YHIHF: The Information Revolution's Very Own Losers

I think we pretty much survived the first wave of the information revolution largely unscathed. We learned that giving money to startups without a clear business plan is a bad idea, we learned that astronomical salaries and fortunes made of stock options are not for real, and we learned that the Internet, as a whole, is here to stay. Why, haven't you heard the first youngster ask you yet how life was before the Internet?

Now it's time for a deeper assessment, one with long-ranging views, a structural look at things: who are the real winners and losers of the Internet Revolution? What did, indeed, the Internet bring that is such an epochal change?

Let's start with a quick note: Al Gore was right. The whole point of the Internet is the Information Revolution. We have more information available to us, it is much higher in quality, and it's much easier to find.

That's wonderful, isn't it. But you know, the opposite was the case for most of mankind's history. For millennia, there was very little information available, it was extremely low in quality, and it was really hard to find. Just think you are a peasant in Medieval Europe: what should you plant? First, there are only a very few crops available to you. Then, the reasons why you should plant one instead of the other are only marginally understood and you mostly rely on astrology. Finally, the information on good crops in pretty unattainable: how would you know that there are potatoes in the New World?

Nowadays, things are quite the opposite. I recently had a snowboarding accident. A separated shoulder. I had no idea what that was, except for the fact my left collar bone was detached from its resting place and freely floating. Not so good.

The next thing you know, I am on the Internet, and within a few minutes I know everything I needed to know about the injury I sustained. I could validate what the doctor and the physical therapist had told me, could add information to that, could set up a recovery plan, and could decide where the medical staff had lied to cover for liability. (Knowing exaggeration certainly counts as lie in my book.)

So, we are winners in this information game. Who are the losers? Well, that's everybody that has been making money with information. Who's that, you ask, and you are probably thinking of bookies and newspapers.

Well, you see, the business of information is actually enormous, one of the largest in the world. It's the entire financial industry, including banking, brokerage, and insurance.

How so? Well, you see, a bank doesn't actually produce anything. It just finds sources of money and connects them with people that need it. You think the "products" that a bank offers are loans and savings accounts, but that's not true. A bank sells information, that's all. The products are fronts to convince you to give the bank money: the interest rate on a loan, for instance, is displayed as a cost to you for the money the bank gave you. The interest rate on your savings account is your profit.

The bank detaches your savings account from the loan that pays for it in the same way the Federal Government takes its taxes and spends its money in an unrelated way. You cannot say, I do not want to pay for this particular project that you don't want, primarily because it would be impossible for the government to tell what money goes in which direction.

How is that important, though? Well, you see, since connecting money sources with money sinks (in computer lingo) is the only real function of a bank, it deals simply with information. And since you can find that information more cheaply than with a bank, you will at some point simply bypass the bank. The difference between loan interest rates and investment interest rates (the "spread") is enormous, somewhere between 5% and 15% of the amount in a constant basis. The only thing the bank has as a downside is risk, which it mitigates in the same way it has been doing for thousands of years (collateral). It is the fat cat that the Internet will kill.

Another example? A very egregious one: insurance companies. What they sell is information. Actually, the don't sell you their information, but useless products based on that information. You see, the point of insurance is to take a particular risk and give it a dollar value. What is the likelihood that you will have a car accident? How much will it cost? The product of cost and probability is the likely payout, and ideally an insurance company would charge you precisely that amount.

Now, why do insurance companies make obscene profits? Because they know something that you don't know, namely what the likely payout is going to be. Sure, there are costs associated with insurance - administrative, regulatory, marketing, fraud detection. But ultimately, the business of insurance is to sell you something above the value of risk.

Sometimes the insurance cost is absurd more than simply obscene. You have probably rented a car before and gotten annoyed at the agent painting in graphic detail the horrors of having to deal with an accident in your rental car. I sure have, and the pressure tactics are amazing: I've had rental companies refuse a rental if I didn't carry proof of insurance with me, put a hold on my credit card for the value of the car, preach for ten minutes. Then I looked at the insurance cost versus the rental cost and made a simple realization:

It is completely impossible that insuring a car could cost more than renting it. If I can rent a car for $20 a day, and the insurance on the car itself (that is, for damages to the car) is the same amount, then logic dictates that every other car returned is damaged. How do I figure? Well, if I made a business renting cars to rental car companies, then I would ask for $20 a day, just like they do. If a car is returned damaged, I just give them a different car, for $20.

The logic has flaws, but it works. I've had an insurance company try to charge me more for motorcycle insurance than the motorcycle is worth. How does that make sense? Let's see: I can either give you the money each year, or buy a new (used) motorcycle every year. Unless I wreck the motorcycle every year, not such a good deal.

Think about it. You don't need to go to an insurance company, you really just need a place that is willing to pool your bets.