Short Take

How Tech's Disruption Alters
Investors' Appetite for Risk

New technology’s upending of the old creates demand for alternative assets to offset risk

The explosion of technology over the last three decades has changed the way all of us live and work. It also has significantly altered the way many people think about investment risk, new research suggests.

In a working paper, UC Berkeley's Nicolae Gârleanu and UCLA Anderson's Stavros Panageas seek to connect the tech boom with dramatic changes in investor behavior. They posit that the economic disruption wrought by technology has fed surging demand by investors for a broad mix of "alternative assets" such as real estate, venture capital and private equity.

In short, Gârleanu and Panageas say, new technology's rapid destruction of old technology has made once-stable investments newly risky. And that drives investors to look for assets other than plain-vanilla stocks and bonds to lessen the risk of portfolio turmoil and loss.

The stunning growth of alternative assets was the initial motivation for their research, the authors say. In the paper, they note that the total invested in alternative assets over the last decade has risen far faster than either the economy itself or total investor assets under management.

To test their ideas about the tech revolution's effects on investments, Gârleanu and Panageas constructed a "general equilibrium" model of the economy. Such models use actual data to project how the economy might react to changes in technology, government policy or other factors.

Central to the authors' thesis is the idea that much of the tech innovation of the last few decades heavily rewarded a relatively limited number of investors, contributing to rising wealth inequality in the economy. The financial benefits of new technology accrued "predominantly to [business] creators and, more generally, early investors holding large fractions of their equity, rather than to investors simply holding the market portfolio of public companies," the study says.

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To back up their case regarding a shift in wealth distribution, Gârleanu and Panageas used data from the Forbes and Wealth-X annual tally of ultra-high-net-worth individuals. In 2003 the estimated net worth of self-made billionaires — that is, the entrepreneur class — was comparable to that of billionaires who had inherited their wealth. But by 2016, the self-made billionaires' net worth was roughly twice that of billionaires who inherited their wealth, the study says.

Although the stock market has performed well as the economy has recovered from the 2008–09 crash, investors "have an incentive to increase allocations towards asset classes that are less affected by, or can even benefit from, disruption risk," the paper says. The "natural targets" for diversification would be assets such as real estate, commodities and private equity, Gârleanu and Panageas say. Real estate and commodities "benefit from increased arrival of new firms because they are useful to all firms, new and old," the study says. "Private equity benefits because it helps offset the displacement risk of public equities."

Gârleanu and Panageas also identify one other key winner amid technological upheaval in the economy: the financial industry, which grows to serve up an expanding array of alternative assets to a hungry investor audience.

Gârleanu, N., & Panageas, S. (2017). Finance in a time of disruptive growth.

Stavros Panageas

Professor of Finance

Stavros Panageas studies asset pricing and macroeconomics. He has worked as a fixed income quantitative analyst for Fidelity Investments and was a co-founder and board member of AIAS NET, one of the first Greek internet service providers. His latest research connects the tech boom with dramatic changes in investor behavior.


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