This is a technology post by Ellie Jo.
Do you know why society is wealthier today than it was 200 years ago? It’s not just that we have had more time to build wealth. It’s because we now have technology that does many tasks for us.
Technology is the only real driver of progress over the long-term. Nothing else – not even physical capital – really matters. In the 19th century, people had machines that would allow them to make clothes en masse. But even if you imagine more and more of them, they still wouldn’t have been able to build the incredible wealth that we have today.
Some naysayers say that technology is slowing down – or that future gains won’t be as valuable as those already made. But in the world of finance, that’s looking increasingly untrue. In fact, banking, insurance and brokering is about to go through a revolution, the likes of which it has never seen before.
Take automatic enrollment, for instance. This technology automatically puts people on 401(k) policies, getting them on the saving bandwagon early in life so that they don’t put it off for the future.
It sounds like a simple thing (and compared to a lot of modern software it is), but it still makes a tremendous difference. Automated saving is often the difference between a retirement spent in luxury, and one spent in poverty.
Economists are very interested in consumer behavior. In fact, there is a whole branch of economics dedicated to it. The idea is that, contrary to regular economic theory, people don’t always behave rationally. Instead, they make decisions that appear to go against their own best interest.
The solution is to embed social psychology into technology to improve outcomes. For example, Yale professors have released a savings app that leverages social pressure if people miss their savings goals.
Imagine if you didn’t have to pay an expensive insurance clerk to underwrite your insurance policy. Instead a machine did it for you.
Well, according to some experts, that’s now a reality. Artificial intelligence is taking over the insurance underwriting process, potentially leading to profound savings.
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The job of a typical underwriter is to evaluate an insurance application, determine the level of risk and cover, and then quote an acceptable premium. Historically, insurance companies would look at manually collected data or even rely on the skills of the underwriter themselves.
While these methods worked well, they didn’t always price insurance correctly. Some people always wound up paying too much, while others paid too little.
Artificial intelligence changes this because it is able to draw on a much larger and more diverse pool of data to generate premiums. So, for you personally, it means that the price you pay accurately reflects the risk that you pose. It’s a seachange from how insurance was done in the past.
Imagine if you could lend people you don’t know your money without going through a third-party broker first? It seems impossible. How could you ever trust another person to pay you back? However, it is surprisingly easy with blockchain. The technology lets you lend peer-to-peer in a trustless system, knowing who owes you money.
Blockchain doesn’t guarantee that you will get your money back – no system can do that. But it does let everyone in the network know who owes whom money. There is a permanent ledger record of your debit and the other party’s credit.
AI Stock Investing
Artificial intelligence is also making its way into stock investing. AI algorithms are looking for patterns in stock price data and then using these to recommend portfolios to clients.
For the investment industry, this is a big deal. Currently, the vast majority of people invest in mutual funds. This is where they effectively hand over their money to a third party and get them to manage it for them. This third party then takes a fee – as much as 2 percent of the portfolio value per year – to cover their costs.
Unfortunately for portfolio managers, most of them are not good at their jobs. Relatively few ever beat the market, meaning that most people are better off simply investing in a market tracker fund.
AI-based investing could change the game substantially. There is no need to hire expensive investment managers to oversee a portfolio.
Send Money More Cheaply
Another advantage of new technology is that it is allowing people to send money to other countries more cheaply. Digitization of the payment system has already cut traditional banking fees by around 75 percent. However, with blockchain, there is even more room for price cuts.
Blockchain-based currencies essentially operate without any borders at all. Sending money over the network is as simple as sending an email. It doesn’t involve any expensive third-party costs. The blockchain itself determines who is credited and who is debited.
The benefits for people who want to travel or send money overseas are enormous. No longer will you need to spend vast sums of money moving your cash from one location to another. Instead, you’ll be able to do it almost for free.
Many websites now allow people to improve their financial planning. These let you create goals, type your income, and set out what you would like to achieve.
Over time, they’ve become more complicated. Some even connect to your bank account, showing you in real-time whether you are getting closer to your objectives or not.
Budgeting apps may also help people with the so-called “overconfidence” problem. Sometimes we can get carried away by past performance and believe that it will continue into the future. Stocks are a good example. Budgeting apps can handily point out that this isn’t necessarily the case and that things can and do change over time.
So, there you have it: some of the ways that technology is going to make your finances better. It’s complicated, but it is also valuable to know what is going to happen in the future.
Rachel is an Austin blogger, educator, mom, wife, young breast cancer survivor writing about health, saving money, and living a happy life in Austin, Texas.
Rachel has written for HuffPost and Hometalk and has been featured on KXAN, Studio 512, Fox 7 Austin, and CBS Austin.