 1: to repeat, and it often doesn't because the back tests
• 1:08:31
  Speaker 1: are are overfit. So in my recent research stream, I
• 1:08:36
  Speaker 1: proposed a number of different ideas UH to kind of
• 1:08:41
  Speaker 1: adjust back tests and and a protocol UH to really
• 1:08:48
  Speaker 1: understand the past performance. It comes down to the culture
• 1:08:54
  Speaker 1: at the asset management firm. Do they just want to
• 1:08:57
  Speaker 1: gather money in the short term and collect to see
• 1:09:01
  Speaker 1: uh it. It also comes down to investors asking the
• 1:09:06
  Speaker 1: right question. So so, for example, the presentation has been
• 1:09:11
  Speaker 1: given on a new product, and here's the back test,
• 1:09:14
  Speaker 1: and and what I do sometimes very uh strategic question.
• 1:09:20
  Speaker 1: I said, oh, this is pretty super interesting, very impressive work.
• 1:09:25
  Speaker 1: Uh oh did did you try variable X? And then
• 1:09:32
  Speaker 1: the response might be, oh, yeah, we tried that, but
• 1:09:35
  Speaker 1: it didn't work. So as soon as I hear that answer,
• 1:09:40
  Speaker 1: I know that there's been extensive data mining, and it
• 1:09:44
  Speaker 1: is like it's like seeing a cockroach in your house,
• 1:09:49
  Speaker 1: you know, when there's you see one that there's a
• 1:09:52
  Speaker 1: dozen behind the wall, and and that sort of small
• 1:09:58
  Speaker 1: indication is that this product in the back test has
• 1:10:03
  Speaker 1: been overfit. When it goes to live trading, you're going
• 1:10:06
  Speaker 1: to be disappointed. So so what do you actually want
• 1:10:10
  Speaker 1: is in the back test not to choose the best one.
• 1:10:13
  Speaker 1: The best one is the one that's most likely to
• 1:10:17
  Speaker 1: disappoint in in live treating. So you need to do
• 1:10:21
  Speaker 1: this in a way that minimizes, uh, the overfitting in
• 1:10:25
  Speaker 1: the back test. And what we what we want is
• 1:10:28
  Speaker 1: to invest in a product that will repeat it's past performance.
• 1:10:33
  Speaker 1: We don't want to invest in a product that you know,
• 1:10:37
  Speaker 1: the advertised sharp ratio is two and and we get
• 1:10:40
  Speaker 1: point to in live trading. So is this why you've
• 1:10:44
  Speaker 1: said half of all the financial research out there is
• 1:10:48
  Speaker 1: likely false a combination of overfitting and selection bias and
• 1:10:54
  Speaker 1: all the other fun reasons why back tests are can
• 1:10:58
  Speaker 1: be somewhat misleading. Yeah, and I said, uh, the half
• 1:11:04
  Speaker 1: of the empirical research and finance that has published in
• 1:11:08
  Speaker 1: academic journals. The key is to understand the incentives. So
• 1:11:14
  Speaker 1: the journal editors compete in terms of um what's known
• 1:11:18
  Speaker 1: as an impact factor, the number of times that their
• 1:11:21
  Speaker 1: articles and their journals are are cited by other journals. Uh.
• 1:11:27
  Speaker 1: And they know that if they publish a result that
• 1:11:32
  Speaker 1: is a non result. So you try a trading strategy,
• 1:11:35
  Speaker 1: for example, and it doesn't work. If they publish that,
• 1:11:38
  Speaker 1: nobody's going to cite it. So so the authors note
• 1:11:42
  Speaker 1: that they need to deliver something that's really interesting and
• 1:11:47
  Speaker 1: is what we call a positive result. So this trading
• 1:11:50
  Speaker 1: strategy delivers a very high um sharp ratio. So they
• 1:11:55
  Speaker 1: know that, and the data mining begins because these academics
• 1:12:02
  Speaker 1: they need to publish in the top journals to get promoted,
• 1:12:07
  Speaker 1: so so the data money begins. And then you get
• 1:12:10
  Speaker 1: a select sort of paper flow that's going in with
• 1:12:15
  Speaker 1: data mind results, and and you put this together, and
• 1:12:21
  Speaker 1: you combine that with a mistake that that many people
• 1:12:27
  Speaker 1: have made in kind of the execution of the statistics.
• 1:12:30
  Speaker 1: It might be that you try a hundred things and
• 1:12:34
  Speaker 1: there's one that works, uh, and and then you even
• 1:12:38
  Speaker 1: admit that you tried one hundred things, one hundred different
• 1:12:43
  Speaker 1: versions of the trading strategy, but this one works really well.
• 1:12:47
  Speaker 1: Well you expect that out of a hundred, five would
• 1:12:52
  Speaker 1: work just by random chance. So if you're presenting one,
• 1:12:56
  Speaker 1: it's probably uh, not significant, will not hold up in
• 1:13:00
  Speaker 1: live trading. So the incentives defined that really interesting result
• 1:13:08
  Speaker 1: that you know will be cite it and the journal
• 1:13:10
  Speaker 1: editor will like it. And you combine that with a
• 1:13:14
  Speaker 1: mistake of not adjusting for all of the possible things
• 1:13:19
  Speaker 1: that you tried. Then you get to this fifty percent number.
• 1:13:23
  Speaker 1: It is also important to realize that, in my opinion,
• 1:13:28
  Speaker 1: the problem is is less severe in the practice of management,
• 1:13:32
  Speaker 1: because in the practice of management, if you really overfit,
• 1:13:36
  Speaker 1: and if you get people to invest, and if your
• 1:13:41
  Speaker 1: arrangements are not just a fixed fee but an incentive
• 1:13:44
  Speaker 1: fee or performance fee um, then if the product doesn't perform,
• 1:13:50
  Speaker 1: you're not going to get any performance fee and you're
• 1:13:54
  Speaker 1: gonna lose a reputation. So in the practice of finance,
• 1:14:00
  Speaker 1: there's no equivalent to academic tenure, so you don't perform
• 1:14:05
  Speaker 1: your out. So I think the incentives are better aligned
• 1:14:09
  Speaker 1: in the practice of asset management and that sort of research,
• 1:14:13
  Speaker 1: much of which we don't see, so you don't publish
• 1:14:17
  Speaker 1: the mechanics of a really good training strategy. Renaissance Technologies
• 1:14:23
  Speaker 1: hasn't released any white papers as to how they're doing
• 1:14:27
  Speaker 1: a fees year after year. And and I want to add,
• 1:14:31
  Speaker 1: this sort of research issue is not just in academic finance,
• 1:14:37
  Speaker 1: but it seems to be across you know, many many fields.
• 1:14:41
  Speaker 1: Reproducibility of of results are very very challenging. So it's
• 1:14:47
  Speaker 1: more than just form fitting. It's even the basic concept
• 1:14:51
  Speaker 1: of research seems to be um somewhat problematic in in
• 1:14:55
  Speaker 1: both academia and in the real world. So you're correct
• 1:15:00
  Speaker 1: that other fields have actually uh come to this realization
• 1:15:05
  Speaker 1: well before the field of finance medicine, for example, Uh,
• 1:15:09
  Speaker 1: they fully realized that half of their research findings are false.
• 1:15:14
  Speaker 1: And you could argue that that's way more important than finance.
• 1:15:18
  Speaker 1: So and finance we're talking about like some alpha, and
• 1:15:22
  Speaker 1: in medicine we're talking about life or death. So again
• 1:15:28
  Speaker 1: we need to have a proper perspective on this. I
• 1:15:31
  Speaker 1: know I only have you for a little while longer,
• 1:15:33
  Speaker 1: so let's jump to our favorite questions that we ask
• 1:15:37
  Speaker 1: all of our guests, starting with what have you been
• 1:15:40
  Speaker 1: doing to stay entertained during the pandemic? Tell us what
• 1:15:44
  Speaker 1: you're streaming, either Netflix or Amazon or anything you're listening
• 1:15:48
  Speaker 1: to and enjoying. I'll tell you what I'm streaming on
• 1:15:51
  Speaker 1: Netflix is a finish UM drama show called border townmmend
• 1:15:59
  Speaker 1: it very interesting thing. It's it's dubbed, but it's it's
• 1:16:02
  Speaker 1: well done. Um. But in terms of podcasts and things
• 1:16:06
  Speaker 1: like that, Uh, really, what I'm I'm doing, I'm focusing
• 1:16:11
  Speaker 1: on one particular podcast which is not for entertainment necessarily,
• 1:16:15
  Speaker 1: but more in the DEEPI space, and it's called uh
• 1:16:18
  Speaker 1: fine maddics, that's FI and E matics, and it's really
• 1:16:24
  Speaker 1: uh nicely done where the presentations are like seventeen to
• 1:16:29
  Speaker 1: twenty minutes long, animated, but really trying to understand some
• 1:16:34
  Speaker 1: of these complicated concepts in uh in the crypto space.
• 1:16:40
  Speaker 1: Really interesting. Tell us about some of your early mentors
• 1:16:43
  Speaker 1: who who helped to shape your career. Well, I've just
• 1:16:48
  Speaker 1: been so lucky, Uh it just my timing. I think
• 1:16:53
  Speaker 1: I didn't realize that at the time was just so
• 1:16:56
  Speaker 1: good um and and and UM just purely do to
• 1:17:02
  Speaker 1: luck that I've had the opportunity, uh to interact with
• 1:17:07
  Speaker 1: the greats of finance. So my chair um is Eugene
• 1:17:12
  Speaker 1: Vama uh on my committee Martin Miller and Lars Hanson.
• 1:17:18
  Speaker 1: But I also had, uh in half the opportunity to
• 1:17:23
  Speaker 1: interact with Bill Sharp, my Marin shoals that role, Steve Ross,
• 1:17:30
  Speaker 1: Bob Martin um and and even Fisher Black. And let
• 1:17:34
  Speaker 1: me just briefly tell you my introductions of Fisher Black.
• 1:17:39
  Speaker 1: I was an assistant professor, junior professor, and I was
• 1:17:43
  Speaker 1: working late at the office while actually wasn't late for me,
• 1:17:47
  Speaker 1: was bout nine pm and I get a phone call
• 1:17:51
  Speaker 1: and Duke had one of the early call I d
• 1:17:55
  Speaker 1: and I could see the calls coming from Goldman Sachs
• 1:17:58
  Speaker 1: and I think it's a buddy of mine from Chicago
• 1:18:03
  Speaker 1: that's working late, just like me. I pick up the phone,
• 1:18:06
  Speaker 1: just assuming it's him, and and make some disparaging remarks
• 1:18:11
  Speaker 1: and then there's a long silence and the person says,
• 1:18:15
  Speaker 1: is this Campbell Harvey? And I realized, oh, somebody else?
• 1:18:19
  Speaker 1: And then he said it's Fish or Black. And for
• 1:18:22
  Speaker 1: a junior person to get a call from Black, who
• 1:18:26
  Speaker 1: everybody knows it's going to win the Nobel Problems, it
• 1:18:29
  Speaker 1: was shocking. So so he said, I'm reading your paper
• 1:18:33
  Speaker 1: here and UM and your table too. I don't believe.
• 1:18:40
  Speaker 1: I said, well, what do you mean you don't believe?
• 1:18:41
  Speaker 1: So well, you've you've engaged in data mining to get
• 1:18:45
  Speaker 1: this particular result and these results are not credible. And
• 1:18:51
  Speaker 1: I said, no, there's no data mining. This is all
• 1:18:54
  Speaker 1: I did, is exactly what I said. There was no
• 1:18:58
  Speaker 1: uh going variable by variable. It was a predictive regression
• 1:19:02
  Speaker 1: for the SMP UM that I just basically this is
• 1:19:07
  Speaker 1: what people have done. And then I just I just
• 1:19:09
  Speaker 1: presented that and he said, no, uh, it's it's not credible,
• 1:19:13
  Speaker 1: not credible, and um so it was interesting. We had
• 1:19:18
  Speaker 1: this conversation and many other conversations. Uh and and we
• 1:19:23
  Speaker 1: developed a good relationship. Uh and and how did you
• 1:19:27
  Speaker 1: convince him it was a legitimate research paper? So I couldn't.
• 1:19:32
  Speaker 1: So it's just totally convinced. So uh many years later,
• 1:19:39
  Speaker 1: I decided to basically do the out of sample test
• 1:19:45
  Speaker 1: and uh so I replicated my Richard results and and
• 1:19:51
  Speaker 1: I found using the I collected the data again and
• 1:19:55
  Speaker 1: I found I got almost exactly the result in that
• 1:19:57
  Speaker 1: table too. But then I did the other sample twenty
• 1:20:02
  Speaker 1: five years apot a sample and the other sample there
• 1:20:07
  Speaker 1: was zero predictability. Really, so Fisher Black was right. And
• 1:20:14
  Speaker 1: the lesson that I've learned, and the lesson is I
• 1:20:18
  Speaker 1: didn't do any data mining, so it was clear that
• 1:20:22
  Speaker 1: I was telling the truth. I didn't. Even a legit
• 1:20:24
  Speaker 1: paper can have structural problems in it. But what I
• 1:20:28
  Speaker 1: did was I relied upon the results of other academics,
• 1:20:34
  Speaker 1: so so basically they might have been doing the data mining,
• 1:20:38
  Speaker 1: and then I just took their paper and then implemented
• 1:20:41
  Speaker 1: it and and and basically it's it's essential delegation, right
• 1:20:46
  Speaker 1: garage right, Yeah, so this is so he was he
• 1:20:50
  Speaker 1: was correct and yeah, and obviously that experience was really
• 1:20:56
  Speaker 1: important for me and shaping my research agenda. My presidential
• 1:21:01
  Speaker 1: address to the American Finance Association is exactly on this topic.
• 1:21:04
  Speaker 1: So he was extremely influential in terms of my development
• 1:21:11
  Speaker 1: and the idea generation. Meanwhile, that's some murderous row of
• 1:21:16
  Speaker 1: mentors you had over your career. It's really quite an
• 1:21:19
  Speaker 1: amazing list. Let's jump to everybody's favorite question. Tell us
• 1:21:24
  Speaker 1: about some of your favorite books. What are you reading
• 1:21:26
  Speaker 1: now and what are some of your favorite books to
• 1:21:29
  Speaker 1: recommend to students? Well, and probably won't be that interesting. Um.
• 1:21:36
  Speaker 1: I I began thinking I was going to be an
• 1:21:40
  Speaker 1: English major, so so I do read um and my
• 1:21:45
  Speaker 1: tastes or maybe a little unusual. So I'm a James
• 1:21:50
  Speaker 1: Joyce nut um in terms of reading everything that he's done,
• 1:21:55
  Speaker 1: which is incredibly challenging to do, but very uh boarding
• 1:22:00
  Speaker 1: for me. In terms of what I'm reading right now,
• 1:22:04
  Speaker 1: I'm reading Danny Kahneman's book on Noise. I do work
• 1:22:09
  Speaker 1: in behavioral finance also, and I've been struggling with some
• 1:22:12
  Speaker 1: of the issues that are prominent in his book in
• 1:22:17
  Speaker 1: terms of some of my recent research. So that, uh,
• 1:22:21
  Speaker 1: that's something that interests me a lot. UM. And then
• 1:22:24
  Speaker 1: I'm doing something really geeky UM that I'm trying to
• 1:22:30
  Speaker 1: make my way through, um the third edition of The
• 1:22:34
  Speaker 1: Golden Bow, and maybe some of your readers might our
• 1:22:37
  Speaker 1: listeners will will pick up and take a look at
• 1:22:41
  Speaker 1: what that is. It's all online, it's very long, UM,
• 1:22:45
  Speaker 1: but it's the sort of thing that interests me, and
• 1:22:49
  Speaker 1: it's essentially how people um come to believe in something.
• 1:22:55
  Speaker 1: So expectations are something that I've thought about for a
• 1:23:00
  Speaker 1: very long time. It's very important for our research. Uh.
• 1:23:05
  Speaker 1: One of my research streams tries to measure those expectations.
• 1:23:09
  Speaker 1: But this is much deeper analysis of how beliefs are
• 1:23:14
  Speaker 1: actually form mythology and things like that. More than anticipating
• 1:23:19
  Speaker 1: the pleasure of an event or purchase. You're talking about
• 1:23:23
  Speaker 1: how we start to conceptualize entire frameworks or mythologies exactly,
• 1:23:33
  Speaker 1: so very important, just the way that is presented, and
• 1:23:36
  Speaker 1: and some thing's happened that might be random, but others
• 1:23:41
  Speaker 1: are not. So before I go to the next question,
• 1:23:43
  Speaker 1: I have to ask, how does the world of stock
• 1:23:46
  Speaker 1: memes fit into this that that seems to be that
• 1:23:51
  Speaker 1: sort of investment narrative seems to be dominant over the
• 1:23:55
  Speaker 1: past five years. Do you do you look at those?
• 1:23:58
  Speaker 1: What do you think of those? Sure? So this is
• 1:24:03
  Speaker 1: extremely interesting to me because we've been on a trend
• 1:24:08
  Speaker 1: where the retail investor has become a smaller and smaller
• 1:24:14
  Speaker 1: part of the total amount of investing for many years. However,
• 1:24:22
  Speaker 1: with the rise of certain fintech, it's been a lot
• 1:24:27
  Speaker 1: easier for the retail investor to actually get into the
• 1:24:31
  Speaker 1: market with apps like robin Hood for example. So we've
• 1:24:35
  Speaker 1: seen a big turnaround. So the proportion of the retail
• 1:24:39
  Speaker 1: investor of the total market maybe was ten, is up
• 1:24:43
  Speaker 1: to fifteen, maybe it will be twenty over the next year.
• 1:24:47
  Speaker 1: And and what happened there is that the retail investor
• 1:24:53
  Speaker 1: doesn't have access to the sort of information that an
• 1:24:59
  Speaker 1: institution well investor has got access to. They have the data,
• 1:25:04
  Speaker 1: they don't have the computing capability, they're not working on
• 1:25:07
  Speaker 1: this full time, but they've got the crowd. So you
• 1:25:13
  Speaker 1: might have a dedicated team and a hedge fund working
• 1:25:17
  Speaker 1: out a problem, but the retail investor, even though part
• 1:25:20
  Speaker 1: time there might be you know, a hundred thousand people
• 1:25:24
  Speaker 1: that are contributing so effectively, what we're seeing is the
• 1:25:30
  Speaker 1: possibility of kind of a decentralized hedge fund, if you
• 1:25:35
  Speaker 1: think about it that way. So I think it's very interesting,
• 1:25:40
  Speaker 1: like how this space evolves. It is, uh, it has
• 1:25:44
  Speaker 1: some downsides where a bandwagon has jumped on and it
• 1:25:50
  Speaker 1: basically drives a stock well beyond its fundamentals. But usually
• 1:25:55
  Speaker 1: you would have shorting going on and to bring the
• 1:25:59
  Speaker 1: stock back down to its fundamental level. But some of
• 1:26:03
  Speaker 1: these hedge funds, the risk of shorting has gone up dramatically.
• 1:26:07
  Speaker 1: They've seen what's happened. So when people step out of
• 1:26:11
  Speaker 1: the shorting, UH, that means that you've got this asymmetry
• 1:26:15
  Speaker 1: and it's just more likely that you've got misvaluation. So
• 1:26:19
  Speaker 1: in my opinion, given what's happened, I think that the
• 1:26:23
  Speaker 1: market will become less efficient in the short term short
• 1:26:27
  Speaker 1: term and UH that provides some opportunities, of course, but
• 1:26:33
  Speaker 1: eventually I think that the information gathering will become cheaper, uh,
• 1:26:40
  Speaker 1: more efficient, will kind of return to where we were.
• 1:26:42
  Speaker 1: But in the short term, UH, we get situations like
• 1:26:46
  Speaker 1: game stop and MC quite fascinating we're down to our
• 1:26:51
  Speaker 1: favorite last two questions. What sort of advice would you
• 1:26:56
  Speaker 1: give to a recent college grad who was interested in
• 1:26:59
  Speaker 1: the crew year in either UM investment management or finance
• 1:27:03
  Speaker 1: or crypto and defy. So the key thing to realize,
• 1:27:10
  Speaker 1: and I give this advice to my students. Uh, the
• 1:27:15
  Speaker 1: key thing to realize, in my opinion, is that finance
• 1:27:19
  Speaker 1: will not look like it has in the past in
• 1:27:23
  Speaker 1: the future. So we are in the midst of a
• 1:27:27
  Speaker 1: structural change. So it's really important to have a vision
• 1:27:33
  Speaker 1: of the future, and just a naive extrapolation from the
• 1:27:36
  Speaker 1: past is not good enough. So I many of my
• 1:27:42
  Speaker 1: students take the job at the traditional bank or investment bank,
• 1:27:52
  Speaker 1: and my advice to them is, after graduating, that doesn't
• 1:27:57
  Speaker 1: mean that you're finished your learning. You need to know
• 1:28:01
  Speaker 1: what you don't know. And my course and my book
• 1:28:06
  Speaker 1: is maybe a good example. After you read that book,
• 1:28:09
  Speaker 1: you will know what you don't know, and you will
• 1:28:12
  Speaker 1: know that there's not a lot more learning that has
• 1:28:15
  Speaker 1: to happen. So those students that go into the traditional sector,
• 1:28:20
  Speaker 1: I said, that's fine, you're gonna learn something. You need
• 1:28:23
  Speaker 1: to continue. Uh, the quest of knowledge in this difficult
• 1:28:27
  Speaker 1: space and the first day that you arrive, you need
• 1:28:31
  Speaker 1: to be thinking about the next stop, and hopefully that
• 1:28:36
  Speaker 1: stop is somewhere in the DeFi space. Pay down your
• 1:28:40
  Speaker 1: student loan, and then take some risk to go to
• 1:28:44
  Speaker 1: a venture. You're gonna learn a lot. The venture probably fail,
• 1:28:47
  Speaker 1: but it doesn't matter. You're going to learn a lot
• 1:28:50
  Speaker 1: and you'll be able to go to another venture very quickly.
• 1:28:55
  Speaker 1: So it's not as risky as you think. But again,
• 1:29:00
  Speaker 1: and it's way better to be at the vanguard of
• 1:29:03
  Speaker 1: disruption rather than at an institution that is doing everything
• 1:29:09
  Speaker 1: possible to hang on to extend that one way, fully
• 1:29:13
  Speaker 1: knowing that they will be eventually replaced by algorithms. H
• 1:29:20
  Speaker 1: really interesting in our final question, what do you know
• 1:29:23
  Speaker 1: about the world of finance today that you wish you
• 1:29:27
  Speaker 1: knew thirty years ago or so when you were first
• 1:29:30
  Speaker 1: starting out. So I guess what I didn't fully appreciate.
• 1:29:35
  Speaker 1: And it's kind of embarrassing because when you do economics
• 1:29:39
  Speaker 1: at the University of Chicago, it's it's all about economic
• 1:29:43
  Speaker 1: incentives and and how that shape's behavior. And we've talked
• 1:29:48
  Speaker 1: about this a little bit that I've really realized that
• 1:29:52
  Speaker 1: the research in my field is is shaped by Economic
• 1:29:59
  Speaker 1: Guy and say atoms. So at most schools in the world,
• 1:30:05
  Speaker 1: well maybe ninety percent or more schools, just a single
• 1:30:10
  Speaker 1: publication in a very top journal is a job for life.
• 1:30:16
  Speaker 1: You've done it right. So the Journal of Finance publishes
• 1:30:19
  Speaker 1: seventy seven zero articles a year, so it's very difficult
• 1:30:23
  Speaker 1: to get in to a journal like that. So to
• 1:30:27
  Speaker 1: get promoted, UM, you've got to hit this top journal.
• 1:30:33
  Speaker 1: And that causes UM data mining, UM and and and
• 1:30:40
  Speaker 1: some of it might even be unconscious where you're you're
• 1:30:44
  Speaker 1: trying to to look at various different techniques of estimation
• 1:30:50
  Speaker 1: and you just happened to pick the one that works
• 1:30:52
  Speaker 1: the best. So these incentives are really think of influenced
• 1:30:58
  Speaker 1: research and has led to a problem with our research,
• 1:31:04
  Speaker 1: and that when you take that research into live trading,
• 1:31:09
  Speaker 1: it doesn't do as well as what was published. And
• 1:31:13
  Speaker 1: I think it's purely the result of these incentives. I
• 1:31:17
  Speaker 1: was naive UM graduating and thought that well, this is
• 1:31:23
  Speaker 1: just about the pursuit of truth. Well that's part of it,
• 1:31:27
  Speaker 1: but for many people it's about the pursuit of a
• 1:31:31
  Speaker 1: job for life. That's quite quite fascinating. Professor cam Harvey,
• 1:31:36
  Speaker 1: thank you for being so generous with your time. You
• 1:31:40
  Speaker 1: can pick up his new book, Defy in the Future
• 1:31:43
  Speaker 1: of Finance wherever you get your usual book purchases. If
• 1:31:49
  Speaker 1: you enjoy this conversation, we'll be sure to check you
• 1:31:51
  Speaker 1: out any of our previous three and seventy six podcasts
• 1:31:56
  Speaker 1: we've done over the past seven years. You can find
• 1:31:59
  Speaker 1: that iTunes, Spotify, wherever finer podcasts are sold. We love
• 1:32:05
  Speaker 1: your comments, feedback and suggestions right to us at m
• 1:32:08
  Speaker 1: IB podcast at Bloomberg dot net. Sign up for my
• 1:32:12
  Speaker 1: daily reads at Riholts dot com. Check out my weekly
• 1:32:14
  Speaker 1: column at Bloomberg dot com slash Opinion. Follow me on
• 1:32:18
  Speaker 1: Twitter at Riolts. I would be remiss if I did
• 1:32:22
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• 1:32:24
  Speaker 1: together each week. Nick Falco is my audio engineer. Michael
• 1:32:28
  Speaker 1: Batnick is my head of research. Paris Wald is my
• 1:32:32
  Speaker 1: producer slash booker. Latico val Bron is our project manager.
• 1:32:36
  Speaker 1: I'm Barry Riholtz, upens and two master's in business on
• 1:32:41
  Speaker 1: Bloomberg Radio