IFJ April Edition by The IFJ

The

intercollegiate finance journal APRIL 2014

Marketing to the Brain:

Science or Scam? by Julia Verbrugge, page 20

internship-less freshmen: how to stay ahead of the game by Claire Su, page 32

inflation and deflation in the eurozone by Christopher Dederick, page 10

Is there a bubble brewing in the craft beer business? by Matthew Janigian, page 4

More than your problem: The Dangers of credit card debt by Christian Ackmann, page 26

The IFJ Team

The Intercollegiate Finance Journal April 2014

Executive Board Alex Drechsler – Co-President Brice Gumpel – Co-President Max Deutsch – Co-Head of Business Matthew Ostrow – Co-Head of Business Steven Adler – Head of Content Alexandra Nuttbrown – Head of Style Stephanie Hennings – Head of Design & Layout Felicia Iyamu – Head of Distribution Michele Narbonne – Head of Recruitment Lauren Tsai – Head of Operations Yuta Inumaru – Head of Web & Social Media Emily Law – creative founder

Editorial Board Steven Adler – Head of Content Alon Galor – Markets & Investing Alex Lloyd George – Markets & Investing Thomas Pesce – Political Economy Eric Han – Political Economy Carter Johnson – Business & Startups Siavash Naderi – Business & Startups Christian Ackmann – Personal Finance Sarah Park – Personal Finance Andrea Wistuba Behrens – Careers & Internships Claire Su – Careers & Internships Caroline Vexler – Interviews & Other Content

Senior Staff Writers Jasmine Bala, Tiffany Chang, Christopher Dederick, Miguel Ferreira, Michael Golz, Matthew Janigian, Kaden Lee, Ebony McCaskill, Camila McHugh, Tung Nguyen, Ana Rosenstein, Radhika Singhal, Elizabeth Studlick, Lauren Sukin, Angela Marie Bernadette Teng, Julia Verbrugge, Caroline Vexler, Amanda Yao

Staff Writers Alexander Behnke, Shreya Bhargava, Rachel Binder, Frances Chen, Noah Elbot, Perry Feldman, Miguel Ferreira, Alexandra Garcia, Peter Hix, Kristina Hu, Nathan Johnson, Joanne Low, Lehm Maguire, Giuliano Marostica, Thee Meensuk, Wesley Meyer, Alisa Owens, Kiera Peltz, Christian Petroske, Ignacio Perez-Pozuelo, Graham Rotenberg, Jordan Schochet, Kelsey Sherman, Kjetil Stiansen, Carolyn Stichnoth, Mark Valdez, Jonathan Vu, Carolyn Westphal, Jonathan White, Samantha Wong

business team

Layout & Design team

Max Deutsch – Co-Head of Business Matthew Ostrow – Co-Head of Business Lauren Tsai – Head of Operations Amanda Beaudoin, Christine Blandhol, Paul Cichocki, Sara Hartse, Christopher Heo, Quinn Herrera, Yuta Inumaru, Madelyn Metz, Amy Yao Meng, Connor Lynch, Arielle Schacter, Pranav Sharma, Destin Sisemore, Wenjie Zheng

Stephanie Hennings – Head of Layout Chandelle Heffner – graphic designer Madeleine Johnson – Head Illustrator Charlie Benson, Israel Carrete, Linda Navon Chetrit, Quinn Herrera, Jie Hao Kwa, Kaden Lee, Shiying Luo, Kimberly Meilun, Amy Yao Meng, Nicholas Pucel, Lorraine Salim, Mili Sanwalka, Claire Su, Sirena Turner, Kayla Tyrrell

web & Social Media team

Maria Jose Hererra, Nathan Johnson, Lisa Opdycke, Duncan Weinstein, Francesca Whitehead

Yuta Inumaru – Head of Web & Social Media Sara Hartse – Head of technology Michelle Watt – Head of Social Media Karthik Harihar Reddy Battula, Chien Teng Chia, Jenna Chuck, Sara Hartse, An Truong, Amanda Yao, Raymond Zeng, Wenjie Zheng, Joshua Wang

fact checkers

blog team

Eric Hu, Arielle Schacter, Scott Schubert, Ella Warshauer, Francesca Whitehead

Julia Verbrugge – Blog Editor Paul Cichocki, Maria Jose Herrera, Eric Hu, Shiying Luo, Masahiro Nakanishi, Angelo Nakos, Patrick Rosanelli

Copy editors

The Intercollegiate Finance Journal April 2014

Contents

Markets & Investing Is There A Bubble Brewing in the Craft Beer Business?

National “Fine” League by Wesley Meyer & Rachel Binder The Price of Being a Food Trend Chaser by Ana Rosenstein High Frequency Trading and the Flash Crash of 2010

6 7

by Matthew Janigian

Political economy Inflation and Deflation in the Eurozone: the Lady or the Tiger? by Christopher Dederick

Also: Mundell’s Optimum Currency Area: Theories in Action by Christopher Dederick

Top Ten Freest Economies of the World - 2014 by Tung Nguyen The Real Cost of Your T-Shirt by Sarah Park Rethinking Venezuela by Miguel Ferreira North vs. South Korea by Eric Han Ready for the Big Bucks by Lauren Sukin

13 14 16 17 18

by Elizabeth Studlick

By appealing to the deeper levels of human responsiveness in order to understand what drives consumers, neuromarketers stand at the frontier of a rapidly developing field. As more and more market researchers use neuroimaging techniques like fMRI, EEG, and eye-tracking, more and more questions are asked of neuromarketers. Can the subconscious mind of the consumer be accurately tapped in order to generate greater profits? Should it be?

The IFJ Online

Business & Startups Marketing to the Brain: Science or Scam? by Julia Verbrugge 3D Printing: Sci-Fi Brought to Life by Samantha Wong Under the Radar: Is There an Advantage to Keeing Your Startup Secret? by Michael Golz Candy “Crash” Saga: King Games’ IPO is the Real Puzzle

On the cover... Marketing to the Brain: Science or Scam?

20 22 24 25

Personal finance More Than Your Problem: The Dangers of Credit Card Debt by Christian Ackmann

The Low Down on Financial Aid by Sarah Park

Also: Store as Showroom: Threat or Resource? by Carolyn Stichnoth

www.theifj.com The Blog The Blockbuster Deal by Angelo Nakos Three Protests, Three Countries, Three Continents by Paul Cichocki Uber: Taking on the Taxi Industry in Style by Shiying Luo Automating Your Financial Life by Patrick Rosanelli Career of the Week: Investment Banking by Masahiro Nakanishi archives Principles of College Savings: Amazon Prime The International Monetary Fund Cheap-On-Investing: 5 Affordable Stocks for College Students Brown Market Shares

University Finances: An Interview with Brown’s CFO by Alex Drechsler

Let’s Get Digital: The Future of Wallets by Tiffany Chang

Email: team@theifj.com Facebook: facebook.com/theifj1 Twitter: @the_ifj

Careers & Internships Internship-less Freshman: How to Stay Ahead of the Game

Unpaid Internships: Will They Affect Your Career?

The Creative Economy: South Korea’s Transformation

The Creative Economy: Entrepreneurship at Brown by Caroline Vexler

Student Spotlight: Bill Weber by Caroline Vexler

by Claire Su

by Amanda Yao

by Caroline Vexler

Volume I Issue IV “Serving the collegiate community with news and knowledge on finance, economics, and business topics, all at your fingertips!”

MARKETS & INVESTING

Markets & Investing

The Intercollegiate Finance Journal April 2014

Also In This Section 6 7 8

National “Fine” League The Price of Being a Food Trend Chaser High Frequency Trading and the Flash Crash of 2010

Visit theifj.com for these articles: • Shock in Silicon Valley: Explaining the Facebook-Whatsapp Deal • Career of the Week: Investment Banking • Shadow Banking: How an Abstract Financial Chain Nearly Brought Down the System • E-Cigarettes: Smoke in our Eyes or Shock to the Industry?

Is There A Bubble Brewing in the Craft Beer Business? by Matthew Janigian

ver the past several years, the craft beer business has been booming. Growth has been tremendous; between 2006 and 2012, the volume of craft beer produced rose 71 percent and hasn’t stopped since. In fact, there are now over 2,500 breweries open in the United States, and more keep popping up. For the uninitiated, the distinction between a “craft beer” and normal beer might seem like a blurry one. The Brewer’s Association defines a craft beer producer as “small, independent and traditional.” For the quantitatively minded, this means an annual production of less than six million barrels and an alcoholic beverage member ownership of less than 25 percent. Finally, a majority of a craft brewery’s produce must have “flavor [that] derives from traditional or innovative brewing ingredients and their fermentation.” Big Producers Take Notice Although many of the new offerings are from local breweries, the big producers haven’t been sitting on the sidelines: many of the large producers have developed craft-like products. MillerCoors is the parent company of the well-known Blue Moon Belgian White—a beer that is marketed as “handcrafted” in an effort to appear craft-like. Many would be quick to say that beers like Blue Moon or Shock Top (made by Anheuser-Busch InBev) distinguish themselves from the more bland “everyday” beers and BeerAdvocate does indeed give them above average

ratings. What started out as a movement led by small, independent breweries has gained popularity at a rapid pace that doesn’t seem to be slowing. The Bubble Builds With such growth, it might be wise to ask if the industry is getting ahead of itself. Indeed, there are many breweries that are opening up without sufficient capital. Only a few are able to really ride the foamy wave of success, while others are left drowning after an initial, fleeting burst of popularity. Some brewery owners have even gone so far as to call the craze “irrational exuberance,” hinting that the popularity of craft beer might be inflated. To answer whether the craft beer industry is in the midst of a speculative bubble, one ought to consider what it means to experience a bubble. The term “bubble” is typically assigned to a class of assets or a sector in which the prices of the products are unjustifiably high. For example, in the tech bubble of the early 2000s, there were many Internet startups with no potential sources of revenue and unreliable business plans, yet their stock prices rose to high levels. During the housing bubble, property costs rose dramatically even though people weren’t buying houses nearly as fast as houses were being built, thus leading to an overinflation of real estate prices. The craft beer industry has grown rapidly over the past decade, indicating that perhaps it is becoming overheated. Indeed, more and

The Intercollegiate Finance Journal April 2014

Markets & Investing

States with the Most Craft Breweries: 10 craft breweries

more breweries are opening without sufficient capital and struggling to survive as a result. Worries Overblown It might be tempting to call the craft beer boom a bubble, but this would be inaccurate. While there are some breweries that simply cannot stay solvent and are undercapitalized, the price of craft beer is not unjustifiably high: By nature, craft beer takes more effort to brew, so it makes sense that a can or bottle of craft beer would be more expensive than a typical mass-market beer. Furthermore, the increasing number of breweries will also likely put pressure on existing breweries to keep their prices competitive.

breweries that charge upwards of $7 per can or bottle, the fact that there is a high demand for the beers shows that prices are justified. The Pull of the Product Craft beer is a food item. In order for beer to sell and for businesses to con-

craft beers: once consumers try them and realize they like the beers, they continue to buy them; once they learn what beer can be, they seek out that balanced, tasty bubbliness that they can’t find in regular beers. The explosion in the industry has contributed to the growth of craft breweries like the Boston Beer Company (parent company of Sam Adams), one of the largest craft breweries. It currently has control of nearly 20 percent of the craft beer market. D.G. Yuengling & Son also produces large volumes of craft beer each year. The growth in these companies isn’t speculative: there is real demand for the drinks.

"The craft beer industry has exhibited rapid growth over the past decade, indicating that it is becoming overheated."

The Brew to Beat Based in Waterbury, VT, The Alchemist Brewery has achieved celebrity status in the beer world for its desirable brews. BeerAdvocate gives its signature brew “Heady Topper” a perfect 100 rating. Despite its popularity and despite the incredible demand for the beer (the brewery limits how much a single customer can purchase), the Alchemist refuses to raise the price of Heady Topper above $3 per can. While there are certainly craft

tinue to stock the beer, consumers have to like the product. Consumers have taken a liking to craft beer as many buyers seek out independent labels. If the beers were not selling off the shelves in liquor stores, supermarkets, and restaurants, retailers would not carry them. Since retailers who sell beers are consistently selling craft beers, the growth in the craft beer industry is being sustained by the matched demand. One should consider the fact that the craft beer industry is a peculiar case since supply tends to drive demand. People have a relatively steep learning curve with

Forever Blowing Bubbles As a final point, it’s worth considering that the craft beer movement is not an anomaly. In fact, it lags significantly behind a parallel movement in organic and local foods. The local food movement has been growing for years, especially since Alice Waters popularized it when she opened Chez Panisse in California in 1971. Since then, the local food movement has experienced incredible growth, from farm-to-table restaurants, to the expansion of Whole Foods. The craft beer movement is only in a young stage, and its growth isn’t likely to fizzle out soon.

126-Year Brewery Count 2,538

2,011

2,000

1,000

( June 2013)

1,179

1,500

703

(1887)

Number of Breweries

(1887 – 2013) 2,500

500 (Prohibition)

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Markets & Investing

The Intercollegiate Finance Journal April 2014

NATIONAL

“FINE” LEAGUE

hen it comes to economics and the NFL, exorbitant salaries and high-demand ad slots might be the first ideas to come to mind. What might not be so obvious is the financial incentives in place to keep players safe. Over time, these financial deterrents have become more prevalent and stringent. Most likely a response to recent advancements in concussion research, fines have placed pressure on players to reduce unnecessary roughness in games. However, fining players also raise important questions of efficiency and equality in the NFL. NFL fines have been in place since the late 1980s, but have increased over time and have received more media coverage in the last few decades. Taking a look at some surprising examples illustrates a clear pattern of high fines for risky activities. Ed Reed, a safety for the Baltimore Ravens, tackled another player in “the head and neck area” and consequently received a $55,000 fine for this reckless behavior. Similarly, Ryan Clark, a safety for the Pittsburgh Steelers, was fined $40,000 for a “helmet-to-helmet” on-field hit. Clark was fined $15,000 for previous violations. Despite Reed’s $1 million salary and Clark’s $3 million salary, given the split-second nature of these decision, these fines are substantial. Thinking With Fines The NFL standards not only generate financial incentives, but also change the way the players play the game. Rather than simply defending their ground, safeties now also have to consider their level of force when defending said ground. Will players view these fines as merely unavoidable inconveniences, a cost to be accepted for the good of the team? Attaining that last touchdown may be more important to players than the money spent on fines. They may go for the game-saving tackle even if it means incurring fines.

by Wesley Meyer & Rachel Binder

Fines Per League Year

3 2.5 fines (per million)

2 1.5 1 0.5 0

2002

2003

2004

2005

2006

2007 year

2008

2009

2010

2011

2012

A Ransom for Reputation Medical professionals applaud the NFL for their seemingly altruistic steps toward concussion prevention, though a closer look reveals that the NFL has implemented a myriad of other fines aimed merely at protecting the NFL’s image. Players are now being held accountable, even financially, for their behavior off the field. For example, Leodis McKelvin of the Buffalo Bills was fined $75 for refusing to follow crew-members’ instructions while aboard a flight. Here, we see the NFL equating their players with public officials to the extent that players are held accountable for actions that could reflect poorly on the NFL even when they are conducted in a non-athletic sphere. Even though McKelvin’s fine may seem small, it could be seen as an encroachment upon the player’s personal liberties. These fines demonstrate the ways in which the NFL views its players as ambassadors of its reputation. It would be interesting to consider whether the NFL truly expects the players’ behavior to change as a result of these financial deterrents. Perhaps, the NFL hopes that over time the players will eventually refrain from such inappropriate behavior in order to show a greater respect for the league. Or, more cynically, perhaps the NFL simply wishes to pay lip service to civility. Not So Fine and Dandy? Health and safety fines also have a complex effect on the split-second decisions that the players face during the course of a game. This then raises questions of equality because certain players, depending on their position, are more likely to incur these fines due to the nature of their on-field responsibilities. For example, a defensive player whose job it is to tackle the opponent is more likely to incur a fine than the quarterback who rarely finds himself in such a situation. Should we then expect this system of fines to result in higher compensation for players who play “riskier” positions, just as the risks associated with Alaskan salmon-fishing lead to higher pay for the fisherman? As the frequency of fines increases, this may be a question that the NFL is required to answer.

Year

Total

# of Fines

Most Fined Team

Most Fined Player

2011 2012 2013 (6 weeks)

$1,040,000 $2,825,321 $1,611,160

79 193 100

Steelers (9) Ravens (16) Lions (10)

Ryan Clark (PIT, $40,000) Ed Reed (BAL, $55,000) Dashon Goldson (TB, $100,000)

The Intercollegiate Finance Journal April 2014

Markets & Investing

The Price of Being A

food

trend chaser

Despite its markup, Gluten is growing.

by Ana Rosenstein

ale, brussel sprouts, quinoa. Apart from their designation as “super foods,” these foods all boast another similarity. They have been trends — that is, foods that have risen to the forefront of the foodie scene as the “it” items to order on a menu. Recent food trends have been largely nutritious — the issue at hand is not of a caloric nature. The real concern is the price one must pay to hop on the latest bandwagon. Gluten Spree One recent food trend, however, does not advocate incorporating a specific food into one’s diet but rather banning a food category in its entirety. Up till now, gluten-free diets have been followed by various nutritionists and by those diagnosed with celiac disease or gluten intolerance. Now, the gluten-free industry is worth a staggering $6.3 billion. The prices of gluten-free foods substantially exceed those of their gluten-containing counterparts. To compare the cost of food items in each camp, we looked at the prices listed on Peapod, an online grocery delivery service operating in many US cities. A loaf of Udi’s White Sandwich Bread, a widely distributed gluten-free brand, costs $5.99 whereas the most expensive regular white bread, Country Kitchen, was $4.69 and the least expensive white bread, Stop&Shop Bread White Round Top, was a mere $0.99. Despite this considerable markup, gluten-free is growing. As of November 2013, gluten-free manufacturers Udi’s and Glutino saw a 53 percent growth in net sales for the quarter. CEO of Boulder Brands, parent company of the aforementioned gluten-free brands, revealed to Food Navigator-USA, “In the third quarter, Udi’s net sales grew 74% year-

over-year. Glutino net sales grew 29%. Combined, our gluten-free brands increased net sales 53%. Udi’s and Glutino now average 19.3 items in retail, up from 15.4 last year.” Gluten-Free, Gluten Fall With the rise of a food trend comes its inevitable fall from grace. If producers fail to lower the prices on these foods, their decline will only be accelerated. Customers may be health-conscious, but not at such a high cost. However, as a food becomes trendy, touted by celebrities, nutritionists, and restaurateurs alike, basic economics tells us that the asking price for the respective foods will increase. Once more producers enter the market and cause an influx of new gluten-free products, the prices will level out. While this would benefit those following a gluten-free diet, another problem may emerge as a result of the market’s rise in popularity. Celiac.com, “an invaluable resource to people worldwide who seek information about celiac disease and related disorders,” has examined the projected growth in the gluten-free market. Their study noted that gluten-free products often cost as much as 30 percent more than those containing gluten.

Gluten Fad The problem that begins to emerge, however, is that increased production of gluten-free products will decrease the quality of the products on the market. In order to lower prices and cater to the new demand, gluten-free food manufacturers may be forced to forfeit some of the nutritional value of their products. Furthermore, even as prices deflate, gluten-free items could remain significantly more expensive than those containing gluten. Gluten-free diets are certainly not purely a fad – they are a medical necessity for many. What is a fad, however, are the hoards of people choosing to be gluten-free as part of a quest toward a healthier lifestyle. Ultimately, for those who must avoid gluten for dietary or health reasons, the recent upswing in accessibility of gluten-free food items appears to be a blessing but is at risk of becoming a curse. The items will burn a much larger hole in the pockets of those who are simply riding the gluten-free train as a fad, since these food items will never be priced lower than traditional foods. If the nutritional value is compromised as a result of higher demand, is the cost of gluten-free food worth it?

Markets & Investing

2:47 PM EDT:

10:00 AM

^ DJI 9869.6209

11:00 AM

The Intercollegiate Finance Journal April 2014

12:00 pM

High Frequency Trading

and the Flash Crash of 2010 O by Matthew Janigian

n May 6, 2010, the Dow Industrial average experienced a 1010.14 point swing and an intraday decline of 998.5 points, closing 348 points down. For a few fleeting minutes, approximately $1 trillion vanished from the entire economy. Following this event, which became known as the “Flash Crash,” regulators and investors alike are questioning the role and practices of the high frequency traders who have received a substantial portion of the blame for the crash.

Advent of the High Frequency Nowadays, exchanges are electronic. Buy and sell orders are placed with brokers or dealers, and the trades are then executed electronically. If, for example, a stock was traded on the New York Stock Exchange (NYSE) and a separate stock exchange, it might trade at different prices since the two exchanges weren’t connected. However, through a series of regulations and technological innovations, markets have become more connected. With the passage of Regulation National Market System (“Reg NMS” as it is affectionately known), markets and exchanges have become even further connected. Reg NMS consolidates the markets and it requires that orders be executed at the best price for consumers so that there are no price discrepancies among exchanges. In theory, it should lower the bid-ask spread, thus increasing liquidity. The Millisecond Market High frequency traders (HFTs) operate by using sophisticated computer algorithms to place and cancel orders. This occurs in the space of a few milliseconds; a high frequency trader can execute millions of trades each day. High frequency trading firms only make up two percent of the

nearly 20,000 firms that trade securities and yet they are responsible for 73 percent of all US equity volume in addition to 35 percent of futures volume. Since HFTs are constantly placing orders to buy and sell securities, they are sometimes seen as liquidity providers for the market. Rather than generating liquidity in the market in the leadup to the Flash Crash, HFTs liquidated their positions, which essentially turned them into liquidity consumers rather than providers. In just a short period of time, liquidity quickly evaporated as algorithms flooded the market with sell orders. Flash Crash Following the Flash Crash, a joint Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) report concluded that the cause of the crash was an automated execution of a large sell order in E-mini S&P 500 Futures — futures contracts designed to track the S&P 500 index. A large institutional investor—Waddell and Reed— placed a sell order of 75,000 futures contracts, which amounted to roughly $4.1 billion. This type of transaction wasn’t unusual for the company. However, the trade was executed in a mere 20 minutes as opposed to being spread out over the course of hours, which is more common for a trade of that magnitude. As the futures were sold, their price plummeted. HFTs, who were likely purchasing many of the contracts, began to sell their contracts while the large trade was still being executed. This created a sort of feedback loop that increased the selling speed of Waddell and Reed’s transaction, thus leading to a rapid decrease in prices, which spilled over into the market for individual stocks.

Upon further examination, it becomes clear that there is more to the story than the execution of this sell order. In fact, there were signs of a crash in the hours and days leading up to the event. While HFTs may not have caused the Flash Crash—their trading behavior remained consistent before, during and after—their actions certainly exacerbated it. However, HFTs could not have prevented the crash unless they completely changed their trading strategies by maintaining positions in the futures contracts that were being traded. The rapid drop in prices rebounded within minutes. Upon examining trade imbalance, one can see that at the time of the crash, HFTs exhibited an incredibly high sell imbalance. However, shortly after the prices plummeted, the trade imbalance moved toward a high buy imbalance; prices were so low that traders took advantage of them by rapidly placing buy orders. While the market didn’t completely erase its losses on the day, the crash was, as the name suggests, a short-lived liquidity event. Signs of the Flash Crash started to manifest themselves prior to the actual sell off of E-Mini contracts. One metric used to gauge uncertainty in the market is the volume-synchronized probability of informed trading ( VPIN.) VPIN can be used to estimate order flow toxicity, which is the expected loss from trading with a better-informed counterparty. By examining the VPIN prior to the crash, it becomes clear that there was already a good deal of uncertainty throughout the market prior to the crash. One must wonder if the cause of the Flash Crash was an errant order, or if it was the manifestation of structural changes in the market due to the growth in high frequency trading.

The Intercollegiate Finance Journal April 2014

1:00 pM

2:00 pM

Markets & Investing

3:00 pM

1 2 The Fear Index Currently, the most commonly looked at measure of uncertainty or “fear” in the market is the VIX index (the Chicago Board Options Exchange Market Volatility Index). As is evident from the chart, VIX lags market movements. This is not surprising, though, since VIX relies on changes in prices, which must be observed, not predicted. While VPIN can gauge market uncertainty, it is not a perfect measure. The theoretical calculation behind it requires knowledge of order flow (whether a trade was a buy or a sell), which isn’t directly observable, but can be predicted with certain probability-based algorithms. However, despite this imperfection, empirical data have shown that the VPIN metric is telling of uncertainty in the market before significant liquidity events occur. Flash to Finish Since the Flash Crash, high frequency trading has been subject to greater scrutiny. Regulations have been put in place to make sure that the trading environment remains fair. While it may appear that high frequency traders have an obvious advantage over regular traders, it might be worth drawing a parallel to the advantage that a tall trader had over a shorter person on the NYSE trading floor a century ago. The goal in making markets fair is to make sure no single entity has an unfair advantage over another and to make sure that there is some access to whatever advantages one might have over others (i.e. the opportunity to purchase information). Moving forward, regulators will have to adapt rules to account for the new advances in trading technology. What started out as an agreement among 24 stockbrokers under a buttonwood tree in 1792 has evolved into a complex system of wires, electronics, and soon, lasers. The Flash Crash will likely be one of many short-lived significant market liquidity events, but regulators can prevent or at least reduce the magnitude of these events by more carefully examining market turmoil and uncertainty.

3 9

4 5 6-8

5. 2:41 PM - 2:44PM: 2:47 PM:

$9869.62

1. 2:00 PM:

HFTs start selling, making the algorithm speed up the rate at which it sends the sell orders into the market. The price of E-Minis falls 3% in four minutes.

6. 2:45 PM:

Protests in Greece turn violent; the euro falls sharply.

Automated trading systems temporarily pause in response to sudden price declines.

2. 2:23 PM:

7. 2:45:13 PM - 2:45:27 PM:

Nasdaq begins issuing alerts about unusual price movements.

3. 2:30 PM: S&P volatility index up 22.5% and the DJI was down 2.5%.

4. 2:32 PM: A large sell order was executed using an algorithm to sell 75,000 E-Mini contracts—a $4.1 billion value. HFTs started to absorb the trades.

HFTs quickly buy and resell contracts creating a “hot potato” effect. In total, 27,000 contracts were traded by HFTs, but only 200 contracts were actually bought and held.

8. 2:45:28 PM: Trading in E-Mini futures is paused for 5 seconds to stop steep decline in prices.

9. 2:51 PM: The algorithm stops executing its order.

POLITICAL ECONOMY

Markets & Investing

The Intercollegiate Finance Journal April 2014

Also In This Section Optimum Currency 12 Mundell’s Area: Theories in Practice Ten Freest Economies of the 13 Top World - 2014 14 The Real Cost of Your T-Shirt 16 Rethinking Venezuela 17 North vs. South Korea 18 Ready for the Big Bucks Visit theifj.com for these articles: • Obama and the 2015 Budget • News from Ukraine • 3 Protests, 3 Countries, 3 Continents • The Global Economy: An Update

INFLATION and deflation

in the eurozone The lady or the tiger? by Christopher Dederick

he Lady or the Tiger is an allegorical no-win situation. Regrettably, it is also a telling metaphor for the Eurozone’s ongoing economic troubles. A man, facing trial at the hands of a barbaric king, must enter through one of two doors. Behind one is a woman, whom he must immediately marry; behind the other is a starved tiger. Watching from the crowd, the man’s lover will either see him marry another or be mauled by the enraged beast. The Eurozone likewise faces a choice between the lesser of two evils. In this case, the starved and incensed tiger goes by the name “deflation.”

Reductionist narratives about the origins of the Eurozone crisis pin the blame on prodigal governments and wasteful welfare states. In reality, Europe’s economic woes are manifold, as are the sources of its public debt burden. At the end of the day though, the greatest challenge for the Eurozone’s beleaguered southern states is not debt, but a chronic lack of trade competitiveness. Under the Maastricht Treaty, Eurozone members agreed to limits on public deficits and debt of three percent and sixty percent of GDP respectively. The PIGS countries (Portugal, Ireland, Greece,

and Spain) have been somewhat unfairly blamed for violating these restrictions, earning this unlucky acronym in the process. It may come as a surprise to many that Germany was actually the first country to violate these limits at a time of financial necessity. That is not to say that government profligacy was not a factor. The spread on Greek government bonds narrowed drastically after it joined the Eurozone, lowering government borrowing costs and encouraging the accumulation of debt. Greece’s public debt levels were hidden from public view for years, but in the past

The Intercollegiate Finance Journal April 2014

few years reached levels close to 200 percent of GDP. However, Ireland entered the crisis with a fairly sound fiscal position. That changed when its overgrown financial sector collapsed, forcing the government to guarantee deposits and bailout the country’s banks to prevent a credit crunch that would have frozen economic activity. Spain’s debt-to-GDP levels were well below the 60 percent criteria. Instead, Spain suffered from a massive speculative construction boom, followed by a bust that left it with some of Europe’s worst unemployment. The resulting collapse in tax revenues has caused deficits to skyrocket, as its debt figures continue to creep upward. Similarly, Portugal’s debt grew out of falling tax revenues and fiscal expansion efforts meant to stem the tide of the crisis. Trade Issues Fundamentally, what these countries all share is a serious lack of competitiveness in trade. For years, they ran large current

Map of the

Eurozone

countries

account deficits, importing far more than they exported. Capital inflows financed these deficits, in the form of foreign direct investment as well as investments in financial assets, such as government debt. Current account deficits are not necessarily a sign of weakness, as long as capital is invested productively, so that it generates the GDP growth necessary to pay the interest on accumulated debt. Unfortunately, this was not the case. Instead, capital often flooded into dubious investments and speculative construction projects. Unit labor costs, which measure competitiveness by wages and productivity, simultaneously rose across the board in the periphery. Countries such as Germany meanwhile kept wages stable, even as their productivity improved. The result has been a large intra-European trade imbalance, with Germany overtaking China as the world’s largest surplus country, and the South falling further into trade deficit. Government austerity can reduce

Political Economy

public deficits, but it cannot address falling GDP and the existing debt burden. In fact, spending cuts can exacerbate these issues by reducing aggregate demand and actually shrinking GDP. Sustainable GDP growth is ultimately the only way these countries can ensure the tax revenue necessary to pay their debts, as well as regain the confidence of capital markets and foreign investors. However, Keynesian fiscal expansion is unworkable with existing debt levels. Traditionally, countries allow their currencies to depreciate in times of crisis, boosting exports and GDP. Under a common currency, the Eurozone lacks the means to adjust exchange rates between member states to remedy trade imbalances. Even if the European Central Bank (ECB) were to use foreign exchange operations in an attempt to devalue the Euro, it would not address the heart of the issue, which is the real exchange rate – the price of a basket of goods in one country versus another.

Political Economy

The cost of goods produced in Greece or Portugal is simply higher than the same basket produced in Germany, and arguably less desirable. Deflation or Inflation? Restoring competitiveness to Europe’s ailing economies can thus only be accomplished in one of two ways: deflation or inflation. Ireland has successfully pursued the former. Ireland managed to bring unions, business leaders, and opposition parties to agree to reforms and wage cuts. Doing so reduced the price of goods produced in Ireland, which now enjoys a current account surplus and renewed access to international capital markets. However, such draconian wage cuts come at great social cost; the past few years have been beset with protests and strikes, and standards of living in Ireland have fallen dramatically. Why can this process not be repeated elsewhere? Crucially, Ireland enjoyed the cooperation of all major stakeholders in achieving reforms – a social mandate to

The Intercollegiate Finance Journal April 2014

make these tough decisions. This is a luxury few other Eurozone members enjoy. Where Ireland saw protests, others have experienced protracted strikes. Ireland managed to form a coalition with opposition parties to achieve important reforms; elsewhere, politicians continue pointing the finger. Karl Polanyi, a political econo-

mist, once described people as “fictitious commodities.” Unlike commodities, human beings cannot be expected to react with ambivalence when their wages and livelihoods are at stake. The social costs to pursuing deflation throughout Europe would be immense. Already austerity has fueled the rise of extremist parties across

by Linda Navon Chetrit

Mundell's Optimum currency area:

Theories in Practice by Christopher Dederick

obert Mundell once modeled and established criteria for an optimal currency area: a geographic region with single currency, organized to maximize economic efficiency. The Eurozone, the only real case of a multinational currency union, is ironically the oft-cited example of a joint currency area – ironic, because the Eurozone fails almost every one of the model’s criteria. The Eurozone’s deficiencies as a currency area highlight that it is above all a political project, not an economic one. Similar Business Cycles Economies in an optimal currency area will have similar business cycles. When one economy is growing, the others are likely to be growing as well. These economies are also likely to experience downturns concurrently. When business cycles correspond, the currency area’s central bank can use expansionary monetary policy (lowering interest rates and quantitative easing) when the economy experiences a recession, and raise rates when the economy faces inflationary risks. The Eurozone’s business cycles are idiosyncratic, roughly divided between northern states that are currently growing and a periphery experiencing recessions. Monetary expansion could help combat deflationary fears in the South and ease credit conditions to encourage lending and investment, thereby counteracting insufficient aggregate demand. However, the North is growing, and expansion would likely cause undesired inflation. When business cycles diverge, appropriate monetary policy at any given time also diverges between what is optimal for each economy.

Capital Mobility With well-developed financial institutions and freedom of movement for physical and financial assets, mobility of capital is the only criteria the Eurozone actually possesses. Mobility allows for capital to flow to where investment opportunities are greatest and where it will be most efficiently allocated. Labor Mobility Mobility essentially allows people to move from where there is unemployment to where job opportunities exist. The Eurozone has formal labor mobility: citizens can move freely and work anywhere in the bloc. However, barriers of language and culture still divide the Eurozone. Risk Sharing Systems An optimal currency area will have mechanisms in place to counteract economic shocks that could cause recessions. A central government is the sole fiscal authority with jurisdiction over a country. If a region experiences a recession, the government can target spending to create employment opportunities and fill gaps in aggregate demand. The Eurozone lacks an established fiscal transfer authority. Member states have transferred fiscal funds to one another, mostly in the form of bailouts from Germany. However, the politics of the US federal government spending in different regions of the country are far less complicated than the politics of German taxpayers bailing out the Greek government.

The Intercollegiate Finance Journal April 2014

the continent, and social instability is a threat in itself to economic recoveries. From an economic and social standpoint, inflation may be the silver bullet that Europe needs. Monetary expansion by the ECB to intentionally create moderate levels of inflation would address the Eurozone’s debt and competitiveness issues. It would counteract Europe’s trade imbalance by making German exports more expensive relative to southern exports. In such a scenario, southern European countries would only need to hold wages at current levels to keep prices down and make their exports more competitive, while wages and prices rise in the North. Socially speaking, keeping wages at existing levels during a crisis is easier to achieve than outright wage cuts. Inflation would also erode the real value of existing stocks of debt, thereby reducing an additional burden. Unfortunately, economically and socially judicious policies may be politically untenable. Germany, the Eurozone’s largest economy, has a deep aversion to inflation. Conceivably informed by its historical experiences with hyperinflation, the Maastricht Treaty codified this aversion, charging the ECB with a strict mandate to pursue price stability. More importantly, Germany would see its export-led growth model suffer if the price of its goods started to rise. As the Eurozone’s most powerful member, and a country that already feels it is unfairly paying for others’ mistakes in the form of bailouts, it is difficult to imagine inflation as a politically acceptable solution for the German electorate. In this sense, Europe faces social and economic necessities that are at odds with political realities. Still, maintaining the status quo could prove disastrous. It would likely require at least a partial default on Greek government debt. A default could force Greece to leave the Eurozone and cause contagion throughout southern Europe, driving up rates on sovereign bonds and leaving other Eurozone members incapable of paying the interest on their debt. Since German banks have invested heavily in southern European government bonds, Germany may find itself having to bailout its own financial system. Economic arguments aside, while history may offer a guide to the dangers of inflation, it was austerity, deflation, and the Great Depression that facilitated the rise of fascism in Europe. The political costs of inflation may be high, but a failure to act could be far costlier. European policymakers thus have a crucial decision to make. The question is, will it be the lady, or the tiger?

Top Ten

Political Economy

Freest Economies of the World - 2014 by Tung Nguyen

very year, the Heritage Foundation and the Wall Street Journal make a list of the freest economies of the world based on the following criteria: the rule of law, the limits of the government, regulatory efficiency, and market openness. Each of these categories is rated on a score of 1-100. The higher the score in each category’s subsections, the more free the economy. Here is the rundown for 2014: 1. Hong Kong - Score 90.1 “Small Government, Low Taxes, and Light Regulation.” Let’s highlight Hong Kong’s 20-year history as the consistent #1 for the past 20 years. Hong Kong is part of the People’s Republic of China, but is governed as a commercial oasis under more liberal laws than those extended to Mainland China. Market openness is high as “trade freedom, investment freedom, and financial freedom [have] been complemented by a transparent regulatory environment and competitive tax regime.” Hong Kong has a “highly motivated workforce and a high level of labor freedom,” adding to its “economic dynamism and resilience.” 2. Singapore - Score 89.4 “High levels of trade freedom and regulatory efficiency.” Similar to that of Hong Kong’s basic descriptions, Singapore emphasizes more strength in its regulatory efficiency, as “a strong tradition of minimum tolerance for corruption is institutionalized in an efficient judicial framework, sustaining the rule of law in the dynamic economy.” 3. Australia - Score 82 4. Switzerland - Score 81.6 5. New Zealand - Score 81.2 6. Canada - Score 80.2

7. Chile - Score 78.7 8. Mauritius - Score 76.5 9. Ireland. Score 76.2 10. Denmark. Score 76.1

The Heritage site cites economist Friedrich Hayek, “To be controlled in our economic pursuits means to be always controlled.” In this sense, the Heritage Foundation defines economic freedom to be as essential as political freedom. where is the usa? Why is the United States not in the top ten? It was last year as #10, but now it has been downgraded to #12. The Heritage Foundation asserts that to be economically free is to be conduct business without the overbearing interference of government regulations. According to the report, because of the “substantial expansion in the size and scope of government, including through new and costly regulations in areas like finance and healthcare,” the US is experiencing an “erosion of U.S. economic freedom.”

Political Economy

The Intercollegiate Finance Journal April 2014

The Real Cost

of Your T-Shirt by Sarah Park

The Intercollegiate Finance Journal April 2014

Political Economy

The Damaged State of Bangladesh's Garment Industry

he $20 billion garment industry in Bangladesh has grown tremendously over the past several years. Low wages and a massive workforce have attracted the business of many international retailers, and ready-made garments now make up 80 percent of Bangladesh’s total exports. In fact, after China, Bangladesh is by some measures the world’s largest exporter of readymade garments and the industry seems poised for even more growth in the future. While retailers have benefited from the low costs associated with having their products manufactured in Bangladesh and the owners of the factories have benefited from large profits, these monetary advantages have come at the expense of the lives of the factory workers themselves.

bargaining power because factory owners do not give them contracts and owners are able to fire workers arbitrarily. The Path to Change Following the collapse of the Rana Plaza factory complex last April that killed approximately 1,100 workers and a fire at another factory soon after, the govern-

the country’s factories and requires them to meet certain standards in order to continue operations. Although inspections began at the end of February, due to political and labor unrest, they most likely won’t be completed until September. Further complicating matters are disagreements between members of the Accord and Bangladesh’s government and garment industry over what standards should be used. Members of the industry and government argue that the standards are too high to be met without significant financial assistance from outside sources. According to the international operations director of the Accord, Alan Roberts, every one of the factories being inspected will need to make some changes if they want to remain in business. Factory owners who are against the new standards contend that they will only increase operating costs, which will in turn force them to increase the rates they charge to retailers. Although the exact effect that these increased costs would have on the garment industry overall is unclear, the government and factory owners fear that the higher costs will detract from business and encourage retailers to take their orders elsewhere. The road ahead for factories in Bangladesh is sure to be mired with problems as the government strives to improve conditions for its workers. While Bangladesh has been able to enjoy growth and economic prosperity as a result of its garment industry thus far, it has come at the cost of the well-being of its citizens, and the government must now learn to balance the two in order to move forward.

"Most factories in Bangladesh are lacking basic safety features, such as fire extinguishers."

A Crisis of Governance Because of the country’s economic dependence on the garment industry, the main players of the industry wield significant influence among all political parties and have been able to successfully circumvent or ignore regulations on factory conditions and the treatment of workers. Further exacerbating the issue is the fact that there is a significant shortage of inspectors able to hold the factories accountable. Most factories in Bangladesh are lacking basic safety features, such as fire extinguishers, or are filled with safety equipment that is outdated or insufficient. The workers themselves are treated poorly, barely paid, and have no guaranteed rights. The majority of the workers are women — whose rights in the country pale in comparison to those of men. Workers are also stripped of any

20%

other

exports

80%

Garment exports

Bangladesh's Export Income

ment finally agreed to investigate factory conditions and establish stronger regulations for its nearly 4,500 factories that employ over four million people. In addition, international retailers agreed to invest in and help finance safer factory conditions. In late February, five global clothing retailers — El Corte Inglés, Inditex, Loblaw, Mango, and Mascot — announced contributions to a $40 million fund for the victims of the Rana Plaza tragedy. The funds will be distributed to the roughly 4,000 victims who include survivors and family members of the deceased. The funds are intended to cover expenses such as lost wages and medical bills. An International Dispute 150 retailers from around the world have joined the Bangladesh Accord, which mandates inspections of 1,600 of

$37

10%

male

90%

a month

female

Garment Workers' minimum wage

Gender of garment industry workers

Political Economy

The Intercollegiate Finance Journal April 2014

Rethinking Venezuela

Clashes between the opposition and the government in Venezuela have prompted a change in the political system, but after weeks of protests and increasing violence on the streets the future looks grim for the South American nation. by Miguel Ferreira

n Venezuela, protesters and opponents of the government have demanded change, as a result of what they call a mismanagement of the country’s wealth. For some time now, the Venezuelan people have observed a decline in their country’s status as one of South America’s most promising emerging economies. With a breakout in violent street protests, the fabric of the Venezuelan socialist government appears to be tearing, and its fragility is now exposed. Venezuela is home to one of the few remaining legacies of the socialist movements that swept South America in the twentieth century, and until now it seemed like the Chavist governance system would outlast its leader. The death of Hugo Chavez in March of 2013 left behind a nation under immense struggle. The continuous rise in inflation evidenced one of its major problems, along with supply shocks that would motivate masses to join the opposition.

are well acquainted. The scars left behind by attempts at coups, revolutions and general social unrest are still felt among most of the people. But recent history – almost synchronized with protests in Kiev – has proven that the opposition of the Chavist government is still present, and is prepared to make its voice heard. There is however, a question as to why the opposition has decided to act so abruptly, in such a short period of time? The answer lies on the country’s disappointing economic circumstances over the past few years. Venezuela has been troubled with general instability in their domestic industries and a soaring inflation rate (56 percent) that is rapidly do-

Casualties of the Protests Violence in Venezuela appears to be inevitable over the short run, by now the death-count has risen above 50- and Maduro has made it clear that the blood of these men and women is on the opposition’s hands. Other sources have stated that the National Guard alone had murdered 15 of the protesters as a result of the clashes between the opposition and the police force. These accusations have placed the Venezuelan president and his government, in a vulnerable position, which could inevitably damage the popularity of the socialist party. Amidst the violence, there is little doubt that the Venezuelan protests will persist, but the question is whether it is time for a new generation of politics. For as many supporters López has behind him, the socialist government has very good ties with the Venezuelan people and has had plenty of backing in the past few weeks. However, López’s arrest and the increasing violence have had a lot of media coverage from abroad, which could revert in a bargaining chip for the opposition. Nonetheless, the protesters are determined to bring change to economic and social policy in the country. Clearly, from an economic standpoint, the government must re-think its approach to foreign and trade policies in order to reduce the shortages in basic goods, as well as re-engineer their inflationary policies. If this persists to an extreme, this could signify a period of hyperinflation in the future that could leave immeasurable dents in the economy. The problem here consists on the type of government that is exercised in Venezuela: their socialist-leaning approaches tend to result in inflexible policy-making. Otherwise, there is a big chance that Venezuela will be facing a series of episodes of political instability. Through the violence of the crowded streets of Caracas, the turbulent political history of Venezuela repeats itself. But now more than ever, the socialist system is being put into question and Lopez’s supporters are not giving up on their cause so leniently.

"Amidst the violence, there is little doubt that the Venezuelan protests will persist."

A history of turbulence Venezuela is one of South America’s most naturally endowed nations, with an oil reserve that once placed it in the spotlight of international trade. Venezuela’s political history is filled with stories of revolution and social unrest, its people are well acquainted with the need to voice their opinions in light of a better future. Venezuela was colonized by Spain until the nineteenth century and gained its independence short after, but its early political endeavors resulted mostly in military dictatorships. In fact, its most iconic political moments occurred only in 1998 with the Bolivian Revolution. This revolution came about as a product of the heavily corrupt government before Chavez and the economic instability that persisted at the time. Hugo Chavez was elected into power and promised a rigorous economic revival of Venezuela, through policy changes that would change the course of the nation for the next 15 years. As a result of its political history, turbulence is a term to which Venezuelans

ing away with locals’ purchasing power. High inflation rates usually imply a problem in adjustment of wages and prices themselves, because people cannot adjust to the rising price levels. In addition to these sudden changes in the markets for goods and services, opposition has also spoken about the recent shortages in essential goods. Stores’ shelves have been emptied due to a lack in supply from foreign countries. Current President Maduro calls this the result of an ongoing economic war, but opposition has been quick to reject this and attributes it to the government’s inability to impose sustainable economic policy. The opposition has marched through the street of Caracas and demands change: the need for a reformulation of the government’s structure. Leopoldo López leads the opposition and has been charged for conspiring against the government and inciting violence in the capital. Leopoldo López is a Harvard-educated politician, who is a well-known political figure among the Venezuelan community. He has given himself up to the authorities, but did not go silent – delivering a speech to a multitude of his supporters through a megaphone.

The Intercollegiate Finance Journal April 2014

Political Economy

north vs. south KOREA by Eric Han History of Korea In June 1950, a political schism led to inner turmoil in Korea, resulting in a civil war that concluded in division along the thirty-eighth parallel. By 1953, the country that once shared 1,300 years of cultural history as a united country was divided into two. The North, led by Kim Il-Sung, undertook a communist government while the South, led by Syngman Rhee, undertook a right-wing government. The two Koreas ultimately served as two of the greatest economic models of governmental impact on economic growth. At the end of the Korean War, South and North Korea were virtually identical. They shared a common culture as well as similar amounts of natural resources, education, and income per capita. The only facet that largely differed was the government and its economic policies. North Korea decided to undergo

central planning and economic isolation from the rest of the world, while South Korea had a relatively free market and preference for international trade. Although South Korea’s rise to democracy was slow and gradual, after two successful military coups in 1961 and 1980, South Korea fully accepted democracy towards the end of the twentieth century. The starkly different paths of the two Koreas resulted in vastly different levels of economic growth and prosperity in the decades that followed. Respective Economic Growths The two Koreas followed very similar economic growth until 1971. This is surprising as many deduced that South Korea would immediately explode past North Korea with its democratic economic policies. Many economists speculate that centrally planned economies

GDP Per Capita

$1,800 North Korea

$32,400 South Korea

< 0.1 North Korea

81.5 South Korea

Internet users per 100 people

POPULATION JULY2013, ESTIMATED

69.2

79.3

Years Old

perform better in their first few decades. Additionally, with revolutionary fervor and aid from the Soviet Union, North Korea was able to keep their citizens well fed until 1972. In the beginning stages of North Korea’s post-war economy, the country grew from brute capital accumulation by forcing citizens to labor, producing military hardware and steel production, etc. However, this age of economic growth came to a halt and began to stagnate as the economy ran out of steam, as shown in figure above. Due to their economic isolation, the Democratic People’s Republic of Korea (DPRK) has largely ceased developing and has hence left many citizens starving today. On the other hand, South Korea developed a strong sense of democracy and free international trade. History has shown time and time again, that international trade and open-mindedness allows for shared technologies, goods, and ideas that ultimately speed up the economic growth of a country, especially in those that were trailing economically, such as South Korea in the 1950s. In the decades that followed, South Korea showed rapid industrial growth and therefore, became known as one of the East Asian Tigers. As one of fastest growing countries in economic history, South Korea left North Korea behind as their distant economically poor cousin. By 2003, South Korea’s income per capita exceeded that of North Korea by more than a factor of twelve. This strongly suggests that government plays an extremely influential role in economic growth, as suggested by the difference in the South and North Korean economics.

26.21 24.72 m North Korea

48.96 m South Korea

North Korea

South Korea

Life expectancy at birth,total population

North Korea

4.08 South Korea

Infant mortality rate 2012

per 1,000 live births

Political Economy

The Intercollegiate Finance Journal April 2014

ready for the

Big Bucks Clinton is coming for the 2016 candidacy, and Ready for Hillary is bringing on the fundraising. by Lauren Sukin

t’s two years before the 2016 Election, and already Democrats are clamoring for Hillary Clinton, donating funds through the Super PAC “Ready for Hillary.” The existence of this super PAC points to an eagerness for Clinton to campaign even before the former secretary of state has announced an interest in running. Despite this political readiness, however, the question remains: is Hillary ready financially to run for President? To what extent does campaign financing affect the outcome of a nationwide election?

as “cool” and “tough.” Her Twitter has functionally gone viral, and she has a quasi-pop star status from the abundance of early media attention that she has received. It is a far cry from her depiction during her primary run against Obama. If you were worried about campaign financing before, this incredibly early campaign start should make those worries worse. Campaign funding generally increases over time, assuming a candidate makes it through preliminary hoops, such as winning in early primary states (or, in this case, actually declaring a candidacy), which means that fundraising’s importance in this election is going to be amplified. The group, Ready for Hillary, was created in January of 2013, making it over a year old. In 2013, three years before the election date, Ready for Hillary raised $4 million from 33,361 donors. The group has continued to raise funds in the early months of 2014. $4 million may seem like a lot – and for this early in the cycle, it is – but it is a drop in the bucket compared to overall campaign spending. In 2012, Romney spent $992 million for his campaign while Obama spent $985.6 million for his. This shows the extent and amount of revenue that is truly needed for a successful campaign.

"What early campaign fundraising for Clinton really means is that any potential Democratic contender who wants to go head-to-head with this political Goliath is at a big disadvantage."

Preparing for Primaries The PAC’s mission is to lay groundwork for a possible Clinton campaign, generating interest, support, and finances to make campaign mobilization easier. The group is also urging Clinton to actually declare her candidacy – even though the election is still years away. Get ready for a rough ride if you live in Iowa. Campaigning in the state has inched earlier with each presidential year, but Ready for Hillary has already made the leap. In January, organizers for the PAC initiated early efforts aimed at putting Clinton on the ballot. PAC leaders met with key Iowa Democrats, and the group is beginning grassroots efforts as well. Ready for Hillary has also organized in the early primary states of New Hampshire and South Carolina as well as initiatives in major cities across the country. It is a bit ironic that Ready for Hillary is raising money by targeting young voters, throwing parties, and branding Hillary

The Intercollegiate Finance Journal April 2014

Campaign Finance, 1898 - 2010

Political Economy

$1,188,664,055 given

top organizations

Individuals PAC Includes contributions from the employees of the organizations, their family members, and their political action committees. Goldman Sachs Merrill Lynch Morgan Stanley Kleiner, Perkins et al. Lehman Brothers Bear Stearns Chicago Mercantile Exchange Credit Suisse First Boston Fidelity Investments Paloma Partners

republicans vs. democrats

$37,902,328 $16,939,809 $13,313,535 $10,317,942 $8,999,443 $8,593,217 $7,910,858 $7,391,457 $6,840,985 $6,698,350

Lessons from 2012 However, most of the money raised by candidates is not actually from super PACs. Obama’s main PAC, Priorities USA, contributed seven percent of Obama’s campaign funding, while Romney’s main PAC, Restore Our Future, contributed 16 percent. A variety of other PACs came into play as well. Ready for Hillary will

not necessarily be Clinton’s biggest PAC, but it will certainly be one that makes the earliest dent in her fundraising plans. Campaign spending is not all about the numbers, either. As evidenced by Obama’s receipts, spending more money is not always the best option – it is about spending money prudently, using well-targeted and well-timed advertising as well as voter-mobilization techniques. Additionally, hiring the best campaign managers and creating the best strategies should also be a priority. Without those, no amount of money will buy a golden ticket. Early funding does not matter solely for Hillary’s ability to beat Republican candidates on the main stage. The assumption that Clinton will win the democratic primary is just that – an assumption. There are still other potential candidates that she will compete with. Still, having money will give Hillary a competitive edge in the upcoming election. How does this spending compare to Hillary’s previous campaign? In 2008, Clinton raised approximately $229.4 million for her primary campaign, which concluded in the spring of 2008. Unfortu-

Republicans (48%) Democrats (45%) Other (7%)

State VS. Federal

Federal (76%) State (24%)

nately for Clinton, she spent more money in losing a primary than any previous Democratic candidate. However, we shall see if history will repeat itself. What early campaign fundraising for Clinton really means is that any potential Democratic contender who wants to go head-to-head with this political goliath is at a giant disadvantage. Not only will Clinton have an abundance of name-recognition, but early, well-funded, and active grassroots movements, like Ready for Hillary, have given her a quite literal head start on campaigning. For a new candidate to reach Hillary’s level of recognition or to deflate her reputation as the next Democratic presidential candidate will be no small feat.

by Charlie Benson

BUSINESS & STARTUPS

Markets & Investing

The Intercollegiate Finance Journal April 2014

Also In This Section 22 3D Printing: Sci-Fi Brought to Life Under the Radar: Is There an Ad24 vantage to Keeping your Startup Secret “Crash” Saga: King Games’ 25 Candy IPO is the Real Puzzle Visit theifj.com for these articles: • Lettuce Share Our Food with You: Market Shares • Uber: Taking on the Taxi Industry in Style • Shock in Silicon Valley: Explaining the Facebook-Whatsapp Deal • Brief Flight and Sudden Fall of Flappy Bird

Marketing to the Brain:

Science or Scam? by Julia Verbrugge

t this very moment, over 90 neuromarketing consulting firms in the United States are trying to figure out what you want before you even realize that you want it. Neuromarketing, a term which came into vogue with connoisseurs of marketing research in 2002, has no firm definition. In business, it is often understood more narrowly as a business tool with which marketers sell products by applying neuroimaging techniques. The field has generated a great deal of controversy, especially in the media. Critics warn of the threat of marketers finding the mythical “buy button in the brain” and deem the field “creepy science,” “mindreading,” and the “misuse of scientific knowledge.” On the other hand, might neuromarketing prove beneficial by allowing marketers to tailor their products more exactly to consumer’s tastes? In order to provide answers and decide

whether neuromarketing is a legitimate meeting point between marketing and neuroscience, the underexplored field must receive more scientific and less sensationalized attention.

"a wealth of recent research supports neuromarketers' hopes that neuroimaging provides hidden information about the consumer experience."

Inside the Black Box As neuromarketing firms constantly note, up to 95 percent of the decision-making process takes place below the conscious level. This means that when making decisions, consumers rely on both conscious and subconscious processes, also known as “system 1” (automatic) and “system 2” (deliberative) thinking. In the past, marketers understood the human mind as a largely impenetrable “black box,” and relied on empirical observations in order to understand consumer decision-making. Now, with the help of neuroimaging techniques such as EEG, fMRI, and eye-tracking, neuromarketers can probe the “black

The Intercollegiate Finance Journal April 2014

Business & Startups

box” of the consumer mind and uncover the subconscious drivers of purchasing behavior. Though these technologies remain far from ideal, researchers note that they currently offer the best evidence regarding how the brain processes information linked to buying decisions.

Tip #1

Don’t go shopping feeling sad Not So Easy Neuromarketing faces considerable technological Research subjects offered to pay 4x more for an item after roadblocks. Concrete interpretations cannot be watching a “sad” emotional video compared to those who made using fMRI or EEG data, so researchers viewed a “neutral”nature video. must take caution and continue to explore the specific relationships between thoughts, emotions and specific neuronal activities. Color & Marketing This means that the cognitive processes associated with consumer decision-makTip #2 1% sound/smell 6% texture 93% visual appearance ing cannot be reduced to a single area Wait before of activation. Put simply, it means you don’t need to worry about marketers making a decision finding a “buy button” in your brain. When marketing new products it is crucial to consider to purchase that consumers place visual appearance and color above For now, the technologies remain imall other factors. precise, expensive to use and limited. Psychologists found For instance, when neuromarthat people reduce keters hook up research participants 15% other 85% color their perceived valto EEGs and record their brain activity as they watch various advertiseue of a reward when ments, there are various limitations the amount of time 85% of shoppers place color as a primary reason for why involved. The primary issue is that they buy a particular product. before receiving the EEGs reveal whether the participant is paying attention, but reward is increased. not the specific details of his Delaying access to or her engagement. Though Color & brandin g a reward actually the technology can tell rereduces the brain’s searchers whether the 80% increase in brand recognition participant’s emotional response to the response is positive or reward. negative, it cannot make the Color increases brand recognition by 80%. Brand recognidistinction between specific positive responses such as amusement or awe. Online Shopping

Power words

Exploiting the Implicit 52% Despite its limitations, advocates ar42% 60% gue that neuromarketing has the potential to further the effectiveness of market research techniques. They point to the issue that conventional market research methods rely on the explicit verbal responses of consumers, which can leave blind spots regarding thoughts, 42% of shoppers base their 52% of shoppers did not re60% of consumers feel at opinion of a website on ease and are more likely turn to the website because feelings and behavior. Neurologically, overall design alone. to buy when the word of overall design. this implies an over-reliance on the “guaranteed” is associated conscious, which could cause market with the product. researchers to miss crucial data occurring below their “radar screen.” Given that neuroimaging holds the to reveal their use of neuropotential to directly record consumers’ thoughts and actions in marketing techniques. an implicit rather than explicit manner, neuromarketing offers Neuromarketing is at a a potential solution. crucial point in its developIt’s not just neuromarketing firms that defend the emerging ment. While the emerging field field, however. Within the academic sphere, a wealth of recent does provide valuable information research supports neuromarketers’ hopes that neuroimaging about the consumer mind, it does provides hidden information about the consumer experience. not give marketers a “window into Within the business world the field also finds support, and com- the subconscious” or access to a conpanies like Google use such marketing methods to test consumer “buy button.” Rather, it is a valusumer impressions. These methods have even gained traction able new tool for market researchers, in politics, though politicians are understandably more hesitant and definitely one to watch.

52%

52% of customers are more likely to enter a store if there is a sale sign in the window.

Business & Startups

The Intercollegiate Finance Journal April 2014

3D Printing: Sci-Fi Brought to life by Samantha Wong

D printing has the “potential to revolutionize the way we make almost everything,” said President Barack Obama during his State of the Union address. While President Obama was referring to 3D printing in manufacturing industries, 3D printing may revolutionize the healthcare sector as well. Also known as additive manufacturing, 3D printing is the use of successive layers of material to print out three-dimensional objects. This allows manufacturers to create a wider variety of products without building expensive molds for each one, as entailed by more ‘standard’ manufacturing processes. Instead, a 3D printer reads a design file and builds the product from the bottom-up by stacking materials on top of each other, rather than pouring materials into a mold’s hollow space. While this may seem like a form of futuristic tech-

nology straight out of a sci-fi movie, 3D printers have actually existed since the 1980’s. Since then, 3D printing has grown into a multi-billion dollar industry, with many recent advancements coming in biotechnology. Printing Ears and Kidneys During a 2011 TED Talk, Dr. Anthony Atala presented the exoskeleton of a human kidney printed using bio-ink and cells that replicated kidney tissue. This exoskeleton would not be functional inside an actual human body, as it was missing the intricate inner structure of a kidney that enables the organ to filter blood. What Atala did present however, was the early stages of 3D printing organs. While the prospect of being able to deliver organs to those on the extensive transplant list is still decades away, 3D print-

a brief history of 3d printing

"Scientists from all over the world are continuously researching and developing new innovative ways to improve lives using 3D printers."

1992 - BUILDING PARTS, LAYER BY LAYER

2002 - A WORKING 3D KIDNEY

The first SLA (stereolithographic apparatus) machine is produced by 3D Systems. The machine’s process involves a UV laser solidifying photopolymer, a liquid with the viscosity and color of honey that makes three-dimensional parts layer by layer. Although imperfect, the machine proves that highly complex parts can be manufactured overnight.

Scientists engineer a miniature functional kidney that is able to filter blood and produce diluted urine in an animal. The development led to research at the Wake Forest Institute for Regenerative Medicine that aims to “print” organs and tissues using 3D printing technology.

1980s

1984 - The Birth of 3D Printing Charles Hull invents stereolithography, a printing process that enables a tangible 3D object to be created from digital data. The technology is used to create a 3D model from a picture and allows users to test a design before investing in a larger manufacturing program.

1990s 1999 - ENGINEERED ORGANS BRING NEW ADVANCES TO MEDICINE The first lab-grown organ is implanted in humans when young patients undergo urinary bladder augmentation using a 3-D synthetic scaffold coated with their own cells. The technology, developed by scientists at the Wake Forest Institute for Regenerative Medicine, opened the door to developing other strategies for engineering organs, including printing them. Because they are made with a patient’s own cells, there is little to no risk of rejection.

2000s 2006 - SLS LEADS TO MASS CUSTOMIZATION The first SLS (selective laser sintering) machine becomes viable. This type of machine uses a laser to fuse materials into 3D products. This breakthrough opens the door to mass customization and on-demand manufacturing of industrial parts, and later, prostheses.

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How 3D Printing Works 1. A laser source sends a laser beam to solidify the material.

Laser source 1

2. The elevator raises and lowers the platform to help lay the layers.

elevator 2

3. The vat contains the material used to create the 3D object.

vat 3

4. The 3D object is created as parts are layered on top of each other.

layered 4 parts

5. Advanced 3D printers use one or more materials, including plastic, resin, titanium, polymers, and even gold and silver.

material 5

3D printers work like inkjet printers. Instead of ink, 3D printers deposit the desired material in successive layers to create a physical object from a digital file. ing’s current application to medicine is still an extremely valuable tool. Just last year, Cornell biomedical engineers unveiled the first 3D printed human ear. This artificial ear had the appearance and function of a natural human ear. For children suffering from microtia, a congential deformity that can cause auditory loss, this advancement can help restore their hearing. Scientists from all over the world are continuously researching and developing new innovative ways to improve lives using 3D printers. This has led to the development of 3D printed prosthetics, medical implants, blood vessels, skin, and even eyes. Drug Tests on Printed Organs On Jan. 29, Organovo’s CEO Keith Murphy announced that the firm had reached a huge milestone in the research and devel-

The first person walks on a 3D-printed prosthetic leg, with all parts — knee, foot, socket, etc. — printed in the same complex structure without any assembly. The development guides the creation of Bespoke Innovations, a manufacturer of prosthetic devices which makes customized coverings that surround prosthetic legs.

opment of human liver tissue models. Organovo, a San Diego based biotech company, hopes it can commercialize 3D human livers for drug testing by next year. The company hopes its product can improve testing results at other pharmaceutical and biotech firms. Currently, companies typically use cells grown in petri dishes or animals to test their drugs. These methods of testing are flawed, as the actual human body reacts to drugs in a much more complex manner than individual, cultivated cells. With 3D models, R&D results can more accurately represent how drug tests or cancer treatments will affect an actual human. Many drugs seeking approval from the FDA fail phase 3, clinical testing on humans, and Organovo hopes its technology can save billions of dollars on research.

The Future Printing Life Like the pharmaceutical companies it hopes to serve, Organovo has discovered that creating new medical technology is an expensive and risky task. Like most biotechnology companies, Organovo has nearly no source of revenue and requires huge amounts of funding for R&D. This comes mostly from grants and development collaborations. To raise capital to further research in their own company, Organovo has sold more shares, diluting its share price and scaring off many investors. Yet finances are not Organovo’s only issue: There is also an issue with the printing itself because certain materials, such as human cells, can become useless upon being placed in the printer. Solving this technical challenge is a major obstacle to printing organ transplants. Organovo is also competing with other 3D printing companies, such as China’s Regenovo, that have similar business models and perhaps better technology. These factors may lead some investors to remain skeptical of Organovo’s ability to advance research and product development.

2011 - WORLD'S FIRST 3D-PRINTED CAR Kor Ecologic unveils Urbee, a sleek, environmentally friendly prototype car with a complete 3D-printed body at the TEDxWinnipeg conference in Canada. Designed to be fuel-efficient and inexpensive, Urbee gets 200 mpg highway and 100 mpg city. It is estimated to retail for $10,000 to $50,000 if it becomes commercially viable.

2012 - 3D-PRINTED PROSTHETIC JAW IS IMPLANTED Doctors and engineers in the Netherlands use a 3D printer made by LayerWise to print a customized three-dimensional prosthetic lower jaw, which is subsequently implanted into an 83-year old woman suffering from a chronic bone infection. This technology is currently being explored to promote the growth of new bone tissue.

2010s 2009 - FROM CELLS TO BLOOD VESSELS Bioprinting innovator Organovo, relying on Dr. Gabor Forgacs’s technology, uses a 3D bioprinter to print the first blood vessel.

2020s

2008 - MAJOR BREAKTHROUGH FOR PROSTHETICS

Business & Startups

2011 - 3D PRINTING IN GOLD AND SILVER i.materialise becomes the first 3D printing service worldwide to offer 14K gold and sterling silver as materials — potentially opening a new and less expensive manufacturing option for jewelry designers.

2011 - WORLD'S FIRST 3D-PRINTED ROBOTIC AIRCRAFT Engineers at the University of Southampton design and fly the world’s first 3D-printed aircraft. This unmanned aircraft is built in seven days for a budget of £5,000. 3D printing allows the plane to be built with elliptical wings, a normally expensive feature that helps improve aerodynamic efficiency and minimizes induced drag.

Business & Startups

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Is there an Advanatage to Keeping Your Startup Secret? by Michael Golz

n an era of primetime spy series and rapid innovation, the idea of stealth brings to mind military drones and (not-so) covert NSA operations. However, more than just a government tool for spying, stealth is oftentimes a fundamental strategy in technology startups. For many aspiring entrepreneurs, avoiding public attention until product completion is a more strategic and safer route to take. Why So Secretive? The world of technology development is cutthroat. Unfortunately, simply having a good idea is often not enough: Founders must also execute on that vision by raising funds and quickly getting to market, where they can receive input from consumers. In fear of more well-established and better-funded companies, however, entrepreneurs sometimes resort to secrecy to preserve their first-mover advantage. They seek the right to say, “We created this first, we started this market,” and with any luck, set the groundwork for a strong share in the market that will surely expand beyond their own firm very quickly once a new concept is unveiled. Yet this decision can hold the product back when it finally is unveiled, depending on the circumstances of the covert operations. The Case of Transmeta Meet Transmeta: the quintessential example of a stealth startup. Set up in 1995 in Santa Clara, California, Transmeta hoped to revolutionize the semiconductor industry by introducing a low power microprocessor. The company’s official public launch did not occur until January of 2000, nearly five years after its inception. To achieve such furtiveness, founders Bob Cmelik and Dave Ditzel were not only working to perfect their product, but also, through non-disclosure agreements, ensuring that their idea would not become public. Non-disclosure agreements, or NDAs, of which Transmeta had nearly 2,000, are signed between parties to prevent basic but necessary business partnerships from allowing confidential information to slip out. Whoever was computing the company’s payroll or supplying Transmeta with basic materials had to promise to keep contractual information secret. In Transmeta’s case, the stealthy development phase did not pay off in the long run. After a series of cryptic online announcements, they finally released their low-power Crusoe processor. However, the company succumbed to financial losses by 2005 after rival firms, namely Intel and AMD, produced higher-performance hardware. In the end, Transmeta’s product failed to match the founders’ promises for improved overall performance and user experience. All for Nought For many critics of covert enterprise, the crucial point regarding Transmeta

is that it was ultimately, not rival companies that caused the company’s failure. The downfall was in the founders’ inability to provide a product to match the hype they had generated after releasing their low-power processors. Though Intel and AMD could not initially match the lower energy consumption of the Crusoe, their devices translated into actual battery-life extension rather than theoretically superior power saving. It was not necessarily a question of entrepreneurial espionage, but rather just one firm failing to achieve at the level of its competitors. With the everyday consumer seeking visible enhancements in tech usage, Transmeta underestimated the need for highly demonstrable improvements. Should You Take Off the Invisibility Cloak? Any company seriously considering secretive operations to develop their product may be approaching entrepreneurship from the wrong angle. In the end, the first-mover principle is not nearly as important as learning about consumer preferences. If any enterprise fails to recognize what the market is truly demanding, or cannot present a product to sufficiently meet that demand, it has no chance of success. Entrepreneurship is not usually a question of protecting an idea from firms with better resources. An entrepreneur should not actively seek to avoid the input and support that comes with open product development. The fundamental concern is not in hiding your ideas until they are ready but rather having the wherewithal to adjust to the market and respond to peer criticism and competition in a way that ensures your final product is realistically adapted to the current environment.

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Business & Startups

Candy "Crash" Saga: King Games' IPO is the Real Puzzle

clearer case of copying. In 2009, King talked to game developer Matthew Cox about licensing his Flash game Scamperghost. After the deal fell through, King ublin-based King Games, the maklaunched a game called Pac-Avoid that ers of popular mobile game Candy was almost identical in gameplay and Crush Saga, filed for an initial public ofvisuals. Though King claimed that they fering on the in mid-February. Looking merely sponsored a similar game, the to raise about $500 million in equity, replacement developer revealed to Cox King’s story may seem like an obvious that he was approached by King and told one: a social game company looking to to “clone the game very quickly” with a cash out. But the details of goal of “[beating] the release the IPO may surprise you. of the original game.” After "King makes money through selling As those familiar with the these allegations came foraddictive game can tell you, consumable in-game items, helping ward in light of the “candy” Candy Crush doesn’t make trademarking this January, money through advertising. users move up levels. Despite what may King took down Pac-Avoid King stopped selling outside seem like a ridiculous strategy, King and released a statement that ads last year, but even before they don’t clone games. In has annual revenue of $1.88 billion." recent weeks, similar claims that, advertising accounted for 10 percent of revenue in have come up in reference to 2012 and only one percent in 2013. It ment; repeating Candy Crush’s success is other games offered by the company. doesn’t charge for its games, either. In- far from a scientific process. And for iOS stead, King makes money through selling games, success is often all or nothing: A Puzzling IPO consumable in-game items, helping users your app either rises to the top of the Complicating the picture is that it’s not move up levels. Despite what may seem charts or languishes in obscurity. clear why King is filing for an IPO. The like a ridiculous strategy, King has annual company doesn’t need to raise cash— it revenue of $1.88 billion and a profit of King Copy has no debt and a comfortable amount of $568 million, 80 percent of which comes King has recently drawn ire from the reserves, and recently paid $504 million from Candy Crush. As a February Atlantic game development community over in dividends to its initial investors, about article entitled Candy Crush: Addictive copyright claims. King’s trademark ap- the same amount it is offering as stock in Game, Incredible Business, Horrible plication for the word “candy” was filed the IPO. Under “Why we’re going public” Investment put into perspective, King with the US Patent and Trademark office in the SEC filing, King CEO and co-foundmade more than a quarter of Amazon’s in January. Though it would be on King er Riccardo Zacconi offered only, “Going lifetime earnings in just a year. to prove in a court of law that any other public creates a liquid market for our candy-themed game infringes on their current and future employees and equity Not-So-Sweet Deal copyright to the point of confusion in the holders and will give us greater flexibility Although the IPO is predicted to raise marketplace, the trademark would allow to act on strategic opportunities if they $500 million and King has been cash flow them to send threatening cease-and-de- arise in the future” - which is true of any positive since 2005, most financial writ- sist letters to developers. Independent IPO and doesn’t say much of anything. ers are bearish on King. They point out developers, unequipped to fight these “Use of Proceeds” lays it out even further: the “one-trick pony” nature of the game battles, are likely to roll over. After cases “We have not allocated any specific porcompany, whose second-most popular were publicized, the indie game commu- tion of the net proceeds to any particular game draws only 15 million daily users nity launched CandyJam, a site dedicated purpose, and our management will have in comparison to Candy Crush’s 93 mil- to the creation of games with “candy” the discretion to allocate the proceeds as lion. Many investors fear that King could and “saga” in their name, many of which it determines.” King doesn’t have a plan be the next Zynga. The other social game ridiculed King. At the end of February, for the cash other than plowing it back company, which was reliant on the Face- King withdrew its trademark application. into development. book game FarmVille, released a muchIn addition to the copyright saga, Regardless of potential scandals and hyped IPO in late 2011, which performed King has also been accused of copying lack of strategic planning, this is the idestrongly initially but later declined from other games. While the mobile game al time to issue an IPO, as their viral hit a high of $15 a share to a low of $2.12. industry is heavily derivative, King’s begins to cool and King looks to invest Though the price has rebounded slightly, cloning of other games is egregious. For in future games. While not exactly a solid many point to Zynga as the most recent example, Candy Crush Saga’s gameplay investment, King Games’ sheer amount ultimate overhyped tech stock. is highly similar to that of Bejeweled, of revenue makes it a hard stock to igKing does have a strong financial and several of its other games have sim- nore. But despite King’s sweet offering, position, with no debt and both strong ilar parallels. However, there’s an even investors just might not bite.

by Elizabeth Studlick

cash flow and reserves ($708 million and $409 million, respectively, in 2013.) King has plenty of games in the pipeline, all of which it has claimed have been more successful than Candy Crush had been at that same point in its life. King calls its process “unique, repeatable, [and] scalable,” as represented by the Saga designation across most of its titles. But the mobile gaming industry is far from secure, making King an unreliable invest-

PERSONAL FINANCE

Markets & Investing

The Intercollegiate Finance Journal April 2014

Also In This Section 28 The Low Down on Financial Aid as Showroom: Threat or 29 Store Resource? University Finances: An Interview 30 with Brown’s Chief Investment Officer Get Digital: The Future of 31 Let’s Wallets Visit theifj.com for these articles: • Principles of College Savings • Cheap-On-Investing: Five Affordable Stocks for College Students

More Than Your Problem:

The Dangers of Credit Card Debt by Christian Ackmann

illions of Americans receive credit card applications in the mail each year. You have probably received several letters from banks advertising special credit cards with exclusive offers for students. Banks will often send these letters regardless of your financial situation or credit score. As a result, many subprime borrowers are able to easily obtain credit. Access to credit can increase consumer spending and cause economic growth, but irresponsible usage of credit has the opposite effect. The recent trend of marketing credit cards to subprime

consumers is often predatory and can negatively impact the macroeconomy. Subprime Targets If you have been in an airport in the past few years, you have likely seen a kiosk offering free t-shirts to everyone who signs up for a Southwest Rapid Rewards Card. Most people who walk by these stands were not considering applying for a new credit card before they arrived at the airport, but many people impulsively fill out the application. Similarly, the Chase Sapphire Preferred Card offers 40,000

bonus points if you spend $3,000 within the first three months of signing up. Banks offer enticing sign-up bonuses to lure consumers to credit cards that they may not need. While there is nothing inherently immoral in the marketing of credit cards, the temptation of easily accessible credit and gimmicky incentives is alluring to less financially literate consumers. The people who are the least financially literate – and therefore least likely to be able to pay credit card bills on time – are sent countless credit card applications. This

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is especially dangerous when consumers apply for new credit cards to make payments on the debt of old cards. It is not uncommon for a person who has credit card debt at a certain bank to be sent another credit card application from the same bank. Therefore, a problem arises when issuers focus disproportionately on subprime and low-income borrowers. Borrowers are typically considered subprime if they have credit scores below 660, and these borrowers frequently accumulate consumer debt. Consumer debt is comprised of credit card debt and debt from alternative consumer financing, such as payday loans.

banks that give credit cards to unreliable customers are assuming risks similar to the subprime mortgage lenders in 2008. Since subprime consumers are the most likely to accumulate credit card debt, lowered lending standards can increase national consumer debt. For instance, banks in Turkey have recently marketed credit cards specifically to low-income consumers, resulting in $131 billion of consumer debt. Massive consumer debt causes consumption and output to decrease because people must allocate their disposable income to paying back their debt, rather than spending on other goods and services. During the Great Recession,

"Banks that give credit cards to unreliable customers are assuming risks similar to the subprime mortgage lenders in 2008." Regulatory groups, such as the Consumer Financial Protection Bureau (CFPB), exist to prevent predatory lending and deceptive marketing tactics among credit card issuers. In 2012, Capital One was fined $60 million and required to refund $150 million to over 2 million customers who were persuaded to buy add-on products â&#x20AC;&#x201C; such as payment protection and credit monitoring â&#x20AC;&#x201C; they did not understand and could not use. The CFPB suspects that similar deceptive activity is common among many other issuing banks. While the Capital One settlement was successful, the CFPB can only prevent explicitly illegal lending activity, so subtler forms of deceptive marketing may be unavoidable. Macroeconomic Impact When credit is used responsibly, consumer spending and output will increase. Lending standards are loosened as confidence in the economy grows, giving more people access to credit. However,

the decrease in consumer spending triggered many layoffs and unemployment increased. To make consumers start spending, the government can reduce taxes on low-income families or use other conventional economic stimulus policy, but then the household debt will just be transferred to public debt. So how can we limit the negative effects of lending to subprime borrowers? One potential solution is to regulate the marketing strategies of credit card issuers using organizations like the CFPB. Perhaps a more effective long-term solution is to improve financial literacy. According to the Council for Economic Education, only five states currently require a stand-alone course in personal finance for graduation. Fewer than 20 percent of teachers report feeling competent to teach personal finance topics. If financial education is improved, subprime borrowers will use credit more responsibly and many of the dangers of predatory lending will be removed.

Personal Finance

Plastic In Numbers average credit card debt by demographic: $5K

$10K

$15K

$20K

18 to 29 30 to 39 40 to 49 50 to 59 60 to 69 70+

$18,642.81

$10,423.37

Average total debt per American household

Average total debt per American over 18

credit card circulation by brand: 300 M 200 M 100 M

Visa

MasterCard

American Express

Discover

Total credit cards in circulation:

576.4 million

Personal Finance

The Intercollegiate Finance Journal April 2014

The Low Down on

$13,218 per student

average financial aid

financial aid by Sarah Park

he first case of financial aid occurred in 1643 when Lady percent from 2005 to 2012 to almost $1 trillion dollars. Ann Radcliffe Mowlson donated 100 pounds to Harvard While there are many types of financial aid, most college College to help support students who could not afford the tu- students receive the bulk of assistance from either the federal ition. However, it was not until the Higher Education Act of government or the college or university they are attending. 1965 that the federal government began to take on a signifFederal Aid icant role in the administration "With college tuitions rising faster Aid from the federal governof financial aid. The law authoment is administered through rized the creation of several fed- than inflation and debt becoming the Department of Education, eral financial aid programs and and covers costs such as tuition, provided greater funding for a larger issue for many students, room and board, books and colleges and universities. Since supplies, and transportation. financial aid is increasingly then, financial aid has grown The amount of aid you receive exponentially in size and magdepends on demonstrated becoming a greater factor in nitude. In just a decade from need, which is determined by a not only which college students formula that takes into account 2001 to 2011, federal grant aid nearly tripled, and the Amerithings like income, family size, choose, but if they are able to can Recovery and Reinvestment and other assets. Most financial Act of 2009 provided an addiaid packages include a combiattend at all." tional $200 million in federal nation of the following: grants, work-study funding. which do not need to be reWith college tuitions rising faster than inflation and debt paid; loans, borrowed money that must be repaid with interest; becoming a larger issue for many students, financial aid is in- or work-study, which is a paid job or program that helps pay creasingly becoming a greater factor in not only which college for tuition. students choose, but if they are able to attend at all. According However, just because you are eligible for financial aid does to the National Center for Education Statistics, the percentage not mean that it will be given to you automatically. If you wish of first-time, full-time undergraduate students at four-year insti- to receive federal financial aid, or even see if you qualify, you tutions receiving financial aid increased from 75 to 85 percent must apply using the Free Application for Federal Student Aid from 2006 to 2010, with the largest increase at private institu- (more commonly known as FAFSA). It is recommended that you tions. Student debt in the U.S., adjusted for inflation, rose 110 fill out the FAFSA even if you do not think you qualify for aid.

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College Debt In The USA

trillion In addition, you must re-apply every year for financial aid. University Aid Almost all colleges and universities today—both public and private— offer financial aid to eligible students. However, schools differ in their approaches to administering financial aid. Certain schools have adopted a need-blind admissions policy, which essentially means that a student’s ability to pay for tuition will not be a factor in his or her admission decision. Need-blind admissions policies have become increasingly prevalent in order to encourage students to apply for financial aid without having to fear that it will have an adverse effect on their admission. Unlike the Department of Education, which utilizes a formula to determine how much financial aid a student receives, it is unclear how colleges decide who gets aid and how much they receive. Increasingly colleges are practicing what is being called “financial aid leveraging”— giving more aid to high-achieving students in order to gain their enrollment. In order to increase transparency and provide students and their families with more information, the Obama administration has recently released some new consumer tools that are designed to make information more accessible and comparable, such as a model financial aid award letter and a net price calculator to provide students with individualized cost estimates. Scholarships In addition to aid from colleges and the government, which is solely based on demonstrated financial need, many char-

44% of aid came from the federal government

Personal Finance

growth in aid per student

57%

Store as Showroom: Threat or Resource? by Carolyn Stichnoth

howrooming occurs when consumers enter physical stores to browse merchandise, but purchase from another retailer online. Online retailers like Amazon do not pay overhead that comes with operating a physical store, and so often sell goods at a discounted price. Smartphones play a key role in showrooming by providing an easy way to look up more information, explore similar products, and compare prices. In 2011, of those who used smartphones while shopping, 43 percent visited that same store’s website, 40 percent viewed other stores’ websites, and 38 percent used price comparison apps. Stores see showrooming as a blessing and a curse. The threat of losing sales to online retailers is real, but consumers using smartphones while shopping provides an opportunity to create a seamless storeand-online experience. Retailers see showrooming as an opportunity to increase foot traffic in stores and convert online shoppers to in-store buyers. Target, for instance, has initable foundations, businesses, and other organizations offer scholarships. While some scholarships are only available to moderate to low-income individuals, the majority are merit-based, which means that they are awarded based on special skills, talents, or academic achievement.

stalled free WiFi in many stores. Best Buy actually encouraged shoppers to use their store as a showroom during the 2013 holiday season, with many commercials touting Best Buy as “your ultimate holiday showroom.” Best Buy hoped that this would increase traffic to their stores, and once there, shoppers would be impressed enough by prices and customer service. Best Buy also implemented a price-matching policy that applies online or otherwise. Sometimes, this means selling products – especially electronics – at a loss. Often, however, the difference is recouped through sales of associated accessories. Only 10 percent of shoppers actually take advantage of Best Buy’s price-match policy, and so the benefits of the policy – improved trust and sales – overshadow any risks. The crux of the matter now is that companies are faced with an important decision: to follow Best Buy in seeking to exploit the changes in shopper behavior, or take measures to discourage the practice. Furthermore, scholarships do not need to be repaid. Although the world of financial aid may be daunting, as its role in students’ lives increases, it is imperative that students understand what it is and how to apply for it.

Personal Finance

The Intercollegiate Finance Journal April 2014

University Finances An Interview with Brown's

Chief Investment Officer by Alex Drechsler

Joseph Dowling is the Chief Investment Officer of Brown University and is responsible for overseeing the portfolio in which the University’s endowment is invested. Prior to coming to Brown, Dowling founded Narragansett Asset Management, an investment management firm. Dowling discusses the ways in which Brown’s endowment is invested, how students and other members of the community can influence this investment, and how Brown compares to other institutions.

an you explain the mission of the Investment Office? The mission of the Brown Investment Office is to guard and enhance the endowment, as it is an enduring asset that shapes the character of Brown as an institution, ensures the University’s permanence, and supports the many endeavors of Brown’s faculty and students. More specifically, the endowment contributes 16 percent of the University’s annual operating budget ($16,000 per student) that supports the faculty, student body, and the University’s academic infrastructure. To ensure that the Office can continue to support the University at this rate and in perpetuity the Investment Office targets a 8.5 percent annual return that is 5.5 percent (the high end of the University’s 4.5 to 5.5 percent annual spending rate) plus 3 percent (the twenty-year average rate of HEPI (the Higher Education Price Index which is an inflation-adjusted index of the cost of higher education).) In calendar year 2013, the endowment returned 14.9 percent ($401 million) and contributed $141 million to the University. What types of investments does your office make? The endowment is primarily invested

in investment managers and passive indexes that fit into several primary asset classes including: Public Equity, Equity-Like Credit, Hedged Strategies, Private Equity, Real Assets (Real Estate, Commodities, Energy), Fixed Income, and Cash.

Brown university's Asset Allocation Asset Class

Market Value ($ in millions)

% of Endowment

Public Equity

$854

28%

Equity-Like Credit

169

Hedged Strategies

838

27%

Private Equity

587

19%

Real Assets

310

10%

Fixed Income

Tail Hedges

Cash

273

total endowment

$3,057

100%

How do decisions about divestment get made and implemented? The Advisory Committee on Corporate Responsibility in Investment Policies (ACCRIP) considers issues of ethical and

moral responsibility in the investment policies of Brown University. Committee members include students, faculty, staff, and alumni of the University. ACCRIP advises the President on areas where they believe Brown and its governing body, the Brown Corporation, should divest. The Brown Investment Office coordinates with ACCRIP to implement policies adopted by the Corporation. In 1984 Brown University divested from firms doing business in apartheid South Africa at the recommendation from ACCRIP. In 2003 the University divested from direct investments in companies that manufacture tobacco products. In 2006, in response to the humanitarian crisis in Darfur, the University joined several peer institutions divesting from companies that supported the Sudanese government and its sponsorship of human rights violations in Darfur. How is Brown’s investment process different from other schools? Traditional endowments set asset class ranges and keep investments sized within those ranges. They follow the “Endowment Model” made famous by David Swenson at Yale. The Brown Investment Office does not follow this model. We focus much more on finding value, being opportunistic and contrarian. We do not look at what other Universities are doing or mimic their investment style. We set wider asset allocation ranges to shift the focus to investments that provide the most value and capture the best risk-adjusted returns.

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Personal Finance

let's get digital

the future of wallets by Tiffany Chang

hat do you look for when choosing the perfect wallet? If you are like most consumers, security, convenience, and style are among your biggest considerations. A few other factors, such as the number of card slots or tri-fold versus bifold may cross your mind. All in all, finding a wallet that suits your needs can be a frustrating process. This is where technology swoops in to the rescue. For smartphone users, here is a rundown on a few tech-forward products that can ease your wallet-searching woes. Square Wallet By now you have probably heard of Google Wallet. With its usage of Near Field Communication (NFC) technology, payments are as simple as tapping your phone against a special sensor at payment terminals. However, a major problem for Google Wallet is its narrow market. Due to hardware limitations, its signature “Tap and Pay” feature is only available on Android devices. Also, merchants need to have NFC payment terminals installed. Enter Square Wallet, an application from Twitter co-founder Jack Dorsey’s startup Square, Inc. Square Wallet does not use NFC, so it is both iPhone and Android compatible, and over 200,000 businesses accept it. It works by having users enter payment card, loyalty card, and personal information into the application. Then, users only need to open the application and check in to the store (hint: set up automatic check-in for an even faster experience). Simply tell the cashier your name and your card is automatically charged. The best part? It is completely free.

Point of Sale terminals, so there is no need for merchants to install NFC terminals or set up a new payment acceptance methods. The application hit the Apple App Store late February, and is set to launch for Android this April. The company is also releasing a battery phone case version of the device which charges your iPhone 5 or 5S for $99. Coin If the idea of completely forgoing cards is too big of a change, try Coin instead — $50 if you pre-order before the summer release. Fret no longer over the availability of card slots in your wallet: Coin has the dimensions of any standard card, but it smoothly integrates all your cards into one. It has a button which you toggle to switch between cards and swipes just like any card. To store a payment or loyalty card’s information in Coin, you simply need to swipe the card through an apparatus that plugs into your iPhone or Android and take a photo of it. You can then remove the apparatus, and your card is instantly usable through Coin. For additional security, Coin will send a notification to your phone if you accidentally leave it behind, and users have the option to set their Coin to automatically deactivate if it is geographically apart from their phone for too long. Coin promises to reach the wallets of consumers by this summer.

"Fret no longer over the availability of card slots in your wallet: Coin has the dimensions of any standard card, but it smoothly integrates all your cards into one."

Loop Loop is another technology that allows shoppers to use their mobile phones as a method of payment. Loop consists of a small device — retailing for $39 — that attaches to your smartphone and an application in which card information is entered and stored. The device emits a magnetic signal that simulates swiping your payment or loyalty cards through the terminal, just by holding it nearby. The benefit of Loop is that it is compatible with over 90 percent of current

Off to a Slow Start Despite the promised convenience of these payment technologies, there is one major obstacle keeping consumers from adopting these digital options: fear. According to a 2012 study commissioned by American Express, 83 percent of surveyed consumers listed security as their primary concern when asked about payment methods utilizing new technology. Another obstacle is price — while credit cards are free, Loop and Coin will take a bite out of your wallet. These options are also only available to owners of smartphones. Other problems include merchant reluctance to comply — there is no guarantee that they will accept Square Wallet or an atypical card like Coin, so consumers may find themselves still reaching for their traditional wallets. Nevertheless, new technology presents a promising way to improve the consumer’s payment experience and leave your wallet a little lighter (in a good way.)

CAREERS & INTERNSHIPS

Markets & Investing

The Intercollegiate Finance Journal April 2014

Also In This Section Internships: Will They 34 Unpaid Affect Your Career? Creative Economy: South 35 The Korea’s Transformation Creative Economy: 36 The Entrepreneurship at Brown 38 Student Spotlight: Bill Weber Visit theifj.com for these articles: • Career of the Week: Investment Banking • Career of the Week: Consulting • Career of the Week: Accounting • Career of the Week: Actuaries

Internship-less

Freshmen:

How to Stay Ahead of the Game by Claire Su

ost internship programs are built for the purpose of seeking new hires in the upcoming years. Freshmen, many of whom are still unsure about what they want to major in – let alone what industry they want to work in – just don’t fit the bill. Here are some ways freshmen can stay productive during their summer, even without a set internship program. Monetize your interests and skills If existing companies and institutions are not looking for applicants like you, why not hire yourself? Figuring out a way to monetize your skills and interests shows that you are a proactive worker and creative thinker, traits that will help you on your internship search for following summers. For example, one Brown junior who loves cooking, creating visually appealing space, and finance decided to open up a takeout restaurant the summer after her freshman year. Volunteer While many companies are unwilling to pay freshmen to work for them over the summer, non-profit organizations are always looking for more volunteers to spread awareness for their cause. Volunteer for an organization that supports a cause that is important to you and that demonstrates interest in the field you hope to work in during upcoming summers.

Take Classes or do Research on Campus Another reliable option is to take more specialized classes, which will help you pursue a wider range of opportunities for the following school year and summer. If you are interested in economics or finance but have not taken many classes in those fields, consider taking some more technical classes online or at a nearby university, especially if you currently attend a liberal arts school. Also consider reaching out to a professor before the end of spring semester to ask if you can help them with research while you are on campus over the summer. Get a Summer Job Working close to home as a camp counselor, a lifeguard, or a tutor is another way to add to your resume -- even if you are returning to the same summer job you had in high school. Having a low stress job the summer of your freshman year also leaves you with plenty of time to network and build quantitative or computer skills that can help you stay competitive during the next round of internship applications. Spend Your Extra Time Networking As a freshman, you have one advantage over everyone else in the game: time! Spend your extra time conducting informational interviews with professionals and alumni in your area. If you are interested in a specific company, find an alumni or friend’s parent who works there and see if you can shadow them for a day at work. If you can shadow or interview at least one individual every other week, you will be way ahead of the game by the time sophomore year rolls around! The key point is to make sure that you do something productive over the course of the summer that builds on your personal brand. You should be able to talk about the skills you learned through whatever you choose to do and turn your summer experience into a story that demonstrates interest in the field you want to work in.

The Intercollegiate Finance Journal April 2014

What Other Students Have Done the Summer After Their Freshman Year Stephanie H.

Brown University ’15 Economics & Architectural Studies During the summer after my freshman year, I decided to open up my own takeout restaurant. I did everything from painting the walls, to creating the menu, to looking over the finances for ingredients and food preparation costs. Even though I didn’t participate in an established internship program, I felt like I was still able to develop all the skills that interns would learn through a formal program. The summer after sophomore year, I worked at a hedge fund and this upcoming summer, I will be working in the investment banking division at Goldman Sachs. My freshman year summer definitely helped me in my internship search. It seemed to be all people wanted to talk about. People at investment banks and other finance firms get bored of hearing about the typical hedge fund internship and want to hear about a risky and creative venture, which is why the takeout restaurant was such a popular topic in interviews. I got asked more questions about that than I did about my hedge fund internship.

Tim othy p. Brown University ’15 Applied Math-Economics I basically chilled at home and worked on managing my band — I don’t play in it, I just volunteered as manager. I interned at Viacom this past summer in New York and my band managing experience was a topic of discussion in the interview. The skills I learned from managing the band definitely did translate to the Viacom internship.

Kathleen H.

Brown University ‘14 Applied Math-Economics I didn’t realize that I was interested in economics until late second semester of freshman year. I decided to take macroeconomics classes over the summer so I could start taking courses with prerequisites in sophomore year. This kept me on track with people who had decided upon concentrating in economics earlier than I did. The summer of my junior year, I ended up getting a research opportunity on campus.

Jason H. Brown University ‘16 Economics After my freshman year I spent the summer working at a sports day camp as a counselor and lifeguard and this upcoming summer I am interning at an investment bank in Boston. My freshman year experience did not directly help me get my internship this year but it was something I could talk about during interviews.

Careers & Internships

advice from upperclassmen and career advisors “Do something where you have responsibilities. It does not have to directly relate to the field of finance. The advantage of this will be experiences you can talk about during future internship interviews. And overall, something is better than nothing.” — Jason H. Brown University “There are plenty of people who didn’t do formal internships freshman year but have solid ones now. I know someone who did an SAT tutoring program where you manage your own “branch” and basically run your own business. Some people created their own startups or traveled and taught English in some cool places around the world. A lot of people just got normal jobs in retail or something because it can help a lot to say you worked in sales and developed professional skills. “It’s honestly fine for people interested in finance to just say you spent your summer working on your hobbies, volunteering and teaching yourself quantitative, excel and/or computer science skills.” — Angel S. University of Chicago “Freshman should try to create their own summer project! If they are going home, they should be doing networking to try to arrange something. Local offices are often willing to take on summer interns, especially if they don’t need to be paid. Many first years go home and do a job they had in high school. They should think about classes to take next year, and of course, student groups to join. They should be learning from their peers about opportunities ” — Rachel B. University of Pennsylvania “Internships are a great way to learn about careers and build experience, and there are many other things a student can do to advance his/her career development as well. These include short term shadowing, volunteering, and networking with alumni or others in the field. The latter is particularly important. Experts in the field can offer advice and guidance, and also introduce you to others. Many jobs never appear on a job board — they are discovered through the process of talking with and meeting people in the field. “Before leaving for the summer, I encourage first-year students to talk with one of our advisors about their near and long-terms plans. They can help students develop a personal plan of action. “Many students at the end of the first year are still not sure what direction to follow, and that’s fine as long as you have a plan to explore options. Through this process of exploration, students will learn about what’s required for entry into various professional fields. Many will want to see hands-on experience, though the timing and quantity will vary. Overall, first year students should not panic if they don’t have an internship right away.” — CareerLAB Brown University

Careers & Internships

The Intercollegiate Finance Journal April 2014

unpaid internships by Amanda Yao

ith the Spring semester well underway, many college experience. By being too unselective when looking at unpaid students are wrapping up the search for summer in- internships, are we are setting ourselves up to be more easily ternships. There seems to be a collective understanding that the exploited? According to the New York Times, this has created a only way to be successful after “permanent intern underclass: edgraduation is to land the perfect Survey of students who got job offers ucated members of the millennial internship. According to a study generation who are locked out of straight out of college: done by Millennial Branding, 91 the traditional career ladder and percent of employers expect aphaving to settle for two, three and plicants to have had one or two sometimes more internships after internships in college. For most, graduating college.” Instead of “perfect internship” entails a internships being solely reserved paid, prestigious program at a for college students, they have large, well-known firm. Unpaid started to replace entry-level jobs internships are often seen as secfor recent college graduates. AlPaid Unpaid ond rate, a last minute effort to though the employment rate fell Internships Internships Both Paid & get something on your resume if to 6.6 percent last month, the rate Only Only Unpaid all else fails. Many people overfor recent college graduates is look the fact that if you are selecstill about 8 percent, according to tive and know what to look for, the Bureau of Labor Statistics. We you can actually gain invaluable have to wonder if we are contribexperience and connections that uting to this “permanent intern 35.2% No Internships At All will help you out for many years underclass” by accepting these to come. internships so loosely. So let's break down the statistics: The largest demographic of students who reGaining Experience "Good" vs. "Bad" ceived jobs right out of college were students Rather than exchanging time Fortunately, mistreated inwho had had paid internships (63.1 percent), and effort for cash, unpaid terns are starting to speak up likely because many paid internship programs are interns exchange time and in recent lawsuits, and lawmakers paths to full-time job offers. The second largest effort for invaluable skills, are investigating the legality of demographic of students were those who had experiences, and netunpaid internships. Meanwhile, unpaid internships (37 percent.) While only a working opportunities. it’s important to know that internsmall portion of these students had exclusively Not only can students ships still matter and some may unpaid internships (1.7 percent), the fact that work in a collaborative still be very beneficial. Until there 35.3 percent of students had both paid and unenvironment, apply is more uniformity in the quality paid internships suggests that unpaid internships classroom knowledge of internships, you just need to may be a gateway to getting paid internships. Formto real-life situations, be careful where you apply. Many ing relationships with co-workers in an unpaid inand learn to handle work good internship programs pair ternship can help you find new job opportunities, get conflicts, they can also up interns with a mentor within great recommendation letters, and make lasting professional the company; this allows interns guide you through your job search. connections. Such an expeto learn more about the organizaOn the other hand, even though rience can also give students a tion’s culture and to form a solnearly two-thirds of students who rebetter perspective on the indusid relationship with at least one try and whether or not it would ceived job offers straight out of colperson in the company. Other lege had some kind of internship, almake a good career choice. characteristics of good internThat being said, there are sev- most a third of students did not. This ships include ones that provide eral points that you should keep shows that internships are not the exposure to the field and ones in mind when browsing through only way to land a job offer. It is likethat allow you to meet a large unpaid internship opportunities. ly that many of the students who had number of professionals workno internships found other ways to ing in that field, which provides a stand out through volunteer work, after Graduation ? good opportunity to make profesBe careful and selective when summer jobs, or research positions. sional connections. Be cautious if looking for unpaid opportuniyou’ve heard of any mistreatment ties. Unpaid interns are not proof interns at the company, or if tected by labor laws and aren’t offered key legal protections. the company doesn’t seem to give work to or trust their interns. Poorly coordinated programs may undervalue an intern’s time Some signs of “bad” internships are lack of training, and lack of and feel more akin to unpaid labor than a valuable learning clear goals or responsibilities.

27.8%

35.3%

1.7%

The Intercollegiate Finance Journal April 2014

The

Careers & Internships

CREATIVE Economy:

south korea's transformation by Caroline Vexler

“The power to imagine and think of ideas is universal.”

ark Geun-hye, the current president of South Korea, spoke at the 44th World Economic Forum Annual Meeting this past January where she advocated for a paradigm-shifting vision of the future: the creative economy. President Park’s proposal would reform the job market, shift economic focus, and be a potential source of sustainable growth. President Park assumed office in February 2013 after being elected the first female President of South Korea. Bereft of both her mother and father who were assassinated during her father’s presidency from 1961-1979, Park has striven to leave her own mark on South Korean politics since becoming first lady of South Korea in 1974. Park supports policies towards economic prosperity in South Korea, including her vision for a creative economy, which she originally unveiled last summer.

t the World Economic Forum Annual Meeting, Park reiterated her objective of building a creative economy. Her goal is a significant change in the job market to encourage economic growth. She claims that since the Industrial Revolution, material divide marked quality of life. Now in the modern era, technology marks the divide. In the future, she posits, creativity will be a divide. The financial crisis has brought to light economic, environmental, and sustainability issues that have existed for years but are only now being dealt with. Innovation is the key to solving the world’s issues. Park notes that the global economy “continues to experience slow growth, high unemployment is weighing economies down, and income inequality continues to linger.” She affirms that we “must make growth sustainable.” This is where the creative economy comes into play. What is a Creative Economy? “Creative economies seek to tap into the creativity of the human mind,” says Park. A creative economy places emphasis on innovation, technology, and entrepreneurship. “Creativity begets innovative ideas, [and] entrepreneurship puts innovation into action.” Park & South Korea Park’s plans for South Korea will remove barriers to entrepreneurship via financial policies. For startups and entrepreneurship to thrive, entrepreneurs cannot be afraid of failure. Research and new ideas need to be constantly evolving; therefore, financial policies need to enable entrepreneurs to fall down and get back up again. Park expressed her concern that it is currently very difficult for early-stage startups to raise funds. She plans to transform how startups finance capital, shifting the emphasis toward investment capital and angel investors, in addition to tax-breaks for entrepreneurs and increased credit restoration. Park will

relax regulations to promote risk-taking, keeping only that which is absolutely necessary. In addition, she is making government data more accessible to the public. Park is in the process of building creative economy centers across Korea. These centers will pair entrepreneurs with expert mentoring, government agencies, and venture companies. Park predicts that the creative economy will resolve the increasing income gap. Imagination and creativity are independent of race, religion, nationality, and education. Anyone and everyone has the potential to innovate. This in turn will both diversify and expand the job market. She expects “to see some 12,000 jobs created by 2017.” Entrepreneurship will be “the driving force of sustainable, inclusive growth.” Creativity is a renewable resource that will power the economy and connect the nations of the world. Park hopes that her investment in creativity will yield new markets and new jobs. More importantly, Park aspires for her vision to improve the human condition as a whole, using science and technology. The eyes of the world will be on South Korea as it transitions towards the creative economy and Park’s entrepreneurial challenge. Park's Creative Economy In light of this new economic model, the question for world leaders to ask themselves is: is Park’s vision an optimistic oversimplification of the world’s economic issues, or an ingenious solution vested in the power of the human mind? In either case, Park is certainly correct in observing that “the global economy is charting a new course.” If entrepreneurship is the key to the future, employment in the world may soon change dramatically to accommodate “an ecosystem where entrepreneurship can flourish.”

Careers & Internships

The Intercollegiate Finance Journal April 2014

CREATIVE

The Economy: Entrepreneurship at Brown by Caroline Vexler

Gaurav Nakhare

it, but the goal is, don’t spend your time on building something no one wants. To that end, EP and Venture Lab were extremely useful and successful. IFJ: What made you realize there was a real need for Durgood?

Gaurav Nakhare ’15 is an Electrical and Computer Engineering concentrator at Brown University. Hailing from the UK and India, he runs the International Mentoring Program, which includes the university pre-orientation program for international students. In addition, Nakhare is a Teaching Assistant for engineering and computer science classes and is on the executive board for the Ivy Council. In the fall of his freshman year, Nakhare participated in the inaugural semester of Brown Venture Lab in conjunction with resumed undergraduate student Will Houston where they cultivated their startup “Durgood,” an online product recommendation tool for durable goods. IFJ: Tell us about your experience with Brown Venture Lab. GN: It was really well done in terms of the structure of the experience. BVL was a semester-long program and the idea was to make sure that we were adequately prepared for the West Coast Accelerator. It involved a weekly meeting with alums, professors or members of the community who have a good sense of how startups should run. It was nice to meet people who were taking time off from school to pursue their venture full-time. We had drop in hours and Skype hours with mentors who were also budding entrepreneurs. We would bounce our ideas off of them. The whole concept of a minimum viable product (MVP) is essentially: you don’t create a Facebook in a day. You throw something up and see how people respond to it. If a lot of people like the site, then you start adding more things. If people hate it, you change it and throw something else up. That concept was really driven home. Everyone has a different take on

GN: Before Will started college he worked at Sears as a sales person. He realized that people go into a shop and look at fifty different types of the same appliance and are completely confused. They turn to the Internet and they get even more confused. Why not replicate the sales person experience online? Consumers would be able to get a specific set of recommendations that they could then take to the store and choose from three as opposed to a hundred different products. I could relate to this issue because my parents moved from England to India when I was transitioning into high school. The biggest problem they faced in the move was putting together the house. They spent almost seven months picking out kitchen appliances--we had no kitchen for the longest time. In retrospect it seems really trivial: just pick a fridge! That kind of problem is ingrained in my mind. The entrepreneurship program helped us pitch this idea to so many people. Many students don’t understand because a dorm room fridge costs $50 or $80 and that’s not something we worry about too much. But the demographic 25 and above can definitely relate to that. EP gave us the chance to have a sounding board and remind ourselves that what we’re building might not appeal to a college student crowd but it does appeal to a large number of people out there. IFJ: How has Durgood developed since you participated in Brown Venture Lab? GN: We are live at durgood.com. This is the fourth or fifth iteration of our minimum viable product. Each successive iteration has been more successful, but not to the point where we want to take time off and pursue it full-time. I think over the summer Will and I will spend more time on it. We’re definitely playing the slow and steady card on this one. Sometimes it’s good to throw something up and gauge progress over two or three months as opposed to a couple of weeks. I think in the long run it will be worthwhile. IFJ: What is your ultimate goal for Durgood? GN: We’re identifying a couple of sources of revenue, the most obvious being advertising. There are also some more involved sources which include talking to retailers and manufacturers and trying to develop a business model. That’s definitely very high up on our to-do list. We also want to be able to improve our graphic interface. Right now the website is up and functional but it’s not nice and smooth. No one wants to look at a bare bones website in 2014. That’s high up on our list. I think we will still play the MVP card, in that we’ll just change one thing and see how people react to it before we cement that change.

The Intercollegiate Finance Journal April 2014

Viktoria Belberova

Careers & Internships

Ventfull. They were part of BVL and they were a really hardworking team. They were really passionate about solving the insufficiencies of Brown Morning Mail. We helped them streamline their idea, figure out what the most important aspects were, and how to put customer insights into developing their platform. It launched a few weeks ago. They had about 900 views in the first three days and it’s going very well. Pete Simpson and Joe Stein came to Brown Venture Lab knowing that they weren’t satisfied with Brown Morning Mail. They felt that it wasn’t well-organized or catered to students’ interests. They wanted to create something to help students receive notifications about events they are interested in. They also wanted to create a space where students could learn about what ‘cool’ events are happening. Their site has a voting system where you can “upvote” specific events that you are interested in. The more upvotes an event has, the further on top it will be. It’s a way of getting crowd promoted events. IFJ: How can students interested in entrepreneurship get involved with Brown EP?

Viktoria Belberova is a junior at Brown University from Bulgaria concentrating in Economics. This spring she is heading the Brown Entrepreneurship Program. IFJ: What is the Brown Entrepreneurship Program? VB: The mission of the program is to ignite entrepreneurship on College Hill. This includes collaborating with RISD. We think that Brown and RISD are two schools with complementary skills and we therefore see the future of entrepreneurship at Brown as closely connected with RISD. The Brown EP is divided into two tracks, Idea Lab and Venture Lab. In Idea Lab, we try to promote entrepreneurship and make students aware of all of the opportunities it has and inspire people to think about solving problems in entrepreneurial ways. We have a speaker series, a variety of workshops, mixer events with RISD E’Ship, the Program in Innovation Management and Entrepreneurship on campus and other groups interested in entrepreneurship. In BVL we work with startups to help them develop their ideas and become entrepreneurs. We also organized a program called the West Coast Accelerator. This January was the second time we had the program. We brought Brown student venture teams to the San Francisco and the Silicon Valley for a variety of sessions and workshops that helped them connect with and obtain advice from Brown alumni entrepreneurs on the West Coast. We also visited a variety of startups like Uber and Hotel Tonight and companies like Facebook, Saleforce and Microsoft. The students also had the opportunity to pitch their ventures to venture capitalists- not directly pitching for funding but rather for feedback. The reviews were really great. It was a huge success. IFJ: What projects have Brown students been working on? VB: We work with a variety of ventures. Among the ventures in BVL this semester is the team who won the Brown Hackathon, Hack@Brown, and students working on developing a ginger beer brand. One of the ventures that we had last semester was

VB: If they’re interested in entrepreneurship but don’t have an idea, they should come to some of our speaker series (we brought the founder of Reddit last semester) and network with other students who are interested in entrepreneurship through our mixer events. We are currently working on a fellowship project that we’re going to launch next semester that is going to be an incubation program where we help students with the idea process of what exactly they want to work on. If they have an idea and they’ve done some research and are passionate about the problem, then Venture Lab is the best place to go. We are also currently working with the Brown administration to potentially make the incubation project more university-integrated and develop its resources. The school itself is having more developed interest in entrepreneurship. There have been a few successful initiatives already, such as the CV Starr fellowship, which is a social entrepreneurship program. The student fellows have worked on a variety of social ventures around the world and have made a great impact. IFJ: Why do you think entrepreneurship is important? VB: I come from Bulgaria, and I don’t think it’s known for being a very entrepreneurial country. Our education system has a lot of residual elements of the communist one. We didn’t have many extracurricular activities. Students had mostly nowhere to work together on projects and design things. I started a newspaper when I was in school. It’s a different type of entrepreneurship, but it was my first experience in really creating something. The newspaper is still continuing and has become part of the culture of the school. I was really inspired by that. When I came to Brown I really wanted to develop my own interest in ingenuity. I have a broader idea of what entrepreneurship is. We’re trying to give students the tools to approach problems in entrepreneurial ways and to use those skills whether they’re working on a tech venture or a social venture. Any project has the potential to gain from problem solving and learning by doing. We encourage students to go out and talk to people, learn about the problems, and even make sure the problems that they are working on actually exist. A lot of students come here with ideas but they don’t realize that the ideas they have don’t actually solve any problems. We encourage the process of really understanding where the fit is and iterating and testing hypotheses. These skills can be applied to a lot of things, not just technological or commercial ventures.

Careers & Internships

The Intercollegiate Finance Journal April 2014

student spotlight: Bill Weber by Caroline Vexler Bill Weber is a junior at Brown University studying economics and Arabic language. He is spending this year abroad at Oxford studying economics and politics. While at Brown, he was a Teaching Assistant for the course Financial Accounting and a member of the Alpha Epsilon Pi fraternity. Bill took a year off between his freshman and sophomore years to complete four different internships in both the public and private sector; the summer after his freshman year he worked at the US Securities and Exchange Commission. The following semester he spent as an intern at the White House National Economic Council. During the spring semester he worked at the White House Council of Economic Advisors. That summer he interned at the US Department of Justice. The following summer he went back to the White House Council of Economic Advisors for three months, and then his remaining two months were spent in Hong Kong working for a multi-strategy hedge fund. During his spring break at Oxford, Bill will be working in Singapore for a venture capital fund. This summer he will be in New York interning at Morgan Stanley.

IFJ: Can you describe the process for applying for each of your internships? BW: They were very different, depending on public versus private sector and the specific department or company I was applying to. It varies in terms of how much networking is required and how formal the process is. The very first internship I did was at the SEC, which was one of many applications that I filled out as a freshman. It was a pretty standard application and interview process. I applied to work at the White House the summer after my freshman year; I did not get the job. I then reapplied for the fall semester. After first semester at the White House, at the National Economic Council, I moved over to the Council of Economic Advisors. Together, those two offices make up what’s called the White House Economic Team. I switched offices to learn more about how economics feeds into the policymaking process. I ended up working at the Justice Department after sharing an umbrella with an official from the Justice Department at a rained out White House event. I applied for the job at the hedge fund in Hong Kong because I really wanted a job in the private sector and to see what working in finance was like. I ended up leveraging the Brown network and information available online about what funds are and looking at financial centers in the US, Europe, Asia, and the Middle East. I really wanted to go abroad. One company happened to get back to me, and I sent them work samples from Brown, went through their interview process, and got lucky. They were all pretty different. IFJ: How was the recruitment process studying abroad? BW: It’s challenging. That’s something

that I was warned about before studying abroad for a whole year. Not only are you missing the networking, but also the Oxford schedule doesn’t really line up with the schedule of Brown. To anyone who is thinking about studying abroad I suggest going to as many networking events as you can as a sophomore. Learn about the different banks, learn about the different cultures, and learn about the different divisions. Your opportunity to do that overseas is much smaller. I was fortunate to end up at Morgan Stanley because of efforts made as a sophomore to get to know the different institutions. It’s not impossible, but it is an obstacle. IFJ: What did you do as an intern in the White House? BW: The White House offices were a world in and of themselves. Just to be there, the energy was very intense. Long hours, very exciting work. The National Economic Council is a small office of about twenty full-time staff and a dozen interns headed up by Gene Sperling. Those interns work one-on-one with a different White House Official covering a different area in the economy. My day-today was a combination of short-term and long-term projects. One of the coolest things that I did was I got to update Gene Sperling and other White House officials, multiple times per day, on the biggest financial markets. Basically, I was taking data from the Bloomberg terminal and pumping it out to make sure that they were constantly up to speed with what was going on in financial markets. I put together all of the economic indicators that were released that day like inflation, indexing measures, etc. I’d write up briefs on all the indicators that were released. During the day itself, I could be pulled in any direction. The guy who works in manufac-

Bill Weber's

Timeline Freshman Year Fall: on campus Spring: on campus Summer: US Securities and Exchange Commission

one Year off Fall: White House National Economic Council Spring: White House Council of Economic Advisors Summer: US Dept of Justice

sophomore Year Fall: on campus Spring: on campus Summer: White House Council of Economic Advisors (3 months) & Hedge Fund in Hong Kong (2 months)

Junior Year Fall: study abroad at Oxford University Spring: study abroad at Oxford University Spring Break: venture capital fund in Singapore Summer: Morgan Stanley Global Capital Markets

The Intercollegiate Finance Journal April 2014

turing could be working on some issue that comes up with big manufacturing companies or maybe a federal program related to manufacturing and he needs data or information or analysis on X, Y, Z, right then. You just dive in. The coolest part about it is just being in the office and having the opportunity to see the Treasury Secretary, the President, the Vice President, and different very important people on a very frequent basis. The Council of Economic Advisors, the other office, had a little bit of a different environment. As opposed to working in a one-on-one relationship with one of the officials, it was more work with other interns and team projects. At the NEC, they advise the president on economic

policy. When they come up with policy there are a hundred different variables that come into the equation in determining what good policy is. Therefore, the type of work that they do is determined by all these constantly changing variables. It’s not just rote economics. Their mission is to provide the president with totally objective economic analysis. It’s all unbiased analytical research. At that office I was working on longer-term projects with other interns and full-time staff. IFJ: Do you have any advice for students who are interested in getting into either economic policy or finance? BW: It’s never too early to start. I think

Careers & Internships

I benefited from working at the SEC after my freshman summer. If you know there’s something you want to do, it’s never too early to pursue it. The more opportunities you pursue, the more you learn about what you do want to do, and what you don’t want to do. In addition to that, I would say that there is no right path. I took a very unorthodox route in the sense that I moved from the public sector into the private sector, took a whole year off from school, and worked overseas. I think that the more you try to find unique, exciting, interesting experiences, the more enriching your own work experiences will be and the more beneficial they’ll be in terms of building into new opportunities.

Crossword Puzzle: European Economies

Across

by Caroline Vexler 1

3 5

6 7

2. This country will vote in May to approve a policy that would implement in the highest minimum wage in any country in the world. 4. Leading economists recently predicted that this country’s economy would return to its pre-financial crisis size by Summer 2014. 7. Their economy saw unexpected growth of 0.3%, as compared to the predicted growth of 0.1%. 9. The newly elected Prime Minister announced recently that he will reduce the income tax by a total of 10 billion euros to increase consumer spending. 11. This country’s currency had a striking increase compared with the Euro. 12. Though this country had a 0.6% GDP increase in the fourth quarter, it simultaneously had its jobless rate increase to 15.3%. 14. This country could be seriously hurt in the near future if Western powers vote to impose economic sanctions over territorial controversy. 15. President Obama recently praised this country’s emergence from a banking crisis at his annual meeting with the country’s leader for St. Patrick’s Day.

Down 9

1. This country’s economic state currently hangs in the balance as around 1/5 of its exports go to the Ukraine and Russia. 2. The current Prime Minister is planning a major tax reform overhaul to bolster the job market. 3. Reports showed that last year this country’s economy accelerated at the fastest pace in seven years. 5. This country achieved its first account surplus last year for the first time in 65 years. 6. The princess of this country is leading a mission to establish business relationships with Saudi Arabia. 8. This country’s economy is dependent on the export of its oil exports, which may cause problems as investment in oil decreases. 10. This country established in February an Economic Senate in conjunction with Serbia. 13. This country achieved a slight budget surplus in 2013, for the second year in a row.

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