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• Technological change takes place at an exponential, rather than linear, rate. Our bias towards ‘straight-line’ thinking means we can often underestimate the impact of disruptive technologies.
• Disruptors typically generate lower profits than incumbents, from niche markets, so are typically ignored by leading companies until it’s too late.
• The bursting of the dotcom bubble shows how investors tend to overestimate the importance of a technology in the short term and underestimate it in the long term.
• Given the minefield new technologies can present, we think tracking the companies backed by the world’s elite fund managers can give investors a significant edge.

Technological change has been a constant for humankind from the discovery of fire some two million years ago to breakthroughs in nuclear fusion in this decade. But this constant change has itself always been changing in one incredibly important way: it’s been getting faster, and can be expected to continue doing so.

The implication is technological change should become an ever more important consideration for businesses, investors, and the planet. It has the potential to deliver hugely positive impacts on the planet and society, as well as making some people spectacularly rich along the way.

Technological change has been identified as one of the three Fix the Future megatrends, alongside environmental and climate change and social and demographic change. 

Accelerating tech change in action

Moore’s law is one the clearest examples of accelerating technological change in action.

Gordon Moore, a co-founder of Intel, predicted in 1965 that the number of transistors in a computer chip would double about every two years. The snowball effect of doubling from an ever-larger base is known as exponential growth. Moore has proved to be on the money.

With chips now scaled down to five nanometres, which is the size of about 10 large atoms, Moore’s law may finally have run its course. But another common feature of technological change appears to be kicking in. When the exponential growth phase of one technological paradigm fades, another usually emerges to take up the baton. For chips, the emergence of 3D designs, which stack multiple layers on top of each other and can generate vastly increased processing power, seems likely to kick off the next phase of growth.

Breaking down the opportunities

New technology not only offers advantages for innovators, but can transform the competitive positions of established businesses that are prepared to adopt what’s new and relevant.

The excitement about the current roster of emerging technologies not only relates to those technologies themselves but their potential to complement and support each other’s development. For example, digitisation and biology are converging in the world of gene editing which has led to spectacular growth at pioneering companies, such as US company Illumina. The idea that many technologies could start to converge is a long-held dream in Silicon Valley and there are signs it could increasingly become a reality.

Fix the Future breaks down the technological change megatrend into six themes, which are:

Digital infrastructure

Companies providing solutions that underpin the global digital economy, from physical (cables, servers, computers) to virtual (cloud services, cybersecurity).

AI and automation

The creation and harnessing of machine intelligence to increase the efficiency and safety of industrial processes and the delivery of services.

Fintech

The use of technological solutions for the development and delivery of financial products and services, from payment processing to robo-advisers.

Entertainment tech

The very latest technological offerings around entertainment, including digital rights, non-fungible tokens, virtual reality, video streaming, gaming and gambling.

Decarbonisation of transport

The move away from fossil fuel-powered transport towards battery and hydrogen power sources, as well as carbon-neutral synthetic fuels.

Space tech

Companies trying to exploit space for commercial purposes, such as mining, tourism and more traditional activities such as satellite infrastructure.

Investing pitfalls

As well as opportunity, technological change presents many challenges and risks. For investors, the key challenge is psychological.

Firstly, we struggle to understand its magnitude. As futurist, inventor and author Ray Kurzweil put it in a 2001 essay titled The Law of Accelerating Returns, ‘Careful consideration of the pace of technology shows that the rate of progress is not constant, but it is human nature to adapt to the changing pace, so the intuitive view is that the pace will continue at the current rate.’

The difficulty we have comprehending accelerating growth rates is something that influential Swedish public health expert Hans Rosling labelled ‘the straight-line instinct’. The issue also links with what behavioural psychologists call ‘recency bias’; a well-researched human predisposition to attach excessive significance to events that are recent.

Thinking and forecasting in a straight-line makes it easy to overlook both the long-term benefits and harms of fast-developing technology. For many businesses and investors this means underestimating the impact of disruptive technologies, which can result in missed opportunities and large financial loss.

The truth about disruption

‘Technological disruption’ has become a buzzword over the last decade but defining features of disruptive change are often assumed rather than understood. A clear definition is important in helping investors to identify the risk and opportunities that emerge from truly disruptive technologies.  

The difference between disruptive and sustaining technological innovation was formally defined in the 1990’s by Harvard Business School Professor Clayton Christensen in his seminal book The Innovator’s Dilemma. His work was the result of an extensive study into the history of the disc drive industry, aiming to find out why good companies failed.

Christensen found some innovations were sustaining. Incumbents were able to use their market leadership and financial resources to invest in them and successfully deploy these new technological paradigms to better serve existing customers. This type of innovation served existing business models and helped market leaders stay on top.

However, disruptive innovations were a dire threat to incumbents. These innovations were characterised by being different to existing products and initially inferior on many measures. The technology also tended to lower profitability. It also usually was only of appeal to a small niche market and therefore often ignored by large companies. 

However, as the performance of the disruptive technology improved, Christensen found it often became able to address an ever-larger proportion of the market and ultimately become the dominant technology in the industry. By this time incumbents were already too late to switch to the new paradigm.

The success of low-margin online retailers like Amazon is a case of disruption in action. The difficulty traditional bricks-and-mortar retailers have had in competing is that the success of their existing business models was an impediment to change rather than an aid.

The bitter irony is, that this blind spot in our underestimating the long-term significance of emerging technologies co-exists with a tendency to overestimate short-term upside.

In the short-term we tend to get stupidly over-excited by attention-grabbing new technologies, as illustrated by the dotcom boom.

It is human nature to be easily sold on incredible ideas and wonderful narratives without stopping to think much about either the high possibility of failure or realistic timeframes. Once we can imagine a technological leap, we expect it to emerge immediately. We want it all and we want it now.

Even cynical investors find this trap hard to escape. That’s because sentiment influences short-term expectations, which then affect share prices. This in turn influences the benchmarks that investors tend to be judged against, adding to the pressure to those who don’t already own a flavour-of-the-month stock to buy the shares. As John Maynard Keynes is credited with saying, “the market can remain irrational longer than you can remain solvent”.

These misguided and contradictory short- and long-term expectations underpin an observation variously attributed to Microsoft founder Bill Gates, science-fiction writer Arthur C Miller, futurologist Roy Amara and many others besides, which is that we overestimate the importance of a technology in the short term and underestimate it in the long term.

For investors and executives trying to allocate capital, this is extremely problematic. Given the confusion the subject of technological change can create, we think viewing this megatrend through the prism of the investment decisions made by of the world’s most skilled fund managers can provide a significant edge.