AI and Discount Rates
After getting back from the beach, Brent, Emily, and I were sitting around talking about what AI might do to returns across different asset classes and one thing I said was, “I don’t expect that you’ve yet read the lengthy academic paper I linked to in that recent whatever-it-was, but one of the points it makes is that real estate has been a top-performing asset class across centuries because (1) it’s been around for centuries and (2) during those hundreds of years it’s been around, discount rates have declined.”
That’s important because if a significant driver of returns over centuries has been a decline in discount rates, then maybe the question isn’t what AI will do to returns, but what it will do to discount rates.
I’d posit that one reason discount rates have declined over time is because trust has gone up. Because something that's been true since at least 1465 – which is how far back the data in that lengthy academic paper goes – is that technology has made it easier to know your counterparties, improved liquidity, and accelerated the flow of information. And if you know who you’re dealing with, can get out when you need to, and aren’t operating in the dark, you can accept lower returns because you’re taking less risk.
“So what, then,” I wondered out loud, “does AI do to trust?”
“Darn it,” Brent said. “I’m going to be mulling on that for the rest of the day.”
Welcome back to season 7.
– Tim
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