IFJ Winter 2014 Edition by The IFJ

WINTER 2014 • www.theifj.com

LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQU I D INVESTMENTS: AN INTOXICATING

ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN

INTOXICATING ENDEAVOR LIQUI M D INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQ UID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQU ID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: A N INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQ UID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS : AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATIN G ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQU ID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATIN G ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LI QUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS : AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATIN G ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQ UID INVESTMENTS: AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS : AN INTOXICATING ENDEAVOR LIQUID INVESTMENTS: AN INTOXICATIN G ENDEAVOR . . . PAGE 12

“To many women burdened with the struggle to survive, renting their bodies as a commodity is a small price to pay in exchange for the sums they receive.”

“When we were young, our parents told us to never get into the car with a stranger. Now, it’s commonplace.”

“It is nowhere near the fastest supercomputer out there, nor is it the smartest in terms of computing power, but it might be the cleverest.”

SURROGATE PREGNANCY

SHARING IS CARING

ELEMENTARY, MY DEAR WATSON

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Intercollegiate Finance Journal

TABLE OF CONTENTS

Markets 4 Remittances Keeping Aid within the Family Carly West

6 Animal Spirits and the Jungle of Economic Expectations How Human Psychology Influences the Economy Angela Marie Teng

7 Behavioral Finance Why a Bit of Irrationality is Good for the Market Michael Golz

8 Money Morphine Have Financial Markets Become Addicted to Monetary Stimulus? Christopher Dederick

11 A Brief History of Quantitative Easing 6 Years and $3.1 Trillion Later, How Has the Economy Performed? Bill Cai

12 Liquid Investments An Intoxicating Endeavor Matthew Janigian

14 Going Beyond Good for the Earth Sustainable Profits through Sustainable Practices Emma Chow

Political Economy

Personal Finance

16 The Euro Time to Say Goodbye? Sarah Park

18 Samba, Beaches, and Political Change Dilma Rousseff’s Second Mandate Miguel Ferreira

19 The Boom of an Unconventional Industry The Billion-Dollar Business of Surrogate Pregnancy Gillian Lee

20 Turning to the Sea for Answers Desalination and the California Drought Nikhil Kumar

21 Dark Money The Price of 21st Century Politics Alexander Burger

22 Bribe or Not? The Moral Limits of Providing Financial Incentives for Academic Performance Yashil Sukurdeep

25 A Primer on Inequality An Introduction from Professor David Weil Wesley Meyer

The IFJ Online

29 Double Down Limitless Possibilities to Online Betting Tom Pesce

30 The Programmed Product Why You (Won’t) Need to Buy a New iPhone Soon Tiffany Chen

Startups & Technology 32 Elementary, My Dear Watson Sherlock Meets His Match Charles Hemsley

34 Ginger with Soul How a Goat Farmer Plans to Take Over the Alcohol Industry Pranay Bose & Liz Studlick

35 Hacking Your Way to the Top How Tech Companies Are Upping the Stakes at Hackathons

Careers

MONEY MORPHINE PAGE 8

Amazon: No Longer in Its Prime Samanee Mahbub

Kerry Yan

Liz Studlick

Soldiers of Fortune: The Economics of Mercenaries Michael Simic

Outlook of Facebook’s Future Scott Theer

28 How Not to Spend Money like a Pro Why Millionaire Athletes Go Broke

36 The Future through a New Lens Are Facebook and Google Gearing Up for Virtual Reality Wars?

The Blog To Drunker Pastures: Tequila Manufacturers Court Chinese Market Edward Li

The Beautiful Game of Poker Sundeep Jandyam

Rachel Binder

Tiffany Chang

www.theifj.com

Bitcoin? Kerry Yan

26 Sharing is Caring How Experience-Seeking Millennials are Transforming the Travel Industry

38 Stripped Down and Stripped Bare How Independent Contracting is Stripping Strippers of Employee Rights Adrija Darsha

40 How to Build Me, Inc. Using Social Media to Create Your Brand Mariana Carvalho

41 The Art of Networking Building Your First Professional Relationships Mariana Carvalho

42 Under the Yellow Umbrella How the Hong Kong Job Market is Affected by the Protests Francesca Whitehead

ANIMAL SPIRITS AND THE JUNGLE OF EXPECTATIONS How Human Psychology Influences the Economy, Angela Marie Teng 6

MARKETS

$4.03bn to china

$23.16b

united kingdo

$23.40bn

$1.92bn

canada

to philippines

$13.45bn

$1.43bn to france

$1.84bn to france

to china

$19.9 $2.05bn

$120.16bn

$10.04bn

to philippines

united states

fra

to morocco

$3.14bn to india

$1.47bn

to algeria

$23.17bn to mexico

$6.13bn to nigeria

$0.59bn

to bangladesh

$10.84bn to india

Remittances:

KEEPING AID WITHIN THE FAMILY by Carly West

ach year, millions of men and women leave their homes, travel long distances, and work countless hours in the hopes of creating a better life for themselves and their families. In 2013, the United Nations counted over 232 million international migrants in the world, many of whom emigrate from impoverished or developing nations. In the same year, these workers sent $413 billion worth of remittances home to their families. These funds have real societal impact,

yet remain an undervalued force in economies around the world. The scale of this remittance economy is massive. If these workers had their own country it would be more populous than Brazil and have a larger economy than France. In 36 out of 153 developing countries, the value of remittances surpasses all capital flows, public and private. Last year, India received $72 billion in remittances, which is larger than its total value of information technology exports. In Egypt, these funds provide

three times the amount of revenue generated by the Suez Canal. In Tajikistan, remittances amount to about 40 percent of the nation’s GDP. LONG DISTANCE RELATIONSHIP In many poor or conflict-torn countries, like Somalia and Haiti, remittances provide an essential lifeline. Unlike private investment, these funds don’t just dry up when there is political turmoil in the country. In fact, they increase in times of need.

BEHAVIORAL FINANCE Why a Bit of Irrationality is Good for the Market, Michael Golz 7

MONEY MORPHINE Have Financial Markets Become Addicted to Monetary Stimulus?, Christopher Dederick 8

A BRIEF HISTORY OF QUANTITATIVE EASING 6 Years and $3.1 Trillion Later, How Has the Economy Performed?, Bill Cai 11

LIQUID INVESTMENTS An Intoxicating Endeavor, Matthew Janigian 12

GOING BEYOND GOOD FOR THE EARTH Sustainable Profits through Sustainable Practices, Emma Chow 14

Sending Money Back Home

Remittances Received (in green) and Sent (in pink) in 2011

$0.74bn

to bangladesh

$3.74bn

$3.90bn

to ukraine

to india

$21.74bn

$1.76bn

germany

to tajikistan

$1.34bn

99bn

ance

$11.44bn russia

to pakistan

$0.52bn

to lebanon

$0.70bn to turkey

$2.66bn

$0.95bn

to egypt

to tunisia

$3.88bn to nigeria

$4.99bn jordan

$3.96bn to egypt

$4.44bn

$2.60bn

to china

to pakistan

$18.22bn $24.19bn uae saudi arabia

$14.26bn

$11.09bn japan

$1.08bn

to india

to philippines

$7.62bn to india

$2.65bn

to philippines

$2.15bn to china

$1.25bn to india

“

Remittances have become a major component of the balance of payments of nations. India led the chart of remittance flows, receiving $70 billion last year, followed by China with $60 billion and the Philippines with $25 billion. There is no doubt that these flows act as an antidote to poverty and promote prosperity. — KAUSHIK BASU Senior Vice President and Chief Economist of the World Bank

$14.63bn australia

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

Unlike development aid or even charitable donations, remittances go directly into the pockets of loved ones to purchase food, medicine, or other basic necessities. While some remittances have the potential to cause long-term harm to the economy by decreasing incentives to work for those who remain in their home countries, the positive impact of remittances seems to far outweigh their risk. Studies show that families spend remittances disproportionately on human capital-building areas such as health care and education. In El Salvador and Sri Lanka, for example, the school enrollment rate is higher and the dropout rate is lower among children in families that receive remittances.

unnecessary fees, governments must recognize the issue, decrease regulations on sending money, and dismantle monopolies that charge high transfer fees. Reducing these fees to 1 percent would enable another $30 billion per year to get to workers’ loved ones, rather than to businessmen or government officials. This amount is similar to the aid budget of the United States government and greater than the amount of aid going to Africa per year. It’s a no-brainer.

$436 Animal Spirits

billion

projections for remittance flows to developing countries in 2014

COSTS ON COSTS Despite the clear and direct benefits, governments around the world are not making it any easier for these hardworking individuals and their families. They are either neglecting the positive social impact of remittances or they are being purposefully extractive, charging high fees, or allowing private institutions to do so. Indeed, in most developing nations, there are huge costs involved with sending remittances, as banks and transfer unions take an unfairly high commission. The global average cost associated with transferring money is 9 percent and in many of the world’s most impoverished regions, it is even higher. Costs associated with sending money to Africa average about 12 percent while fees for transferring funds within Africa can amount to 20 percent. There are certain programs in place that have identified and aim to combat these exorbitant schemes. For example, the M-Pesa in Kenya enables people to send and receive money at a fixed cost of only $0.60 per transaction. The United States also started a program with Mexico to enable money service businesses to send money to Mexico for a fixed cost of only $0.67 per transaction. THE TIME IS NOW It is projected that in 2014, remittance flows to developing countries will increase 7.8 percent to $436 billion. It is critical that govmore revenue in Egypt ernments work to is generated through make this a more remittances than efficient process. the Suez Canal In order to reduce

and the Jungle of Economic Expectations HOW HUMAN PSYCHOLOGY INFLUENCES THE ECONOMY by Angela Marie Teng

raditional economic principles have focused on quantifiable, rational, and policy-based analyses of the economy. However, recent bubbles and busts have shown that these are only part of the equation – the other component lies in the uncertain field of human behavior. But how much do psychological forces actually affect economic growth? EXPECTING THE UNEXPECTED Studies show that expectations and consumer perception greatly influence market outcomes of monetary and fiscal policies, sometimes even to the point of completely countering their intended effects. History has shown that positive expectations lead to output expansion, while pessimistic expectations lead to low or even negative output growth. Take the example of Ireland. LUCK OF THE IRISH In 1981, the Irish were buried in debt. With a budget deficit of 13 percent of GDP, and government debt at 77 percent of GDP, the government set out to slash the deficit with a tax hike. The results were dismal. Three years later, Ireland had negative output growth, a dismally high unemployment rate, and only a slightly lower

budget deficit. In 1987, the government decided to tackle the beast once again, this time with a cut in government spending, a reduction in the role of government and a widening of the tax base. The results were markedly better this time around – strong growth, a reduction in the unemployment rate and a significant decline in the deficit. Many economists have cited the differential reaction of expectations as the cause of the polar outcomes of the two Irish deficit reduction programs. They argue that in the second attempt to reduce the deficit, people had more favorable expectations since they believed the government would pursue a longer term solution rather than just putting a band-aid on its mis-finances by increasing taxes. ANIMAL STYLE Though the Irish example is only one case in which different expectations resulted in varying economic conditions, behavioral economists have developed a few theories that explain the crucial role expectations play in the economy. Before the 1970’s, there were generally only two schools of thought that dealt with how people develop expectations. John Maynard Keynes, a British economist, coined the term animal spirits to describe human behavior. His theory highlighted the fact that expectations were important, although very unpredictable and therefore enigmatic. On the other hand, Milton Friedman claimed in his article, “The Role of Monetary Policy,” that people have static expectations and base their perceptions of the future on what has happened in the past. MODERN FORTUNE TELLERS Today, rational expectations are frequently used by macroeconomists for policy analyses. Developed by Robert Lucas and Thomas Sargent, this theory states that people make rational decisions about the future based on all the information available to them, including news reports, historical events, statements from the Fed, and the implications of government policies. Although assuming all humans are perfectly rational actors might be misrepresentative, this is currently the most accurate benchmark for evaluating economic activity. In other words, what people think will happen in the future will actually partially affect subsequent economic conditions. So, be careful what you expect, because it just might come true.

MARKETS

Behavioral Finance

WHY A BIT OF IRRATIONALITY IS GOOD FOR THE MARKET by Michael Golz

s it rational to assume we are rational? Traditionally, the field of economics operates under this assumption: that our decisions are appropriate responses to all relevant data. This premise has come under fire in recent decades. Increasingly, academics like Nobel Laureate Daniel Kahneman have challenged the status quo by applying concepts from psychology to understand decision making in a new light. Behavioral economics, as it is called, involves examining everything from the speed of our decision making to the amount and quality of information we actually use. OUR OWN WORST ENEMIES More recently, this psychological approach has started to turn its eye to the world of finance. Given the dramatic improvements in technology and the subsequent rise of trading among non-institutional investors, this is aptly timed to supplement our understanding of increasingly complicated financial markets. This field has come to be known as behavioral finance. It focuses on any empirical anomalies in financial markets that defy the orthodox assumptions of rationality. It asks the big question: if people ought to be trading stocks based on the underlying asset’s value, why don’t prices move with changes in fundamentals — changes in assets, liabilities, revenue, and earnings? Behavioral finance comes to what may be a predictable conclusion: most traders are their own worst enemies. Most people have a tendency to follow their instincts when handling finances, and unfortunately our intuition for investing is massively undeveloped. Loss aversion is a well-known example. Investors tend to quickly sell off stocks once they net any positive amount, whereas they avoid selling off falling stocks in the hope that the trend will reverse and allow them to escape any losses. Researchers have deemed it the disposition effect: it is our “disposition” to prefer avoiding losses over experiencing windfall gains. FEELING THE BEAT Investing requires an understanding of fundamental data, information relating to the actual value of companies or assets, if it is to be viable in the long run. Thus,

Increasingly, the application of cognitive science and psychology to finance has developed our understanding of how markets function. Nobel Laureate Daniel Kahneman (bottom right) is a leader in this field of behavioral finance.

the stock market is ultimately composed of two very different players: fundamental traders and noise traders. The former rely on considerations of underlying asset value in making decisions intended to produce growth in the long run. Noise traders, on the other hand, are casual investors and technical analysts who use any available statistic — including non-fundamental news and overall market trends — to exploit market movement and produce short-term returns. Noise traders tend to rely on recent news and overall trends, and are known for irrational and erratic investment decisions. The goal here is not to shame technical traders or discourage casual investments. The issue is that without fundamental data, traders are more inclined to trust their instincts. Whether we think we have a sense of where the market is going from a recent article or because we could model oscillatory behavior with sophisticated mathematics, any decision made without fundamental justification rests upon believing we can “beat the market” without any knowledge of what we are buying and selling. SORTING THROUGH STATIC However, there is a silver lining. Financial markets actually rely on the very behavioral biases that cause so much grief for uninformed traders. Imagine a world in which the stock market was filled solely with informed investors making rational decisions using fundamental data. Asset prices would be perfect reflections of underlying value. It would become nearly impossible to make any profits from investments. Now imagine that thousands of people with little to no sense of how to use fundamental data begin to enter the market. An inflammatory article comes out on Apple Inc. and suddenly the price starts

collapsing under pressure from these noise traders. Now, for those who understand Apple’s true underlying value, there exists the opportunity to purchase an undervalued stock and later profit once others realize Apple’s true value and drive the price back up. SOUND INVESTMENTS Therein lies the basic gist of the modern revisions to the efficient market hypotheses. It was once thought that noise traders could not have a lasting distortionary effect since they would leave the market due to sustained losses. However, more recently, researchers are apt to conclude that stock market equilibrium is just a level of healthy disequilibrium. Casual traders help to destabilize prices from unprofitable equilibrium by reacting in ways that defy true rational justification, allowing informed investors to exploit undervaluation without the public knowing their strategies. This is a remarkable result, a brilliant union of classical market clearing thought and modern psychological analysis. We find that the stock market does indeed have some type of equilibrium in which different types of traders interact in a constructive manner. But rather than one that relies on all players having perfect information, the market actually rests upon some investors ignoring important data. As long as professional institutions can adjust their methods to account for the presence of noise traders, such as the increased risk they cause, the very price incentives that allow markets to exist at all actually originate from a level of inefficiency. Ultimately, behavioral and traditional approaches need not yield mutually exclusive conclusions, and more likely than not, must be used together to effectively understand what we really observe.

HAVE FINANCIAL MARKETS BECOME ADDICTED TO MONETARY STIMULUS?

MONEY MORPHINE by Christopher Dederick Photograph by Chandelle Heffner

MARKETS

THE WORLD IS ON THE VERGE OF WAKING FROM A LONG SPELL OF INTOXICATION. LOADED WITH AN UNPRECEDENTED DEGREE OF CENTRAL BANK STIMULUS, FINANCIAL MARKETS HAVE FELT EUPHORIC, DAZED, AND DISORIENTED AS OF LATE. NOW AS THE FED BEGINS WITHDRAWING ITS SUPPORT, INVESTORS ARE LEFT TO WONDER WHETHER THE MARKETS WILL SLIP SOUNDLY INTO SOBRIETY OR FACE ACUTE DEPENDENCY AND AN OVERDUE HANGOVER. A BILLION DOLLARS A DAY KEEPS THE DOCTOR AWAY Markets and the broader economy experienced a financial seizure in 2007, suffering prolonged distress thereafter. The Federal Reserve initially responded by lowering the federal funds rate to 0 percent in an attempt to encourage borrowing and investment. When this failed to arrest the pain, the Fed began quantitative easing (QE) — using newly created money to purchase long-term assets from financial institutions on a record scale. Lowering the federal funds rate barely amounted to an IV drip of liquidity; QE was akin to massive injections of morphine. The rationale for QE rested on its effects on private investment. The Fed bought toxic mortgage-backed securities to help purge bank balance sheets and facilitate lending, simultaneously purchasing Treasury bonds in order to lower long-term interest rates. Fed officials hoped to transmit this monetary stimulus to the real economy through its financial arteries. For instance, investment in labor-intensive “brick and mortar” projects is especially reliant on cheap long-term financing. Newly hired employees would ostensibly spend, creating more jobs and leading to a virtuous cycle of economic growth. Though major indicators all point to a sustained economic recovery, the numbers are somewhat misleading. The unemployment rate has gradually fallen to 5.8 percent, but the labor force participation rate has fallen in lockstep. Millions of disillusioned Americans have simply stopped looking for jobs and are no longer counted in the unemployment figures. Meanwhile, stock indices are at record highs. Do economic fundamen-

tals justify these levels? Partially, though many economists are skeptical. SYMPTOMS MAY INCLUDE… High stock valuations are in fact a direct result of Fed stimulus. Meager returns on safe government bonds have compelled fund managers to rebalance their portfolios in favor of riskier, higher-yield equities. Low rates also allow investors to borrow inexpensively to finance stock purchases. In an interview with the IFJ, Walter Molano, Managing Partner at BCP Securities and a Visiting Professor at Brown University pointed out that:

“Whenever you provide easy money to investors and the market, they take it as a freebie and load up with as much risk as they can. This is the reason so much money has gone into speculative assets.” At the height of QE, strategists at major banks observed that bad news had oddly become good news. Negative economic data actually became a boon to stock markets as investors expected the Fed to react by keeping rates lower for longer, underscoring a blatant and potentially unhealthy degree of market dependency. Some of the delirium seems to have worn off. Bad news is again bad news, though markets are still entirely at the mercy of the Fed’s every word and deed. In early October, Wall Street saw its worst week since 2012, but then rallied when the President of the Minneapolis Fed indicated his preference for extending QE. Investors continue to scrutinize the minutes from monthly Fed meetings. The Fed’s “dot plot,” which indicates where each Fed President thinks rates will end up in the medium term, highlights just how closely markets react to central bank signals. LET THE GOOD TIMES ROLL The Federal Reserve officially ended QE on Oct. 29 with its last “taper.” Rather than withdrawing QE outright, the Fed sought to avoid volatility by incrementally reducing bond purchases from $85 billion a month to a final sum of $15 billion. The Fed’s stimulus appears to have ended without a hitch, but investors

QUOTED

“

Whenever you provide easy money to investors and the market, they take it as a freebie and load up with as much risk as they can. This is the reason so much money has gone into speculative assets.

”

— WALTER MOLANO Managing Partner at BCP Securities and Visiting Professor at Brown University

Photograph by Jonah Blumenthal

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

2014

2015

2016

Longer Run

The Fed’s dot plot indicates where each committee member believes rates will end up. Median predictions are marked in pink. The chart is symptomatic of the Fed’s efforts to calibrate its signals to the market and manage expectations.

FED’S DOT PLOT essentially still live in a low-rate, QE world. Fed purchases have significantly reduced the supply of available bonds. Bond yields won’t rise again (and prices won’t fall) until it begins selling these assets back to the public. The Fed plans to continue reinvesting the interest from its $3.5 trillion balance sheet into new assets, so bond purchases will continue longer than headlines might suggest. The federal funds rate on the other hand is set to stay at 0 percent until the spring of 2015 at least. It seems that low rates may keep the stock market highs coming for some time. ALL THE COOL KIDS ARE DOING IT The U.S. economy is back on its feet for the moment but Japan and Europe are still sorely bedridden. The Eurozone is stagnant and on the verge of sliding into the kind of economic malaise that Japan has endured for the better part of two decades. Policymakers in Japan and Europe, where monetary authorities have been far less accommodating, are now hoping that immense liquidity injections are the cure-alls they’ve been looking for. The European Central Bank plans to grow its balance sheet to €3 trillion — about 30 percent of the Eurozone’s GDP compared to the Fed’s 20 percent. Japan’s central bank recently announced its intent to accumulate assets equal to 80 percent of its GDP, an astonishing figure that Molano argues “may border on the irresponsible.” Unsurprisingly, stock markets surged when the news broke. Is QE really the economic panacea we’ve all been waiting for? U.S.

banks are certainly healthier than their foreign counterparts. Europe’s “zombie” banks have been plagued by non-performing loans that preclude lending. Still, it’s difficult to disentangle liquidity from broader factors to determine whether the Fed has really made the difference. Unlike the United States, Europe and Japan suffer from fiscal austerity, inflexible labor markets, and aging populations. Consensus suggests that more central bank stimulus is necessary but also insufficient in the absence of further structural reforms. Since QE is largely untested, the jury is out as to how much

is appropriate, and whether the benefits outweigh the potential costs. IT’S MEDICINAL! Markets may experience a period of withdrawal when the party finally ends, but the jitters will eventually subside. The real question is whether QE has inadvertently enabled more dangerous habits in the long run. Unlimited central bank support can engender the kind of risk-taking and moral hazard that helped cause the same ailments it now hopes to treat. Acting as a lender of last resort is arguably the most important

Cartoon by Linda Navon Chetrit

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role for a central bank. Central banks promise to lend to financial institutions during times of distress to help prevent and manage panics that could otherwise threaten the entire system. This presents a dilemma for regulators: institutions that know they can always turn to the central bank will have the incentive to take excessive risks. QE has amplified these incentives. The Fed went far beyond providing li-

quidity and actually absorbed low-grade bank assets and their associated risks. This has left Molano and many others asking if the markets have developed “a very serious moral hazard problem.” Financial institutions are no longer afraid of making risky bets because “they see the Fed as their backstop.” The result may be that “each subsequent time we’re set up for a worse crisis.” Devised at a time of great need, the

Fed’s grand experiment with QE risks inducing a host of unintended side effects. The end of easy money will ultimately reveal whether this experiment has successfully cured an ailing economy, or simply masked the pain with monetary morphine. If the latter proves to be the case, the Fed will have to worry about more than just taking away the punchbowl; it will have to contend with weaning the markets off a far more powerful narcotic.

A Brief History of Quantitative Easing

6 YEARS AND $3.1 TRILLION LATER, HOW HAS THE ECONOMY PERFORMED? by Bill Cai large amounts of mortgage-backed securities and bank debt. This morphine-like injection directly alleviated fear regarding the liquidity and value of these securities and also increased confidence regarding banks and other financial institutions that held large quantities of these toxic financial instruments. Instead of employing conventional monetary tools such as targeting interest rates, the extent of the crisis forced the Fed to venture into new territory with QE.

BEN BERNANKE Former U.S. Federal Reserve Chairman

n the fall of 2008, the United States was on the brink of catastrophic financial collapse. With the burst of the subprime housing bubble, reputable financial institutions that held toxic assets were either acquired at a rock-bottom price or had gone into bankruptcy of one kind or another. Financial markets were sent into free-fall, as investors feared that the financial contagion of the collapsing housing market would spread. During a single day of trading on Sept. 29, 2008, $1.2 trillion was erased from the U.S. stock market. HISTORY REPEATS ITSELF Quantitative easing, or QE, in the United States began against this backdrop. Economists who studied the Great Depression, like former Federal Reserve Chairman Ben Bernanke, believed that decisive intervention by the Fed was important for preventing the markets from descending into chaos. Beginning in November 2008, the Federal Reserve began purchasing

ESCALATION STRATEGY When the Federal Reserve announced the second round of QE in November 2010, the U.S. economy was not directly threatened with financial collapse, but the economy was stagnating. This second round increased the value of reserves, in both Treasuries and other Fed-supported securities, held by corporations. The Fed hoped that increasing these reserves would stimulate spending and borrowing by corporations and consumers. Numerous economists and analysts opposed the second round of QE, citing the risks of an asset bubble or a currency war caused by a depreciating U.S. dollar. TARGET PRACTICE In September 2012, the Federal Reserve began to publicly target employment rates along with its conventional inflationary targets. Then-chairman of the Fed Bernanke announced the third round of QE and promised to maintain these purchases while unemployment and inflation rates were above the threshold levels of 6.5 percent and 2.5 percent, respectively. This amount was eventually increased to $85 billion in December 2012. The purpose of associating employment rate targets with QE is to provide forward guidance for the economy so that corporations and financial institutions are

assured of continued monetary expansion and low interest rates. THE JURY IS STILL OUT 6 years and $3.1 trillion later, how has the economy performed? On the employment front, it appears that the Federal Reserve has met its target. According to the Bureau of Labor Statistics, unemployment fell from 7.8 percent in September 2012 when QE3 was announced to 5.9 percent two years later. Inflation continues to be low and stable at 1.7 percent. While unemployment and inflation rates are low, GDP growth continues to be sluggish. The World Bank reported that the United States. economy grew by 1.9 percent in 2013, as compared to 2.8 percent in 2012 and 1.8 percent in 2011. With labor force participation rates at a 35-year low, however, experts have expressed skepticism about the apparent improvement in the labor market. In addition, evidence of an asset bubble is mounting, albeit in the stock market instead of the housing market. Stock indices reached all-time record highs in November 2014. In fact, the Price-Equity ratio of the S&P 500 has increased by more than 46 percent since October 2011. As investment manager Warren Buffett warned, the consequences of QE, particularly inflation and asset bubbles, may take decades to play out. In addition, it is nearly impossible to answer whether the American economy would have been better off without quantitative easing. Furthermore, because QE is an unconventional and relatively untried policy tool, there are few case studies or benchmarks to which to compare the effects of the Fed’s QE policy.

INTERCOLLEGIATE INTERCOLLEGIATE FINANCE FINANCE JOURNAL JOURNAL • WINTER • WINTER 2014 2014

Liquid Investments

AN INTOXICATING ENDEAVOR by Matthew Janigian

t begins as an innocent habit. You taste an exquisite wine; it opens your eyes to what really great wine can be. It’s not just that good-tasting glass you had at the restaurant the other night. It’s not just the very decent go-to pinot noir you have in your basement for when you have other sophisticated guests over. No, you’ve honed your palate and you know that you love wine. The first few bottles come easy. Sure, they’re splurges in the moment, but to you they are valuable, and so worth the indulgence. But decanting it—parting with that dear friend—is all too difficult. Soon, you start amassing more and more—and before you know it, you have a collection that’s worth a sizable amount of money. THE CASE FOR WINE There’s no doubt that wine has value; the fact that any bottle of fermented grape juice can fetch a price of over $1,000 should make this obvious. But what makes wine a good investment? And is what typically begins as an expensive hobby really worth it? There are two points to keep in mind: wine is incredibly sensitive, and tastes are subjective to a degree. To the first point, consider this: the Liv-Ex exchange, an exchange specifically for wine and wine-based funds, reported that invest-

ment-grade wines returned an annualized rate of 5.3 percent—roughly in line with how the S&P performed. But those cases of wine need to be stored properly, and storage isn’t cheap: the expense just for keeping wine at the right temperature in a secure location brings the returns down to 4.1 percent. With the added expense of exchange commissions, returns can suffer even more. But here’s a reassuring fact for oenophiles: some of the best wines take years— sometimes longer than a decade—to fully mature. At that point the wine will not only be at its peak flavor, but will also likely be rarer, thus allowing for a higher return. GRAPES OF CASH People have been investing in wine for centuries: a wine connoisseur would purchase bottles, store them for years, and then sell them for a higher price at a later date. But more recently, investing in wine has become so prevalent that exchanges for wines and wine-based funds have emerged. After a quick glance at the LivEx exchange, it might seem like a typical financial website. Upon closer examination, it becomes apparent that the ticker banner isn’t filled with stock symbols, but with the names of certain wines. In general, Bordeaux, Champagne, and Burgundy wines are the most popular. The grapes squeezed by the vintners of these regions tend to be more valued than wines of other regions since they have more of a history and reputation. Recently, Italian, American, Australian, and Spanish wines have been gaining more traction in the market. No longer does one have to seek out the finest 2009 or 2010 vintage Bordeaux to get a good value. Indeed, obscure wineries from places like Lebanon and Chile are starting to attract attention. So how exactly does one choose the right investment? BARRELING THROUGH UNCERTAINTY Investing in wine cannot be done without a great deal of uncertainty. It requires a deep knowledge about all aspects of the wine: from the grape varietal, to the vintage, to the winery, to the age of the

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vines, to the weather during the specific year—and that’s an incomplete list. In addition, the fact that the wine landscape is changing so rapidly makes it difficult to predict which wine will have the best value several years from now. Sure, a 2009 Bordeaux is probably always going to be sought after, but is it really the best value? That’s more difficult to say. To sort out some uncertainty, it’s useful to look at a similar investment: whisky. The same type of uncertainty inherent to wine is prevalent in whisky investing, albeit to a lesser extent. Typically, Japanese and Scotch whiskies are considered the finest around. They’re coveted for their smooth textures, rich hues, and complex flavors. As such, they have gained quite an interest from investors. LIQUID GOLD Investing in whisky is, in many ways, easier than investing in wine. For one, whisky isn’t as sensitive to how it is stored. There also tends to be a general rule for whisky investing: buy from distilleries with good reputations, and buy bottles that have a limited release. While buying a $200 limited release bottle might seem like an BOTTOMS UP Index of Wine and Whisky Prices $480

Whisky 50

Whisky 100

$400

$320

Wine Investables

$240

Wine 1000

$160

2008

2014

expensive investment at the time, several years from now, that bottle could be worth triple the value due to its scarcity. Consider this: the Macallan “M” whisky sold for $628,205 at an auction in January. The 6 liters of scotch were contained in an impressive twenty-eight inch tall glass decanter that took 17 craftsmen over 50 hours to complete. The contents of the bottle came from a selection of the finest and rarest scotches produced by Macallan, ranging in age from 25 to 75 years. The money raised from the auction went to charity; it is the most expensive whisky to date. WHISKY OVER WINE So what makes whisky a more easily

navigable investment? On the one hand, it doesn’t require the strict storage that wine demands—a bottle of whisky can be opened and resealed, and stored in a cool, dark area for a year and still taste fine. Further, the value of whiskies is more predictable: if you buy a good quality, limited edition bottle, it’s likely that the value will increase over time due to the simple fact that the supply will decrease as some consumers will inevitably drink the whisky instead of store it. Take a look, for example, at the 23-year-old Pappy Van Winkle bourbon whiskey. It’s by far considered the best bourbon, and only several thousand bottles are produced each year. One bottle sells for $250. But on the secondary market, people are willing to pay in the thousands for one bottle—not a bad selling point in the rare case that you can acquire a bottle for $250. However, it isn’t all that rare for someone to purchase a $200 bottle of whisky and see its price triple over the next decade.

“

Perhaps ironically, wine and whisky investments aren’t actually very liquid: the market is fairly opaque, and with so much uncertainty, it can be difficult to navigate.

”

TO SIP OR NOT TO SIP? Owning a fine bottle of wine or whisky is all good and well, but why do so many individuals actually invest in these products rather than more traditional securities? The answer is simple: They don’t invest with the mindset of a traditional investor. For most, it begins a hobby. And, indeed, many buy two bottles: one to store, and one to enjoy. In this way, these investors are well hedged against the risk of not achieving a good return on their investments: at worst, they can drink it. Still, these investors tend to be sophisticated and knowledgeable. Perhaps ironically, wine and whisky investments aren’t actually very liquid: the market is fairly opaque, and with so much uncertainty, it can be difficult to navigate. Ultimately it’s probably unwise to invest in these products solely as a store of value. In fact, it tends to be looked down upon by the industry, since these high quality drinks are made to be savored. The market is unpredictable, but if you’re willing to drink your investments if all else fails, then you very well may have a new hobby. But please, invest responsibly.

INTERCOLLEGIATE FINANCE JOURNAL â&#x20AC;˘ WINTER 2014

Going Beyond

Good for the Earth

or many companies, taking steps against climate change simply makes good business sense. Local government and industry leaders have the power to significantly mitigate global climate change through voluntary efforts. There is great potential for industry to slow climate change, especially since the industrial sector accounts for about 37 percent of greenhouse gas (GHG) emissions worldwide, according to a 2009 article in Energy Efficiency journal.

by Emma Chow

MONEY GROWS ON TREES In general, industry and government

SUSTAINABLE PROFITS THROUGH SUSTAINABLE PRACTICES

IKEA has been aggressively expanding locations with appeal to an electric car-driving, greener crowd

tend to acknowledge the threat that climate change poses to long-term sustainable profits, human health, and overall quality of life. As weather becomes more extreme, for example, physical capital becomes more vulnerable. The Global 500 Climate Change Report

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2013 by PricewaterhouseCoopers reported that damages from Hurricane Sandy alone totaled $42 million. Industry’s and government’s best interest is to protect their physical capital and infrastructure investments by reducing GHG emissions now. Joel Makower, a sustainable business and green marketing strategist, argued in “The State of Green Business 2014” that companies across all sectors understand that improving sustainability leads to innovation, efficiency, increased resilience in unstable markets, and

enhanced reputations. As awareness of climate change continues to spread, consumer demand for “green” practices and products will continue to grow, returning higher profits to more environmentally sustainable companies. Industry is realizing at an

accelerating rate that reducing emissions will not only slow climate change, but also generate higher profits. Longterm profitability is only possible if the economic, ecological, and social aspects of business are included in a company’s triple bottom line. BEYOND THE LOW-HANGING FRUIT According to Makower, companies seeking to reduce GHG emissions typically begin by trimming the lowest-hanging fruit and making their supply chains more energy efficient.These actions can be as easy as ensuring that all factory lighting fixtures use fluorescent light bulbs, or that all equipment is turned off at the end of the day. Further GHG emissions reductions require increasing amounts of effort. Trimming higher-hanging fruit often requires completely redesigning manufacturing processes or distribution networks to be less energy intensive, Makower argued. Corporate leaders such as IKEA and Mars Inc. are not satisfied with merely trimming the low-hanging fruit – they have both set the goal to be powered by 100 percent renewable energy by 2020, according to Maria Gallucci’s recent article in the International Business Times. This ambitious goal will place pressure on other corporations to take similar actions and dramatically cut their GHG emissions, as well. IN THE GREEN IKEA is one of the world’s largest investors in clean energy and plans to invest another $1.9 billion in new projects by 2020. Not only will these projects reduce IKEA’s GHG emissions, but they will also ensure the corporation is well-positioned in anticipation of future government-mandated carbon pricing or taxes. These expected policy changes

will dig into the profits of companies that choose to take reactionary rather than anticipatory actions. Companies are pressured to “keep up” with their competitors if they want to maintain or grow their respective market share. When a major corporation with the global presence of IKEA or Mars, Inc. announces an undertaking of such significant positive environmental impact, their competition takes note. There exists a “cascade” effect, whereby peer companies follow industry leaders. FUELING ACTION Some companies lack the knowledge and resources to address climate change. Environmentally-focused non-governmental organizations (NGOs) can help companies seeking to enact mitigation strategies by providing them the expertise they need. Multi-national corporations are increasingly perceived as more powerful than governments. NGOs recognize this distinction and often prefer to partner with corporations, rather than governments, as a means for spreading the NGO’s message and reducing global emissions, according to a 2009 article in the Institute of Development Studies’ bulletin. NGOs across all sectors partner with companies ranging from innovative startups to major corporations. Their relationships and knowledge help them position corporate partners as climate action leaders. The World Wildlife Fund, for instance, has worked with one of its many corporate partners, Unilever, to develop a plan to cut Unilever’s emissions in half by 2020, according to a report in The New York Times. NGOs fulfill the role of a catalyst by providing industry with the tools and experience needed to take meaningful actions toward reducing GHG emissions. Actions for mitigating climate change move beyond corporate social responsibility to financial responsibility. Forward-looking companies should view climate change mitigation strategies as a means to preserve longterm profits. When a company chooses to reduce their GHG emissions, they help protect their capital investments from environmental damage, prepare for potential carbon pricing, and bolster their public image. Companies should not view GHG reductions as a burden or a frivolous contribution to the “common good,” but rather as an opportunity to beef up their bottom line. With this approach, industry can really make a difference when it comes to stalling climate change.

POLITICAL ECONOMY

The Euro: TIME TO SAY GOODBYE? by Sarah Park

“

Despite initial optimism, incomes in the Eurozone today are about 20 percent below what they would have been had the growth trend that prevailed in the years before the euro continued.

SAMBA, BEACHES, AND POLITICAL CHANGE Dilma Rousseff’s Second Mandate, Miguel Ferreira 18

100%

t has now been six years since the start INFOGRAPHIC KEY: YEAR 2013 50% 100% of the global financial crisis. Much has YEAR 2000 YEAR 2013 transpired since Lehman Brothers declared 50% YEAR 2000 bankruptcy and effectively catapulted the world economy into freefall. Although the consequences were large, life went on. The S&P 500 and DJIA both reached record highs in 2013, Brazil hosted the World 87.2% Cup, and Prince William and Duch123.3% ess of Cambridge Kate Middleton 123.3% 41.0% welcomed their first son. However, amidst all these changes, things 37.8% 68 have been relatively stuck in 37.8% Europe, which has been seemingly IRELAND unable to hoist itself out of the pit UNITED IRELAND KINGDOM 53 of recession. Many economists blame UNITE the Euro for exacerbating, rather than mit107.9% igating, the Eurozone’s economic recovery. NE First introduced as the official currency of the European Monetary Union in 1999, the Euro was initially lauded for the con104.5% venience, efficiency, and stability it would bring to the region in terms of trade, L travel, and the coordination of monetary policy. However, in the wake of the recent financial crisis from which the Eurozone is still suffering, the benefits of the Euro have FRANCE been called into question.

92.2% UNITED THEY STOOD, UNITED THEY FELL The Euro’s creation shortly 57.3% 128.0% followed that of the European Central Bank (ECB), 128.0% which was established to 48.5% conduct monetary policy and maintain financial 48.5% SPAIN stability for the 18 counSPAIN tries that currently com92.1% prise the European Monetary 92.1% Union. The Euro is now used by PORTUGAL 59.3% over 333 million people around the world and is the second most PORTUGAL 59.3% important international currency after the dollar. While the Euro has delivered many economic and political benefits, such as lowering transaction costs, increasing price transparency, and boosting trade, it has failed to accomplish one of its original goals: to better protect the Eurozone from external economic shocks. Like most other countries, the Eurozone fell victim to the financial crisis Public Debt as a Percentage of G that swept across the world in 2008. and 2013 (light blue) Many of its member countries saw their largest financial institutions fail and their economies collapse. This resulted in rising unemployment and mounting public debt — when significant economic changes as governments intervened with bailouts in one country spread to others — was and bank nationalizations. compounded by this interconnectedness. Therefore, although the degree to which PIIG-ING OUT the financial crisis affected each counFollowing the adoption of the Euro, try varied, the strong interdependence the financial relationships between the between the countries meant an economic Eurozone members grew in both size and crisis in even one country would affect the complexity. The problem of contagion others, threatening the stability of the en-

Europe’s Newest Pl

THE BOOM OF AN UNCONVENTIONAL INDUSTRY The Billion-Dollar Business of Surrogate Pregnancy, Gillian Lee 19

TURNING TO THE SEA FOR ANSWERS Desalination and the California Drought, Nikhil Kumar 20

56.0%

DARK MONEY The Price of 21st Century Politics, Alexander Burger 21

BRIBE OR NOT? The Moral Limits of Providing Financial Incentives for Academic Performance, Yashil Sukurdeep 22

FINLAND

dubbed the PIIGS and represents the five Eurozone members who experienced the deepest recessions following the crisis. The massive bailouts and loan packages that these countries required shed light on the shortcomings of the Euro.

43.8%

SWEDEN

52.4%

ESTONIA

53.9%

5.1% 10.1%

44.7%

38.6%

LATVIA

38.2%

45.0%

LITUANIA

DENMARK

8.6%

39.0% 23.7%

76.9%

3.8%

POLAND 59.7% 55.7%

ETHERLANDS BELGIUM

LUXEMBOURG 6.2% 23.6%

36.8%

GERMANY

45.7% 18.5%

54.6%

CZECH REPUBLIC 81.2% SLOVAKIA AUSTRIA 59.7%

50.3%

ROMANIA

HUNGARY

37.9% 22.5%

77.3%

72.5%

54.9%

BULGARIA

ITALY

18.3%

127.9%

174.9% 109.2%

107.9%

104.5%

GREECE

103.4%

MALTA

lague

GDP in 2000 (dark blue)

tire system. Further magnifying contagion was the fear that the ECB would not bail out governments who were experiencing debt crises; unlike the Fed in the United States, there was no implicit guarantee that the ECB would step in as a “lender of last resort.” Contagion was made especially evident by Greece’s default. Years of overspending

A PRIMER ON INEQUALITY An Introduction from Professor David Weil, Wesley Meyer 25

and poor fiscal policy finally caught up with Greece; its debt-to-GDP ratio reached a high of 160 percent of GDP in 2012, and it was forced to write down the value of its debt by more than half. Greece’s default subsequently sparked a sovereign debt crisis in Europe that was particularly disastrous in Portugal, Italy, Ireland, and Spain. This collection of countries has been

LENDING TOO LITTLE TOO LATE In giving up their individual currencies in exchange for the Euro, the members of the Eurozone effectively gave up the ability to conduct independent monetary policy. As stipulated in its treaty, all decisions in the ECB must be made by consensus. While this policy works well when all the member countries are financially stable and have relatively similar levels of inflation and growth, it quickly became problematic when countries were unable to introduce necessary policies to counter economic downturn. Had they been able to implement their own monetary policies, countries such as Greece and Ireland could have introduced larger stimulus measures earlier, thus tackling their problems before they magnified. Economic evidence has shown that the faster lending is provided in economic crises, the lower the amount that actually has to be lent. Although the ECB eventually introduced measures to fight the crisis — such as lowering interest rates and injecting liquidity into the system — its response was simply too little, too late. Many politicians and economists advocated for greater fiscal austerity, preventing more aggressive measures from being implemented and even delaying the introduction of any stimulus at all. SKINNY PIIGS Although many countries are on their way towards financial stability, the region overall has made lackluster progress. In general, the Eurozone is still plagued by high unemployment — in the double digits in many countries —, stagnant growth, and a dangerously low inflation rate. On Nov. 4, the European Commission cut its 2014 and 2015 growth forecasts for the Eurozone and projects that inflation will remain well below its 2 percent target rate until at least 2016. Demand, investment, consumer confidence, and manufacturing remain low across the region. Evidently, the measures implemented by the ECB since the onset of the crisis are still not enough to ensure the Eurozone’s recovery. Perhaps, coordination of monetary policy for 18 extremely disparate countries is simply not possible. The appropriate policy response continues to remain highly polemical within the ECB and consensus has only become increasingly more difficult to achieve. While some believe the solution lies in

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

introducing further fiscal and monetary stimulus, others argue that such stimulus measures would only augment the Eurozone’s debt problems; instead, they claim that removing obstacles to investment is the way to promote growth. Financially stable countries such as Germany are growing weary of shouldering the burdens of their less economically sound neighbors. SOMETHING’S GOTTA GIVE To many, it is becoming increasingly clear that something must change. Maintaining the status quo is no longer an option if the Eurozone ever hopes to emerge from its current predicament. While introduced with good intentions, the Euro has fallen far from delivering its idealized promises of a more stable and economically prosperous Europe. Despite initial optimism, incomes in the Eurozone today are about 20 percent below what they would have been had the growth trend that prevailed in the years before the Euro continued. However, despite an increase in calls to dismantle the Eurozone, alternatives have been either notably absent or weak. At this point, after all the time, money, and energy that has been invested in the Euro, the costs of a breakup may bring greater heartache to the region than attempting some heavy-duty counseling. Until a clear solution is articulated, for now it seems like the region is stuck between the Euro and a hard place.

Samba, Beaches and Political Change DILMA ROUSSEFF’S SECOND MANDATE by Miguel Ferreira

hile the Brazilian flag bears the words “Order and Progress,” the country has a tradition of instability that continues to this day. Its path to democratic freedom has been filled with military dictatorships, coups, and corruption. ROUSSEFF THE REDEEMER? In this year’s election, it once seemed Brazilian president Dilma Rousseff would not be able to climb back to popularity after her excessive spending during the World Cup and inability to meet growth targets over the past few years. Nevertheless, she managed to defeat Aécio Neves, a fresh face in

the presidential campaign, in an extremely tight race. Rousseff will now face the challenges of a strong opposition, in particular within the middle and upper classes, while simultaneously uniting their interests with those of a still largely impoverished nation. Rousseff is a member of the left-wing Workers’ Party (PT) that has been in power since 2003. She is widely considered the prodigy child of former Brazilian president Ignácio Lula da Silva, who served two mandates before her. Rousseff’s policies are typically populist, primarily focused on strengthening welfare policy. She is credited with lifting tens of millions of Brazilians out of poverty. THE CARNAVAL HANGOVER Rousseff won the election against the conservative Neves, who ran a campaign that targeted economic reform. Meanwhile, Brazil is undergoing a recession resulting from falling commodity prices and increased government spending accompanied by high inflation. In this year’s second quarter, the economy shrank by 0.6 percent, whilst the revised first quarter statistics indicate an additional reduction in GDP by 0.2 percent. Unemployment has not fallen much, and inflation is at 6.75 percent, which has weakened purchasing power substantially. After Rousseff’s first mandate, it is clear that Brazil requires economic reform to maintain its status as Latin America’s largest economy and one of the most influential nations in the Southern Hemisphere. Under Rousseff, Brazil seems to have declined from a position of economic growth to a climate of economic instability. Under Silva’s previous administration, the economy grew at a rate of 4 percent, but Rousseff has only managed a growth rate of 2.1 percent. The numbers do not lie, as reform seems to be a necessary component for any future administration if Brazil is to prosper. So far, it is unclear how Brazil will fare during Rousseff’s next mandate, because it seems like a nation that clamoured for change — Neves claimed 48.4 percent of votes in the run-off election — is headed for a similar path as before the elections. WHAT COULD HAVE BEEN Neves is a senator in the Brazilian federal senate and president of the Socialist Democratic Party (PSDB), a centrist party that focuses on conservative policy. He was governor of Minas Gerais, Brazil’s second most populous state and the state with the third highest level of income. Neves’ campaign focused on eliminating corruption and stabilizing the stagnant economy by implementing growth policies. In his own state, as governor, he implemented “Management Shock” policies, which aimed at decreasing corruption while directing government expenditure towards individuals. Rousseff, coming into this presidential

race, had an advantage. Rousseff may have plunged the economy into recession, but she was able to lift many people in the North East from deep poverty. Many of Rousseff’s votes came from her likeable policies directed at the most impoverished regions of the country. Neves, on the other hand, was often seen as an arrogant character born into a wealthy political family. This created a barrier for many poorer constituents who did not recognize the urgency to repair the Brazilian economy. As president, however, Neves could have implemented necessary economic reforms to stimulate investment in an economy where investment has fallen 5.3 percent since the first quarter. Business and consumer confidence is very low, in part due to political instability and lack of confidence in the government. If history has anything to say about Brazil’s future, the election of Rousseff will not improve the economy. A TIGHT — AND DIRTY — RACE FOR POWER The presidential race was not absent of attacks from either sides in attempts to gain support from constituents. Neves was accused of hiding drug charges and of censoring Google to hide these charges. In response, Rousseff’s involvement in the embezzlement scandal with stateowned oil company Petrobras was brought up. Members of Rousseff’s party have been accused of directing multi-million dollar contracts to contractors and embezzling this money into their own pockets. The scheme is still under investigation, but ultimately, her involvement did not prevent her from securing a second term. NO WALK ON THE BEACH As we dive into the future, Rousseff will have to face far graver problems than in her first mandate: an economic recession and a divided country. The election exposed a country that craves change — be it political, social, or economic. Rousseff will have to unite both ends of the income distribution to build a sustainable political and economic future for Brazil. So far, Rousseff’s re-election has emphasized an unpleasant reality for businesses and investors in Brazil. The markets responded negatively and rapidly to the incumbent’s re-election as stocks fell by 3 percent, a six-month low. The market has very little confidence in Rousseff, and as a result, it will be an even steeper hike to economic stability. Many already believe that if Rousseff institutes the same policies as before, the country will dig itself into an even deeper hole in the economic and social spheres. The Worker’s Party, PT, may have won this election, but it is unlikely it will maintain political power as Brazil dives deeper into recession.

POLITICAL ECONOMY

The Boom of an

Unconventional Industry THE BILLION-DOLLAR BUSINESS OF SURROGATE PREGNANCY by Gillian Lee Photograph by Jonah Blumenthal

he U.S. Department of Agriculture estimates that it costs approximately $245,000 to raise a child to the age of 18. For Alan Sangpan, the proud father of twin girls, about a fourth of that amount was already spent before he even got to hold his daughters. Sangpan, as well as other parents-to-be, are willing to cough up those sums if it means getting to start a family. The method? Through the overseas surrogacy market, also known as the “rent-a-womb” industry. Surrogate pregnancy presents an option for people who are unable to conceive a child for various reasons. Women are hired and implanted with embryos in order to carry babies for Westerners looking for surrogates with a cheaper price tag. In foreign countries such as India and Mexico, the morally and legally entangled practice has become a $1 billion a year industry that continues to expand. A 21ST CENTURY STORK Commercial surrogacy was legalized in India in 2002 and is also legal in Nepal and Mexico, among other countries. Statistics from various firms and agencies point to a sharp increase in the number of foreign surrogacies since its legalization. Domestically, surrogacy costs can rack up to about $100,000. As a result, Westerners, attracted to the significantly lower cost of outsourcing reproduction, are continually increasing the demand for surrogate pregnancies. Alan Sangpan, the father of the twins, hired a woman in India and spent $32,000 on the agency fee, plus an extra $20,000 in order to hire an egg donor. The process of surrogacy can be lengthy, beginning with the need to find a womb and hire a mother, find an egg donor if need be, ensure that the pregnancy goes smoothly and finally, that the baby is soundly delivered and brought back home. Various

agencies now exist in the United States to facilitate the entire process. Examples include Surrogacy Abroad Inc., which is based in Chicago, and Circle Surrogacy, Ltd., which is based in Boston. Surrogacy is a costly process that hopeful parents with lower income jobs often may not be able to afford, but these agencies make parenthood a feasible option. THE GIFT OF LIFE Thousands of miles away, impoverished women have also benefited from the increased demand in surrogacy by becoming surrogate mothers. Women can go to the numerous clinics that exist throughout foreign countries to conceive a child for another parent. In the Indian state of Gujarat, Dr. Nayna Patel runs a surrogacy center called the Akanksha Infertility Clinic. At the Akanksha Infertility Clinic, women who carry babies earn $8,000 for their services, and $10,000 if they carry twins. To many women burdened with the struggle to survive, renting their bodies as a commodity is a small price to pay in exchange for the sums they receive. Oftentimes, the amount a surrogate mother earns will largely surpass the earnings of her husband, who may earn as little as $40 a month. With the money, women can ensure their families have appropriate housing and food. In addition, it helps ensure their own children receive an education, which can serve to improve the family’s standard of living in the long run. OUTSOURCING PREGNANCY The surrogate mother benefits and the parents-to-be benefit as well. Yet this seemingly innocuous win-win situation has fired an intense debate over whether commercial surrogacy exploits women. The practice still remains a gray area in some countries,

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

as many places lack a legal framework regulating the industry and moral, legal, and political debates are frequently called upon. There are various groups who are staunchly opposed to the commercial surrogacy industry based on moral and religious grounds. Among the opponents is the Catholic Church, which believes surrogacy meddles with the natural laws of human life. The Church claims that surrogate pregnancy represents a failure to meet the classic notions of motherly love by allowing a woman other than the biological mother to carry the child. In addition, the Church notes that the practice offends the dignity of the child. On the opposite end of the spectrum lies a group that perhaps most heavily benefits from commercial surrogacy: same-sex couples. Some nations bar same-sex couples from adopting. Other same-sex male couples simply want to parent a child who is genetically related. In both cases, surrogate pregnancy may be the only way for the couple to become parents. The unregulated industry of overseas surrogate pregnancies provides the added bonus of a cheaper cost. This however, only adds to the political debate of surrogate pregnancy as the fight for the rights of same-sex couples makes the issue more complex. Furthermore, critics claim that the process takes advantage of impoverished women in a heartless baby-making factory. Simply looking for a means to meet the basic needs, women will have a higher propensity to loan their bodies to this industry. On the other hand, defenders of the practice equate the process of carrying a baby and giving birth to hard labor. The payment the women receive is simply a wage for their labor. THE BEGINNING OF THE END? Among the countries where surrogate pregnancy is booming, Thailand is currently facing the greatest amount of controversy. This past summer, the surrogacy industry in Thailand came under fire as laws governing the practice tightened in the country. This legal action accompanied the story of baby Gammy, born to a surrogate mother in Thailand but abandoned by his biological Australian parents when it was discovered he had Down syndrome. After his abandonment, laws were established to prevent such a devastating story from occurring again. Among the new regulations is the requirement for newborns to go through a costly and lengthy legal ruling in order to exit the country. Part of the reason the surrogacy industry has flourished over the past couple years is the relative absence of rules and regulations, which has allowed clinics to proceed with the process however they wished. As a result, it is expected that the commercial surrogacy industry in Thailand will decline because the new policies

involve extra costs and delays. The enthusiasm for hiring surrogate mothers will be redirected to other countries where the costs are cheaper and less legally complex. If other countries are to follow Thailand’s example and tighten their policies, will that lead to the end of commercial surrogacy altogether? Perhaps not, because an industry that so readily satisfies the dreams of hopeful parents will always be in demand, regardless of the price. For now though, the overseas rent-a-womb industry remains a lucrative business that is only continuing to expand.

Turning to the Sea for Answers DESALINATION AND THE CALIFORNIA DROUGHT by Nikhil Kumar

ver the summer, the ALS Ice Bucket Challenge took the country by storm, even in California, where storms actually bringing water have increasingly become a rarity. #Droughtshaming became popular on Twitter as a way of discouraging Californians from participating in the challenge. But how did California become so desperate for water that a seemingly innocent charity campaign engendered widespread outrage, and what can be done to alleviate some of the burden on the state’s sickly water resources? WATER WOES The current California drought has been raging since 2012. 2013 was the state’s driest year on record, and conditions have worsened in 2014

thanks to lower than expected rainfall. The effects of the drought are deep and wide-ranging. The state’s major reservoirs are now at just 28 percent of total capacity, hydropower generation in July fell by a quarter compared to last year, the agricultural industry is set to lose over $2 billion, and wildfires have become more frequent. Given that California leads the United States in terms of population, economic might, and production of fruits and vegetables, the drought should concern the entire country. The prominence of water supply control in geopolitical conflicts in other parts of the world reveals the urgency of solving California’s water troubles. Water is critical to the ongoing struggle in Iraq and Syria; much of the fight between ISIS and Kurdish forces has centered on canals and dams such as the Mosul Dam. A similar story has unfolded in Yemen, where control of water supplies has been vital to al-Qaeda’s success. Of course, it is extremely improbable that the California drought will lead to violent conflict and unrest in the foreseeable future. But the fact remains that water is precious to humanity, and any long-term shortage of it will only undermine the security of those affected. SAVED BY SALTWATER Much work is being done to solve California’s drought crisis: in the midterm elections, voters approved a $7.2 billion bond proposal that will go towards traditional strategies like building reservoirs and tapping into groundwater. But what about desalination? The state’s 840 miles of coastline along the Pacific Ocean provide access to an abundant supply of ocean water, a resource from which Californians can surely benefit. Many water-deprived coun-

LAKE OROVILLE IN 2011...

...AND THREE YEARS LATER, IN 2014

POLITICAL ECONOMY

TAKE THE PLUNGE But Californians shouldn’t balk at the high costs of desalination, even if the drought miraculously lessens in the near future. As climate change continues to leave its mark, drought is likely to become more common, and the state will need a relatively sustainable way to support its population and agricultural industry without utterly devastating the environment. Desalination appears to be the way forward for California, and the state should pay up now to ensure its future security.

Dark Money THE PRICE OF 21ST CENTURY POLITICS by Alexander Burger

ampaign season has come and gone as quickly as the fliers, television ads, and mailings. Seats have been won and lost, and the political tide has already seemed to turn as we make our way to 2016. And yet, what hasn’t vanished as quickly is the influence wealthy donors have gained from bankrolling candidates — but this time, not with Super PACs and party war chests. Rather, by categorizing campaign finance funds as donations to social welfare organizations, donors have increasingly hid from public view. Welcome to our political world of dark money.

Cartoon by Linda Navon Chetrit

tries, including Saudi Arabia, the United Arab Emirates and Australia, obtain a significant portion of their water supplies from the sea. Israel currently produces 40 percent of its water from desalination, just nine years after opening its first major plant devoted to the process. Although California’s population is many times that of Israel, the ability of an entire country to overhaul its water supply system so quickly should serve as an inspiration. California has recently begun to test the waters of desalination. At least 15 desalination projects have been proposed for California’s lengthy coastline, including an enormous plant in Carlsbad that would produce 50 million gallons of drinking water per day beginning in 2016. Unfortunately, the switch to desalination is very pricey. Desalinated water costs twice as much as water from a reservoir or recycled wastewater, and the process of reverse osmosis requires large amounts of energy. And of course, just building the plants is expensive: the Carlsbad facility has a price tag of $1 billion.

AN ASSET OF ITS OWN A seat at the political table has grown in demand, as has its hefty price tag. According to the Brookings Institute, the average cost of capturing a Senate seat in 2012 was around $10.3 million, while in 2002 it only cost $4.7 million. However, as midterm elections gain substantial press surrounding the Republican accent, this number will presumably grow. The $4 billion — almost exactly the GDP of Fiji — infused into the races includes checks cashed courtesy of the Koch brothers, Michael Bloombergs, and Tom Steyers of the world — titans who have utilized the American political arena as another asset within their ever-expanding portfolios. The New York Times recorded donations coming in at $20 million per twenty-four hours the week before Election Day, begging the question: in a world where money buys cars, homes, and education — does it buy politics too? DUCK AND COVER Since the beginnings of campaign finance, academics have relayed the ways in which contributions affect legislators’ voting behavior. Empirical evidence details how money can potentially delay corporate fraud detection by the federal government or lead toward a repeal of banking activity limitation. But, we’ve known these facts for years. This time, however, more and more money is flowing in anonymously through social welfare organizations: a new and growing instrument utilized by wealthy donors who wish to remain out of the public eye. This is dark money. According to American tax code, groups that focus on issues need not

disclose donors. Donor lists like the ones Super PACs are required to report have thus fallen to the wayside. Dark money provides no avenue for criticism or public scrutiny, because no trace of influence can be found. Let’s recap: fewer donor lists, less transparency, less public knowledge of which entities our political leaders are becoming beholden to. Welcome to the 21st century and world of dark money. NEW RULES, NEW GAME In an increasingly interconnected world, the fact that I can look to LinkedIn for information on your work history, find on Facebook images of your family vacations, or even discover your mortgage payments via Zillow is frightening. Yet the millions of dollars funneled to candidates — without our knowing of where it’s from, whom it’s for, and what it costs — is even more chilling. Money and politics go hand in hand in America. But as Thom Tillis readies himself to caucus with the Republicans next Senate session, will receiving the most amount of dark money — a reported $32.6 million — influence his responses to North Carolinians? In Kentucky, will Mitch McConnell become an official the people can trust? Or will corporations and the coal industry be placed on the top of the list? What makes dark money chilling isn’t just the money — although it’s growing. It’s also not that it’s just another loophole within American campaign finance. It’s that Americans are increasingly left in the dark as to whom their soon-to-be leaders report to. In a nation built on the concept of fair representation, does dark money shroud that long-lasting legacy?

THE MORAL LIMITS OF PROVIDING FINANCIAL INCENTIVES FOR ACADEMIC PERFORMANCE by Yashil Sukurdeep Photographs by Keegan Quigley

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

IF I TOLD YOU THAT I’D GIVE YOU $100 FOR GETTING AN A ON YOUR MATH EXAM, WOULD YOU STUDY HARDER FOR IT? OR WOULD YOU ACCUSE ME OF TRYING TO BRIBE YOU? Paying adults for doing their jobs is considered common practice, and paying school children for getting good grades is becoming common practice as well. Ever since USA Today reported in 2008 that a dozen states planned to pay students for meeting class work or test-score standards, the use of financial

incentives in schools has gained popularity. For instance, as part of a study done by the University of Chicago, one Chicago high school offered its ninth graders cold, hard cash for getting good grades in their courses: $50 for an A, $35 for a B, and $20 for a C. Even elementary schools have followed suit. Several in Dallas pay their second graders $2 for each book they read. THE HIGHEST BIDDER The financial incentives are intended to make society better off as a whole. In theory, this is how it works: If children know that they are going to receive financial rewards for performing well academically, they will work harder. Consequently, they will obtain higher grades, which means that they will have gained a higher level of knowledge and skills. As a result, these students will become more productive workers when they obtain a job. Having a productive workforce will benefit the wider society, as increased productivity usually triggers positive GDP growth, which results in low unemployment and increased incomes for families. And there you have it: society is better off as a whole thanks to the financial incentives.

CORRUPTING KIDS WITH CASH Despite theoretically having clear economic benefits for society, many oppose the idea of using financial incentives to improve children’s academic performance. They liken it to a bribe. What they really mean is that the financial incentives corrupt the meaning of education for these kids. Take the primary schoolers in Dallas. With the introduction of the $2 reward, students would start viewing the act of reading as a tool that can be used for personal financial gains. If subsequently the $2 reward were to be removed, the students would no longer be motivated to read, simply because reading would no longer bring them a financial reward. Therefore, the incentives corrupt the meaning of reading, reducing it to a tool that is to be used purely for financial gains. This, they say, is wrong. CAPITALISM AT ITS FINEST Mind you, proponents of the financial incentives will not give up so easily. They criticize the argument behind the “corruption effect” on two fronts: First, in sticking with the case of the children in Dallas, they argue that the “corruption effect” fails to take into account how children used to value reading prior to the introduction of the $2 reward. For all we know, students might actually have viewed reading as a ‘waste of time’ before the appearance of the incentive. Hence, the only way to get them to read in the first place was by incentivizing them to do so through cash rewards. After all, children are better off reading books rather than not reading books, regardless of why they do it. Second, they argue that the “corruption effect” disregards the possibility that children might actually keep on reading the books even if the $2 reward were taken away. Consider those children who never read books before the $2 reward was introduced. If the $2 reward proves to be strong enough to motivate children to start reading, it is possible that they would develop an appreciation for reading. And if they appreciate reading, they would keep on reading even if the $2 reward were subsequently removed. This implies that the financial incentive could potentially act as a valuable tool for inculcating good reading habits for children, rather than corrupting the meaning of reading. RIGHT OR WRONG? Is it right or wrong to use financial incentives for better academic performances in schools? In light of the discussion of the “corruption effect” and its criticisms, it is hard to give a definitive judgment on the issue. However, we will never know for sure until the empirical data is available. So, would you collect the data if I gave you $100 for doing it?

POLITICAL ECONOMY DAVID WEIL PROFESSOR OF ECONOMICS ECONOMIC INEQUALITY AND WHAT IT MEANS FOR STUDENTS AT BROWN I think the rise in inequality has ironically made life as a student at Brown more stressful. Students have become so aware of the potential riches that are out there if they follow a certain path. When I graduated from Brown in ’82 I really didn’t think about what my career would be and where I would end up in the income distribution. I think that my friends and I thought more about adventure and satisfaction in life. We had more of a sense that graduating college was the beginning of a journey that could take all sorts of twists and turns unexpectedly; a sense that one couldn’t map these things out in advance. We thought that everything would turn out fine in the end, that we were well educated and able people, and that there were lots of things that we could end up doing. I think now, unfortunately, Brown students have become aware of the enormous income gap between the top 1 percent and everyone else. And they are really stressed about making sure they are in the top 1 percent.

A Primer on Inequality AN INTRODUCTION FROM PROFESSOR DAVID WEIL Interview by Wesley Meyer Photograph by Basundhara Mukherjee

WHAT’S BEHIND ECONOMIC INEQUALITY IN THE UNITED STATES? Part of the story is that unskilled workers in the United States now have to compete with unskilled workers everywhere in the world. Unskilled workers are relatively scarce in the U.S. but they are plentiful in the rest of the world. Another part of the story has been the decline of unions, which is something that I’m not able to fully explain. Some of it has to do with hostility on the part of government and some of it has to do with the ways firms operate. Firms have become more competitive, and as they become more competitive there is less scope for the unions to get some of the rents that are associated with those industries. Firms have also become more skilled at avoiding unionization. The fraction of the United States labor force that is unionized has gone way down and the only place where unions have really remained strong is in the public sector. That didn’t use to be the case. In addition to the opening of the economy and the decline of unions, technology can also explain economic inequality. If technology comes along and replaces what you do, that means that people who purchase your services now get something cheaper. From my point of view the fact that Expedia replaced travel agents is great because I save a lot of money, but of course the person who was supplying that service is worse off. Technology has destroyed jobs in a number of cases, and so if you’re a Brown graduate who is in the business of starting tech companies or producing a technological product, that is great. But if you’re someone who has to compete with technology, that hurts.

PERSONAL FINANCE

Sharing is Caring HOW EXPERIENCE-SEEKING MILLENNIALS ARE TRANSFORMING THE TRAVEL INDUSTRY by Rachel Binder

hen we were young, our parents told us to never get into the car with a stranger. Now, it’s commonplace. Over the past few years, it has become increasingly popular for young travelers to get rides from strangers or to stay in the homes of people they don’t know. This trend is a part of the growing sharing economy, a market that connects individuals willing to share resources in a more cost-efficient and convenient way. You might ask, what’s driving the popularity of collaborative services? The answer is: millennials, a generation whose spending power is growing and will only continue to grow. Millennials are looking for quick, convenient, and cost-efficient ways to see the world and make the most of their travel experience. A collaborative sharing economy, which involves no long-term commitment and is essentially a come-as-you-go marketplace, has become the new trend for millennial travel. TIME FOR A CHANGE One might assume that collaborative service platforms have gained popularity because millennials don’t have the money to spend on a weeklong car rental or hotel stay. It’s safe to say that a lower disposable income motivates millennials to look for cheaper options. A more interesting explanation, however, is a drastic change in millennial preferences. With the advent of social media and the development of technology, millennials are more trusting of their peers and the online marketplace. They are also more connected with their peers; social

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networking platforms like Facebook, Twitter, and Instagram allow millennials to share their experiences as they are happening. This newfound trust in collaborative services, combined with a need for peer connection, has led to an emerging preference for spending on experiences rather than material goods. In a study done in the United States and Great Britain, 72 percent of millennials favored spending on experiences, as compared to 65 percent of Gen Xers and 59 percent of baby boomers. Paired with this experience-seeking attitude is a craving for authenticity during the travel experience. When traveling, millennials want the experience of a local rather than a tourist. As a result, many millennials have taken to services like Airbnb, which provides the opportunity to stay in a local’s apartment rather than in a commercialized hotel with hundreds of other tourists. STOP, COLLABORATE, AND LISTEN Experience-seeking millennials are demanding fast, easy access to low-cost transportation and short-term rentals. As a result, collaborative sharing services have taken over by storm. Online hospitality platforms like Airbnb connect hosts who can rent out a spare room or apartment with travelers looking for a cheaper option for lodging. Ride-sharing services like Lyft and Uber connect passengers with drivers to make the travel experience more personalized and convenient. Taking a different approach to car-sharing, services like Zipcar provide cars that drivers can rent by the hour, providing a more cost-efficient option than car ownership.

Many predict that Airbnb could become the world’s largest hotel chain, despite not owning a single hotel.

These new business models embrace millennial preferences, and by doing so, pose a threat to the traditional travel industry. Given the increasing market power of millennials, there’s the potential for collaborative platforms to disrupt the travel industry and change the way we think of travel. Investors, seeing this potential, have sky-high valuations for some of these startups, including Uber’s valuation at $17 billion. Many predict that Airbnb could become the world’s largest hotel chain, despite not owning a single hotel. In just one year, the online platform doubled its listings to 550,000 across 192 countries, and travelers booked over 10 million stays. Last year, the company had a reported revenue of $250 million. With this impressive growth and worldwide recognition, Airbnb has increased its market share and has strengthened its niche position as a collaborative hospitality platform. MATCHING SUPPLY WITH DEMAND What’s most unique about the sharing economy is that it unlocks the potential to use assets that were previously unused. Owners can now rent out their spare bedrooms and idle cars to earn a profit. At the same time, consumers can access cheaper services when traveling. Combining this efficient use of resources with the desire for authentic travel experiences makes the sharing economy a model of supply and demand that caters to the millennial lifestyle, suggesting long-term success for the collaborative marketplace. Technology also plays a crucial role in the sharing economy. An online hospitality platform has the power to match suppliers with consumers across the globe so that millennials can opt for a more authentic travel experience. The transportation industry specifically has been revolutionized by the incorporation of technology: smartphone apps allow consumers to request Lyft and Uber drivers to pick them up at their location while Zipcar lets drivers find

HOW NOT TO SPEND MONEY LIKE A PRO Why Millionaire Athletes Go Broke, Kerry Yan 28

DOUBLE DOWN Limitless Possibilities to Online Betting, Tom Pesce 29

THE PROGRAMMED PRODUCT Why You (Won’t) Need to Buy a New iPhone Soon, Tiffany Chen 30 Photograph by Cadence Lee

cars located nearby. The development of technology has allowed collaborative service platforms to better cater to their number one consumer: millennials. TROUBLE IN PARADISE Despite the rampant success of the collaborative economy, several hospitality and transportation companies have faced their fair share of legal issues. Airbnb has been criticized, most notably in New York City, for encouraging the rise of illegal hotels. City dwellers who cannot afford housing have used Airbnb to go from rental to rental at a much lower cost than long-term renting or ownership. This process has only worsened the citywide housing bubble. Earlier this year, the city found that 37 percent, or about $168 million, of Airbnb’s revenue since the start of 2010 had come from hosts that had listed two or

more rentals on the site. Ridesharing companies like Lyft and Uber have also faced legal criticism. If a driver gets into an accident, it’s unclear where the responsibility lies. Because drivers are technically independent contractors, they are not employees of Lyft and Uber, so in the case of an accident, the drivers are liable for property damage and bodily injury. There’s also always the slim chance of encountering a driver or passenger with intent to harm — one of the main reasons why trust is what keeps the collaborative business models afloat. Despite these infrequent occurrences, social media and communal reviews have made millennials typically more trustworthy of collaborative services. FROM GENERATION TO GENERATION Although there are certainly limita-

tions with collaborative services, the sharing economy continues to thrive. With technological development connecting more and more people, the dynamics of consumption are drastically changing. Looking at millennial spending patterns and preferences more broadly, one could suggest that the desire for experience and immediacy reflects a fundamental change in generational preference. Baby boomers, and even Gen Xers, embraced traditional American consumer preferences, craving ownership and material wealth over anything else. Unlike generations before, millennials are favoring access over ownership, experiences over material goods, and authenticity over commercialization. With the increased spending power of trustworthy, experience-seeking millennials, the collaborative sharing economy is a powerful force that could potentially transform the travel industry.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

How Not to Spend Money like a Pro WHY MILLIONAIRE ATHLETES GO BROKE by Kerry Yan

end, when their earning power falls off drastically. Few know the pain of child support better than Tyson’s fellow boxer Evander Holyfield, who had eleven kids from six different moms. Despite making hundreds of millions of dollars from boxing, the costs eventually proved insurmountable and Holyfield declared bankruptcy in 2008. His story reinforces what is probably a smart move for both athletes and nonathletes alike: if you don’t want kids, don’t have kids.

he name “Allen Iverson” is symbolic of many things: the determination to dominate night in and night out as the shortest man on the floor, the most iconic crossover in history on none other than His Airness himself, and a time when the Sixers were a team trying to win the NBA Finals instead of the NBA tank race. Nowadays, Iverson sees himself on the news for different reasons — like struggling to pay $360,000 of monthly expenses with $62,500 in monthly income or losing his $4.5 million Atlanta mansion to foreclosure. Only three years after retirement, a living legend who earned over $200 million during his pro career now finds himself almost as broke as the average freshman in college. Unfortunately, the penniless pro athlete is far from the exception. Sports Illustrated estimated in 2009 that 78 percent of NFL players and 60 percent of NBA players are bankrupt two and five years after the end of their careers respectively. Allen Iverson, Michael Vick, Cheryl Swoops, George Best – the list of names continues, and stretches beyond race, gender, sport, or country. Even Mike Tyson, who made over $400 million from his boxing career, filed for bankruptcy in 2003 with over $27 million in debt. One can’t help but see his role in The Hangover a little differently with that piece of knowledge.

RISKY BUSINESS An extravagant lifestyle usually isn’t the whole story with bankrupt pros. Iverson’s habit of buying new clothes in lieu of packing luggage, Mike Tyson’s Bengal tigers, and Evander Holyfield’s troupe of offspring certainly didn’t help any of their balance sheets, but even then, they didn’t single-handedly cause bankruptcy. Another major reason athletes go broke is poor investing. Many athletes invest heavily in business ventures despite lacking substantial industry knowledge, a problem exacerbated by the frequent targeting of athletes by people seeking capital. Faulty investments by athletes over the years range from the $3.5 million Scottie Pippen lost in a real estate deal to the less explicable $2 million Terrell Owens dropped in an electronic bingo venture. But perhaps the worst case of athlete-turned-businessman was former Red Sox pitcher Curt Schilling’s attempt to create a massively multiplayer online game (MMO) with his company 38 Studios. After blowing $50 million between his own money and Rhode Island taxpayer dollars over six years, 38 Studios shut down years away from the game’s scheduled release date with hundreds of employees missing paychecks. Pippen, Owens, and Schilling are just a few of the many athletes who’ve failed to translate success in a jersey to success in a business suit, which goes to show that no amount of money or fame can replace sound business knowledge and strategy.

BOOZE, BIRDS, FAST CARS… AND BABIES The most obvious reason — and certainly a major one — for explaining the ephemeral nature of many pro athletes’ bank accounts is the high and extravagant lifestyle that many athletes live but can’t necessarily pay for. To be fair, the world of a professional athlete is a place where it’s incredibly easy to spend ridiculous amounts of money. Having extremely competitive and driven people together in one group creates a culture that all too easily encourages buying the fast cars, lavish mansions, and designer clothes that contribute to an unsustainable lifestyle. As the late European soccer legend George Best, who earned over $100 million in his playing career, put it: “I spent a lot of money on booze, birds [women] and fast cars. The rest I just squandered.” But expensive purchases like houses, cars, or clothes can always be resold when financial problems arise. Child support is a different story, as having a kid means almost two decades of legally mandated payments. And these aren’t exactly normal child support payments either: professional athletes regularly find themselves paying upwards of $3,000 a month, many times the national average of $350 a month. Especially problematic is the fact that much of child support is paid after athletes’ playing careers

THE CHARITY STRIPE While bad business investments may be a recurring theme for bankrupt athletes, ignorance and mismanagement is only part of the story. Oftentimes these losing investments are clouded by athletes’ emotional attachment toward their friends, families, and communities. Many athletes — especially those with less prosperous backgrounds — feel obligated to give back to their roots after making it big. For example, take retired NBA power forward Derrick Coleman, who earned more than $87 million over his 15-year career and declared for Chapter 7 bank-

ALLEN IVERSON

LATRELL SPREWELL Turned down a $30mm Minnesota Timberwolves contract

DAN MARINO Played quarterback for the Miami Dolphins Lost $14mm in a single investment

Defaulted on his homes in 2008 and 2010

ruptcy in March 2010. While Coleman certainly made some unwise purchases here and there, a major factor in his bankruptcy was Coleman’s desire to give back to and invest, albeit unsuccessfully, in the Detroit area where he grew up. The side of athletes’ financial affairs shown in Coleman’s story is one that doesn’t garner nearly as much publicity as athletes’ extravagant lifestyles or poor investments — many athletes are too altruistic with their money. It may be easy to criticize pros for their ridiculous purchases, but it’s harder to criticize them for financially supporting friends and family. Bernie Kosar, the retired Cleveland quarterback who declared bankruptcy in 2009, stated that there were times when he was supporting between 25 and 50 families. Retired wide receiver Andre Rison was said to have an entourage of over 40 people. And Allen Iverson, for all his questionable spending, was known for always paying the tab for his friends and generously helping his family in times of need. TICK, TOCK Lastly, one particular factor of professional sports careers seriously distorts the general discussion about athlete finances: career longevity. The average career lengths of the four major sports leagues in the United States are 3.5 years in the NFL, 4.8 years in the NBA, 5.6 years in the MLB, and 5.5 years in the NHL. In other words, most professional athletes have half a decade’s worth of earnings to plan for 40 to 50 years of retirement. While millions of dollars a year is still quite a hefty sum, pros have an extremely short window of time in which they can make and save their earnings. For most young people, saving money is a secondary priority that can be put off for later; for athletes, any year with no savings represents a large chunk of their career earnings going down the drain. It seems strange for any 20 year-old — let alone one with a multi-million dollar salary — to be thinking about retirement, and so it’s no surprise that many athletes spend as much of their earnings as they do. On paper, an athlete’s financials seem invulnerable both to us and to them, and that proves to be a problem. THE BREAKDOWN The phenomenon of professional athletes

going broke echoes a general financial truth that impacts us all at some level: many purchases that seem relatively small individually can add up to something expensive. Inconsiderate spending, risky investments, or even excessive generosity can prove dangerous whether you’re an athlete making millions of dollars or a college student making $8 an hour. No matter how much money they make, nobody is immune to bad decisions. And despite his lack of spending change, Allen Iverson isn’t truly bankrupt – he has a $30 million Reebok trust fund that he’ll be able to access once he turns 55. Perhaps by then, Allen “The Answer” Iverson will have found the answer to his financial woes.

Double Down

LIMITLESS POSSIBILITIES TO ONLINE BETTING by Tom Pesce

o you know who will win this year’s Super Bowl? As of Nov. 16, odds for the New England Patriots to win it all are 7/1. As long as you are in the United States, however, you will not be able to bet on your team online. As the online gambling industry continues to grow, perhaps it is time for the United States to put their money down and legalize it here. PLACE YOUR BETS In November, NBA Commissioner Adam Silver wrote an editorial in the New York Times suggesting it is time to legalize betting in professional sports in the United States. As of now, sports betting is only legal in Nevada. New Jersey has attempted to legalize it in order to jumpstart the ailing casinos of Atlantic City, but it is currently blocked by federal court. In the rest of the world, online sports betting is widespread. Betting is especially popular in Ireland and the United Kingdom, where bets are taken on all sporting events around the world. You can find odds for just about any game being played, from this weekend’s NFL games to the Egyptian Second Division soccer league.

PERSONAL FINANCE

SCOTTIE PIPPEN 7 time NBA All-Star

Lost $120mm on irresponsible financial decisions, including a $4mm broken jet

MONEY ON THE TABLE Don’t worry if you are not into sports. Betting websites have ensured that there are odds for everyone and everything. Popular on PaddyPower, an Irish-based betting website, are bets regarding Prince William and Kate’s second child. You can bet on the name, gender, weight, and even hair color of the next royal baby. Do you know what name they will give their second child? 5/1 says it will be Elizabeth (a $1 bet will earn you $5 plus your $1 back if correct). Personally, I like the 250/1 odds on Joffrey. While you live in the United States, however, your options for online gambling are limited. For now, online poker is only legal in Nevada, New Jersey, and Delaware. There is a huge underground sports betting economy alone, which some estimate to be as large as $400 billion. Commissioner Silver believes it would be beneficial to legalize and regulate this industry, which would surely bring in some revenue for the NBA and state governments as well. MORAL HAZARDS The main argument against any kind of sports betting at all is maintaining the integrity of the game. In the 1919 World Series, eight players on the Chicago White Sox bet against their team and threw the series, creating one of the biggest sports controversies in United States history. Major League Baseball continues to shun Pete Rose, one of its all time greatest players, for betting on games in which he played. Today, soccer’s world governing body, FIFA, is facing problems with fixed games in leagues in several countries. ALL IN Many call for relaxed restrictions on online betting. A legalized betting industry could bring in a lot of revenue for governments and sports organizations alike. Furthermore, the United States has other legal industries that pose a moral hazard. Opponents of online betting say it is too risky for those with gambling addictions, yet the tobacco and alcohol industries continue to sell their products indiscriminately. While online betting remains illegal in the states, Europeans are betting on who our next president will be. Hillary Clinton has the best odds at 5/4. Betting websites offer odds on football to politics to celebrities and everything in between. You can even bet on financials, such as if the Dow Jones Industrial Average will go up or down. After all, that’s what the stock market does, right?

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by Tiffany Chen

WHY YOU (WONâ&#x20AC;&#x2122;T) NEED TO BUY A NEW IPHONE SOON

The Programmed Product

PERSONAL FINANCE

n their prime, nylon stockings served as tow ropes for cars, light bulbs lasted longer than 2,000 hours, and printers could spit out hundreds of pages without malfunctioning. Products were engineered to be durable and long-lasting, and the owners of such items rarely anticipated having to buy replacements. Ironically, the more advanced society in which we currently live seems to promote products that cease functionality after their first several uses. The perpetrator is planned obsolescence, and a quick trip to the mall quickly reveals the extent to which it has permeated and influenced America’s current throwaway culture. FOREVER 21’S SECRET Perhaps the most common method of shortening a product’s lifespan is by its deliberate setup for failure. Engineers determine the type and quality of materials used and how a product is structured in order to ensure that it will break after a certain amount of wear and tear. Such purposely poor design is common in the clothing industry; due to the rise of ‘fast fashion’ and the constant pressure on retailers to keep their stores stocked with the most recent styles, many designers of bulk fashion deliberately use lower quality materials along with poor stitching and assembly to not only cut costs but also ensure that there will be a constant demand for new clothes. Consequently, although many young shoppers favor Forever 21 for the store’s cheap prices, the weak fabric material guarantees that customers will quickly return to spend more money and buy more clothes. Such a phenomena has contributed to the shocking discovery made by environmentalist and entrepreneur Paul Hawken in his book Natural Capitalism that only 1 percent of produced materials are still in use six months after their initial purchase. To escape the trap of poor product engineering, consumers should be pickier about what products they buy: natural fibers like cotton and linen will always win over synthetic fibers like polyester in terms of quality and durability. It can thus be considered advantageous to invest one’s money in more expensive, high-quality items since fewer purchases and replacements will be made in the long-run. A PSYCHOLOGICAL PLAY Producers might also begin appealing to consumers’ psychological, rather than functional preferences. A mass

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The idea of planned obsolescence becomes rather paradoxical: new products are designed to be better, but they are also engineered to not be the best.

change in aesthetic preference can easily compel individuals to buy a new product so as to not seem unfashionable or outmoded. Every season, new colors and styles become the essential wardrobe staples, leaving the previous season’s collection behind. Consumers ditch their old attire, which is typically still in good condition, in order to buy the most currently updated fashion. Similarly, tech companies are constantly updating their products’ aesthetics: larger and thinner iPhones, higher definition televisions, and refrigerators that can create grocery lists are all examples of how new designs and functions in old products are constantly in flux. These changes don’t necessitate a new purchase, but they are psychologically compelling. THE ONLY WAY IS UP(GRADE) More commonly, tech companies tend to make their products obsolete by changing the system or software it uses in such a manner as to make its continued use more difficult. Apple shrewdly forced its old iPod and iPhone chargers towards systematic obsolescence through the new shape of charger ports on its most recent iPods and iPhones. Needless to say, the constant release of new iOS versions and iPhone upgrades every year also plays a critical role in ensuring that customers keep returning to the store, whether it be for software bug fixes, compatibility issues, or even those Apple-obsessed individuals who always feel compelled to own the newest version of the iPhone. While systematic obsolescence can be much harder to evade for consumers, individuals still manage to find ways around it: most video game systems are designed to prevent backwards compatibility, meaning that new copies of the same games must be bought in order to play them on the new system. Many video gamers, instead of buying new games, will resort to trading and renting amongst themselves. Others will forego the console completely and resort to playing on the computer.

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PLANNING FOR THE FUTURE Once upon a time, products were made to last — until around 1928 when the magazine Advertising and Selling noted that “the article that refuses to wear out is a tragedy of business.” While rational and far from unfounded, the idea of planned obsolescence becomes rather paradoxical: new products are designed to be better, but they are also engineered to not be the best. Planned obsolescence promotes consumerism and stimulates the economy, yet its ethicality and fairness have yet to be determined. With a more heightened awareness of what they are purchasing and a more selective taste for products, however, perhaps consumers will be able to take back their purchasing power and turn planned obsolescence obsolete.

TIM COOK CEO OF APPLE

STARTUPS & TECHNOLOGY

Elementary, My Dear Watson SHERLOCK MEETS HIS MATCH by Charles Hemsley

GINGER WITH SOUL How a Goat Farmer Plans to Take Over the Alcohol Industry, Pranay Bose & Liz Studlick 34

HACKING YOUR WAY TO THE TOP How Tech Companies Are Upping the Stakes at Hackathons, Tiffany Chang 35

THE FUTURE THROUGH A NEW LENS Are Facebook and Google Gearing Up for Virtual Reality Wars?, Liz Studlick 36

W LEAVING ITS FOOTPRINT IBM Supercomputer Watson dominates Jeopardy champions Ken Jennings, left, and Brad Rutter

atson, IBM’s artificially intelligent supercomputer, is best known for beating the legendary Ken Jennings at Jeopardy in 2011. It is nowhere near the fastest supercomputer out there, nor is it the smartest in terms of computing power, but it might be the cleverest. Watson can understand questions posed in “natural language”— everyday spoken language — by parsing the input into fragments and running thousands of language analysis programs to generate thousands of different possible interpretations of the question. Watson then sifts through theses and finds trends in the answers, which it then checks against its database of articles, including the full text of Wikipedia. Still, why pour 8 years and $2 billion into the chance of Jeopardy fame? #WATSON Watson works with Big Data — today’s favorite corporate buzzword. It’s found on the lips of every tech talking head and is plastered across glossy corporate advertisements touting its power to revolutionize business. A big data set is one that is so large that normal statistical techniques simply cannot process all of the information. The entire text of Wikipedia is a small example of a Big Data set. Another is all of the metadata — the duration of a call, who called whom, and the location of each caller — that Verizon collects on the hundreds of millions of calls it processes every month. Big Data refers to the techniques that allow researchers to visualize, search, and draw conclusions from these data sets. It’s the size of these sets that allows researchers to draw new inferences that couldn’t be inferred from smaller sets of data. R&D spent over Watson’s Big Data trick is that it can 8 years by IBM understand human speech and answer on Watson questions posed in everyday language using its 200 million page database. Instead of spitting out data, Watson gives you a clear, quick answer, doing all the work for you. This means that if Watson was given access to Twitter, for instance, it could tell an energy drink company what consumers think of its product. Other Big Data companies can tell you how many people are tweeting about your product and who those people are, but only Watson can tell you what they’re saying. Regular techniques can tell you that people talk about your energy drink more around the months of December and May than any other months of the year. It is up to your data scientists to figure out why. Watson can just tell you why: it’s finals period. Realizing Watson’s earnings potential, IBM has teamed up with Twitter. Though Watson has been given access to Twitter, no, Watson does not have a Twitter account yet.

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FINAL JEOPARDY IBM’s stock price has plummeted by 10 percent since September, when CEO Ginni Rometty announced that the tech giant was not going to hit their target earnings per share — the firm’s profits per outstanding share. This is on top of the tech giant’s tenth consecutive quarter of declining revenue. Watson is one facet of the firm’s strategy to check their spiraling earnings, but Watson is not as multipurpose as IBM has hoped. It has actually turned out to be a slow learner. Teams of IBM engineers have to become familiar with their customer’s business before they can train Watson to understand the data unique to that customer. If IBM can get Watson up to speed, then they might just have a market redefining strategy. Even now, Watson is helping doctors to treat lung cancer patients at New York’s Sloan-Kettering Cancer Center. After the $1 billion IBM plans on investing in Watson over the next ten years, it’s a safe bet that Watson will be doing a lot more than just reading tweets.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

Ginger with Soul HOW A GOAT FARMER PLANS TO TAKE OVER THE ALCOHOL INDUSTRY FARMER WILLIE

NICO ENRIQUEZ BROWN ‘16

MAX EASTON

BROWN ‘16

by Pranay Bose and Liz Studlick

hat do you get when you mix a goat farmer with two Brown students? The best alcoholic ginger beer ever tasted. Created by farmer Willie Fenichel in Cape Cod and supported by two Brown students, Farmer Willie’s is set to launch on the Cape in May 2015. Light, refreshing, and naturally gluten-free, Farmer Willie’s is looking to bring “ginger with soul” to the world. FIRST FIZZ Nico Enriquez, Brown ‘16, traveled to the Cape every year with his family, spending his summers playing volleyball on the beach, where he met Fenichel. Fenichel, who Enriquez describes as quite a character, moved to the Cape to start a goat farm with his parents. Fenichel started

brewing his own alcoholic ginger beer in 2008 and started bringing it to the beach in 2011. Enriquez, enamored with the fizzy beverage, encouraged him to do something with it. Despite his initial reluctance, Fenichel refined his beer and by the next summer finally agreed to bring his brew to a wider audience. After teaming up with Max Easton, Brown ‘16, the group stumbled for a while, faced with the problem of too much delicious product and no idea what to do with it. Fortunately, Enriquez discovered an application for Brown Venture Labs, a startup accelerator, due that night. Easton cites the pair’s unique makeup for Venture Labs’ interest: “Here was an Englishman and an American trying to make a business out of a goat

farmer’s recipe.” The trio received $1,000 and Javier Sandoval’s mentorship, and Farmer Willie’s was on its way. FARM-TO-PUB Venture Labs taught the team how to best position their business, first showing them how to identify potential customers. The team learned there was no American alcoholic ginger beer to compete with, only an imported Scottish one named Crabbie’s started in 2009 in the United Kingdom. Their competitor, though valued over $100 million, lacks Farmer Willie’s local charm. And there’s evidence their potential market could take off: Cider, the main alternative to ginger beer, has grown 90 percent yearly over the past five years in the United States.

STARTUPS & TECHNOLOGY

The team’s plan is to launch on the Cape in May, drawing on Enriquez and Fenichel’s family contacts. They’ve already secured four bars for distribution and are confident they can get at least ten more. Farmer Willie’s will start self-distributing kegs and promotional cans in the summer. The company works with a contract brewer to bring their product to market, and plans on working closely with their head brewer to ensure the quality of the product. In the fall, Farmer Willie’s plans on expanding to Boston and forming a relationship with a distributor. “The best way to start our brand is to have someone else distribute it and make it and we would just take care of sales and marketing,” says Easton. And as for the near future? Easton and Enriquez promise to bring their ginger beer to Providence. “At the very least, Brown will have a few parties,” says Enriquez. “And the kegs will be on us.”

learning from your peers. “The best thing about a hackathon is that it’s fun — you meet cool people and hang out, play games, and make cool things,” says Gabe Lyons, Brown ’16, a computer science concentrator and former Facebook intern. The spirit of collaboration is strong — Lyons recalls the feeling of “osmosis” he experienced while soaking up new knowledge at his first hackathon. “People come out of hackathons thinking they learned more over one weekend than in an entire semester,” says Cusack.

Hacking Your Way to the Top

HOW TECH COMPANIES ARE UPPING THE STAKES AT HACKATHONS by Tiffany Chang

f you’re longing to create, but short on time, you may want to participate in a hackathon. In case you haven’t heard, hackathons are events in which students and computer programmers collaborate to bring an idea from imagination to reality in a fixed period of time — usually 24 to 48 hours. Hackathons are a staple of computer science culture, and their popularity has only grown in recent years.

HACK IN ITS PUREST FORM Nevertheless, some hackathons remain dedicated to the original spirit. One such competition is Hack@Brown, Brown University’s multi-university hackathon, which started last year. Hack@Brown takes a unique spin on corporate sponsorship by having actual engineers from companies such as Facebook and Google join forces with student teams. The result is a focus on learning — instead of prizes — as students gain experience working side-by-side with professionals. Nearly 70 percent of participants were first-time hackers. That’s one reason why Cusack along with other students at Brown started a series of Hack@Brown workshops to teach students the skills like JavaScript, HTML, and Git, and inspire them to work on their passion projects. In this way, the spirit of the hackathon can grow even beyond the timeframe of the event. Why even wait for a hackathon? Says Cusack: “You are the only thing standing between your idea and its execution.”

QUOTED

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People come out of hackathons thinking they learned more over one weekend than in an entire semester. — WILSON CUSACK, BROWN ‘16

Photograph by Jonah Blumenthal

MISSION POSSIBLE The mission of a hackathon — to provide an opportunity to create — is the number one reason to partake. “Hackathons are cool because they give people an excuse to do something they’ve always wanted to do,” explains Wilson Cusack, Brown ’16, a computer science concentrator and the director of workshops at Hack@ Brown. “There’s an energy that forces people to make things they might’ve never had the chance to make otherwise.” Though entire companies have sprung up from hackathon ideas, the joy could be as simple as having a great time working on something you’re passionate about while

THE CORPORATE MACHINE Despite their noble purpose of celebrating genius and creativity, there has been ongoing debate regarding the supposed tainting of hackathons by corporations. More and more tech company sponsors are offering substantial cash prizes of thousands of dollars for winning hacks — usually focusing on those ideas which appear marketable. This new emphasis, complete with huge, public pitch presentations to cap off the events, has made the events more competitive and less friendly to first-timers. “Instead of being about a bunch of kids having great ideas and being really passionate about working hard and implementing them, it’s become ‘Who can come up with the most polished business pitch in 24 hours?’ It’s been corporatized,” Lyons laments. “People are no longer playing just to play — people are playing for money.” There have even been instances of winning teams not actually having written all the code behind their glossy business pitches; while these teams presented proof-of-concepts, they did not create functionally coded projects, violating the original hackathon’s intent. Hackathons sponsored by companies tend to limit aspects of the projects, such as by specifying which APIs — interfaces that allow software programs to interact with each other — participants are allowed to use.

“It takes away from the charm of why we’re here. [Companies] are taking out the creative part by forcing people to follow a rigid set of lines and putting constraints on what people can make,” says Adrian Vatchinsky, a masters student at Cornell Tech and two-time winner of Best Hardware Hack at HackNY. His winning hacks? A knife that can distinguish whether the user is cutting a tomato or a potato, and a mind-controlled art gallery simulation. “I like it when my team can create free-form, and work on projects as silly and stupid as we want.” Despite this, corporatization does come with its benefits. Recruiters are often present at these events, and participants have a great opportunity to build their personal network. “Really cool people show up from different universities, tech companies, and the startup community. Take that ten to fifteen minute break to talk to people,” says Vatchinsky.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

The Future through a New Lens

ARE FACEBOOK & GOOGLE GEARING UP FOR VIRTUAL REALITY WARS? by Liz Studlick

e live in a futuristic age: we hold supercomputers in the palms of our hands, we can 3D-print anything, and cars are starting to drive themselves. Alas, no hoverboards or holograms yet, though one stealth startup out of Florida aims to bring us one big step into the future. Rather, one startup backed by $542 million in funding from Google and elite Silicon Valley venture capitalists. Magic Leap, which received its latest round of funding in October, is promising a lot but isn’t saying much. As per its own mysterious website: “Magic Leap is an idea… [that] exploring human creativity is as great an adventure as exploring space.” The same website is filled with videos of tiny elephants hovering in hands and whales floating above beaches. On the team page, where most companies would list their credentials, Magic Leap whimsically lists software ninjas, story-tellers, and psychedelic physicists. One of its investors described Magic Leap’s mystery product as “so badass you can’t believe it.” UNCOVERING THE TRUTH So, what do we know? Magic Leap is making a “lightweight wearable” — likely contacts or glasses — that can supposedly

superimpose virtual things directly on what you’re looking at in the real world, potentially mapping images directly on to your retina. So, basically, lasers beamed directly at your eyes, overlaying dragons and elves on your average city street. For most companies, this would seem like an insane goal. This company’s founder, however, has a track record of working with the incredible: Rony Abovitz was a biomedical engineer in a former life and previously founded Mako Surgical, a robotic surgery company. More importantly, Google seems to believe in the company’s vision: It not only put up an impressive chunk of cash, but also sought out investors and led the funding round. This investment, made through through Google directly, not one of its venture or investment arms, is also accompanied by Google’s head of Chrome and Android joining Magic Leap’s board. For the search giant, Magic Leap’s technology could represent a huge potential to integrate with Google Glass. Google’s computer-in-a-pair-of-glasses launched in April 2013 amid tons of hype, both internal and external — the company dubbed the first Glass custom-

ers Explorers. But consumer privacy concerns, perceptions of digital snobbery, and the $1,500 pricetag have kept Glass from being the computing revolution Google dreamed of. Developers have begun to give up on creating software for Glass, citing a lack of customers. Being able to give customers holograms, not just social media updates, may be the leap forward that the company’s been looking for. TURN ON, TUNE IN Virtual reality also made headlines in March when Facebook acquired Oculus for $2 billion. The company, which produces the Oculus Rift, a box-like headset, provides immersive virtual reality experiences, placing the user directly in a three-dimensional environment. The product’s unique sensors track head movements, letting you lean, crouch, and look around in the digital world. Fans of the Rift call the particular pleasure from it “presence,” a total suspension of disbelief, feeling completely transported to another world. Chief among the praise heaped on it: the fact that the Rift won’t make you hurl, a previous stumbling block in the virtual reality world. Initially funded through a Kickstarter

STARTUPS & TECHNOLOGY

campaign, the Rift was originally created for online gaming. Facebook’s acquisition has promised an expansion into bigger fields: travel, virtual schooling, medical consultations — and of course, the most up-close user experience and penetration an advertiser could dream of. With Facebook’s resources, the Rift could become not just a gaming curiosity but the next step forward for the way we interact with computers. At Facebook’s recent third quarter earnings call, Mark Zuckerberg talked about rolling out Rift on a large scale: 50 million to 100 million units. BACK TO THE FUTURE Although the future may seem within reach, this isn’t the first time that we’ve heard this story before: in 1995, Nintendo unveiled the Virtual Boy, a headset-heavy console to “totally immerse players into their own private universes.” It promised the future of gaming today. The Virtual Boy was a complete flop. Though less technologically advanced than what these companies are offering today, the issues plaguing it may still be relevant today: users found the experience to be asocial and uncomfortable, and many experienced unpleasant physi-

cal side effects. To be honest, it doesn’t look much different than the Rift’s boxy headset, though Oculus has claimed to have worked out all the nausea problems. The factors keeping Google Glass from catching on may also carry over to Magic Leap: it could still look weird and make social interactions uncomfortable. Will fancier holograms really make something like Glass more acceptable to strap to your head? Besides, both products are bound to be as expensive as Glass, making them the kind of elite novelty accessories that keep virtual reality from catching on. GEARING UP FOR A WAR It’s tempting to see the two deals as the beginning of Facebook and Google’s clash over virtual reality. However, there are key differences: while Oculus promises an immersive experience, taking you out of your ordinary world, Magic Leap wants to enhance real life and make the ordinary extraordinary. Oculus takes the user into its technology, creating a new world — Magic Leap takes the technol-

ogy to the user, making your world new. Call it virtual versus augmented reality. Despite differing visions, the two products will doubtless be in fierce competition once they hit the market. Both are at the forefront of this new reality, and want to provide unique gaming, social, and educational experiences. Both are backed by tech companies with huge sway. Though Facebook is willing to bet big on Oculus as the future of virtual reality, making it a full part of the company, Google seems to see Magic Leap as something to keep an eye on, plowing equity into it and placing a trusted employee on the board. Though impossible to predict the winner now, the showdown should start soon. Though Magic Leap is keeping the public guessing on a release date, Oculus has been showing demos for years and pledges a consumer-ready product in the next year. To be competitive, Magic Leap will have to make a big splash soon.

CAREERS

Stripped Down and Stripped Bare 38

HOW TO BUILD ME, INC. Using Social Media to Create Your Brand, Mariana Carvalho 40

THE ART OF NETWORKING Building Your First Professional Relationships, Mariana Carvalho 41

UNDER THE YELLOW UMBRELLA How the Hong Kong Job Market Is Affected by the Protests, Francesca Whitehead 42

HOW INDEPENDENT CONTRACTING IS STRIPPING STRIPPERS OF EMPLOYEE RIGHTS by Adrija Darsha

he profession of stripping has long been subject to ridicule. The real joke, however, is how these hardworking dancers are often forced out of their rights by the nightclub’s favorite gray area: independent contracting. Independent contractors are legally defined as people who provide goods or services to another entity, with specific distinctions from full-time employees. For example, the degree of control the employer exercises over the worker, the permanency of the relationship, and whether the work is related to the employer’s core business are factors used to determine worker classification. Essentially, the more involved the employer is, the more likely the worker should be categorized as an employee. For years, strip club owners across the nation have categorized strippers as independent contractors rather than employees, which has allowed owners to cut a few corners. They do not have to pay independent contractors minimum wage, pay employment taxes, provide benefits that they would for other employees, or follow workplace discrimination laws.

start developing persistent, uncomfortable side-stitch. #stripperproblems.” They work incredibly hard and are deprived of rights employees would never dream of giving up, such as a paid sick leave.

#STRIPPERPROBLEMS This makes life harder for single parents who have resorted to stripping to support their children, or the day-time student trying to put herself through college. Dancers do not receive workers’ compensation. In fact, strippers often have to pay the club for cancelled or missed shifts. As a result, in addition to losing the earnings by not being there, they lose money in the form of punitive fines. Furthermore, strippers are not provided with insurance — an atrocious fact considering the strenuous and often dangerous performances they put on. For instance, @ MissAudreyDawn tweets, “Hurt my hip tonight. Now who would have thought that could occur from dropping into the splits from a 30 foot pole? #stripperproblems”. The situation is lose-lose for the strippers. While they are not paid like employees, they are certainly expected to act like them. Strippers have set hours to work and often end up staying overtime, without pay. In addition, strict dress codes are imposed on them, as one Dallas club has reported a “no booty shorts” rule. Dancers may also have to pay additional fees for leaving a shift early. One stripper, @StripsintheCity, tweets, “Usually somewhere around the 34th lap dance, I

THE BARE NECESSITIES More recently, in September 2013, former strippers won a lawsuit against Rick’s Cabaret in Manhattan for failure to pay minimum wage. As in the previous cases, the dancers were determined to be employees of the nightclub, under the premise that the owner exercised significant control over their behaviors. For example, the club’s policies required dancers to dress in a particular fashion. In addition, they were prohibited from chewing gum, wearing the same dress two days in a row, or wearing any body glitter. The dancers were also forced to pay the nightclub various fees and a portion of their tips under the threat of being fired. Acquiring the status of employee has allowed dancers secure better, fairer working conditions. These lawsuits have been big wins for not only strippers, but for independent contractors around the nation as well. These results could give leverage to independent contractors looking to gain better working conditions and benefits from rightful employee statuses — and more freedom in their workspace. Either way, the definition of and criteria for independent contracting is becoming more clearly defined, improving the quality of life for workers everywhere.

A MOVEMENT IN THE MAKING More and more, however, strippers are taking a stand, winning several precedent-setting lawsuits against greedy employers. Nightclub owners have been found in violation of state and federal law in improperly classifying their dancers as independent contractors. Their suits have won them back pay and damages, with some settlements even ending in six zeroes. In February 2012, the Kansas Supreme Court deemed dancers at the Club New Orleans in Topeka, Kansas as employees, not independent performers, based on the fact that they played a prominent role in the club’s financial success. Thereafter, these dancers were awarded unemployment insurance. Similarly, in November, 2012, strippers of Spearmint Rhino in California won a $13 million settlement and gained the status of “employee” under federal court action.

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The situation is lose-lose for the strippers. While they are not paid like employees, they are certainly expected to act like them.

INTERCOLLEGIATE FINANCE JOURNAL • WINTER 2014

How to Build Me, Inc.

USING SOCIAL MEDIA TO CREATE YOUR BRAND by Mariana Carvalho

hat is the first image you want people to think of when they think of you? What do you want strangers to immediately associate your name with? With the extent of our generation’s digital footprint, the question is no longer whether or not you have a personal brand, but rather whether you choose to guide and cultivate the brand, or let it be defined for you. The foundation of personal branding rests on authenticity. Once you know how you want to be perceived, you can start to be more strategic about your personal brand. The key to creating a successful personal brand is to identify your values, passions, and traits. These unique aspects of your personality shape the person you are. Once you are aware of them, go show the world.

media management platforms such as Hootsuite or Tweetdeck which use dashboards with separate columns for you to organize your streams, mentions, messages, tracked hashtags, and so on to help you organize your time, the people you follow, the people you want to retweet frequently, and to set up retweets in advance. A SITE TO BE SEEN Having a personal website for yourself, with your own unique domain, is one of the best ways to introduce yourself through a biography, display your work, and provide a central space to link all your social media platforms. A website gives you creative freedom to express your personality in ways that are not visible on your resume. Additionally, according to research done at Workfolio, 56 percent of hiring

LINKING IN Your LinkedIn personal profile is the first description of you that people will see. Make it count. Good headlines are clear, confident, and use terms people search for. Stand out by updating your status with projects you’re working on, articles or books you’re reading — and your opinions on them — and events you’re attending. Your brand is not just who you are; it’s what you do. Consider who your circles are and build your LinkedIn network. Connect with colleagues, classmates, and others. Everything you post on an open shared group and every question you answer is an opportunity to market yourself and to build your credibility. Customize connection requests or any other message on LinkedIn to your recipient. People will appreciate the personal attention. TWEET AWAY On your professional Twitter account keep the majority of your tweets relevant to your personal brand, industry, areas of expertise, and value to your target companies. That being said, part of your personal brand is to show your multidimensionality and uniqueness, so tweet about your interests and hobbies, too. Even if you do nothing else on Twitter, posting relevant retweets can also be a powerful way to build a quality Twitter following and get on the radar of people you want to notice you. Depending on the industry, Twitter may be a more common recruiting tool than LinkedIn. Use social

Photograph by Keegan Quigley

managers find personal websites to be the most impressive hiring or self-marketing tool a candidate can have. Everything from the biography you write to the design options you choose for your website says something about you, and provides recruiters another opportunity to decide if they want to interview you. Simply owning your own personal website with your name in the domain is an advantage as it gives you a greater shot of showing up when someone searches for you on the internet. BRAGGING RIGHTS If you have an email signature, you can link it to your Linkedin profile, so that each email has a link to your profile. If you do any public speaking, include your Twitter handle on the last slide of your presentation and tell people that they

CAREERS

can follow you on Twitter. Include your personal website address on your business card and on your resume. Whenever you write an article for a magazine, news website or guest post on a blog, try to include your Twitter handle in your byline. Ultimately, a strong personal brand is dependent on a strong narrative. If you have multiple passions or areas of interest, a consistent story becomes even more crucial so there can one unified theme. Consistency is also conveyed visually, so to the extent that you can, try to make your Twitter, Instagram, Soundcloud, and other social media platforms the same. Ensure that the message you are conveying is the same across all of your social media platforms, and allow them to build upon one another to provide the most well-rounded and colorful image possible of yourself.

The Art of Networking

BUILDING YOUR FIRST PROFESSIONAL RELATIONSHIPS by Mariana Carvalho

f you ever tried approaching a recruiter after an information session and instantly felt the swarm of tens, if not hundreds, of other students racing past you to ask the first question, you are not alone. Networking can be scary. Networking can be intimidating. Networking can even become your worst nightmare, the one

activity that makes you stutter and sweat. But it is also one of the many situations you will have to deal with consistently throughout your entire career, so you might as well learn how to master it now. THE 411 According to the U.S. Bureau of Labor Statistics, 70 percent of all jobs are found through networking. Many believe networking is intended solely to find internships, but good networking involves developing your contacts and truly connecting with people. While it may include asking whether there are available openings, if done well, networking is a longer-term durable connection formed with another individual. Often at information sessions, conferences, or other networking events, students feel pressure to stand out amongst other extremely qualified peers. This is why it is especially important to find comfortable, genuine settings where you can ask honest questions and display your unique personality. Career centers often host events for students to networking with alumni. Small group panels, coffee chats and discussion groups are especially valuable. These settings allow you to ask more sincere questions and obtain advice from individuals who have likely shared many of your fears or doubts. Many students see networking as an opportunity to pitch their skills, experiences, and interests to a potential employer. In fact networking is also a means of developing a two-way connection. Donâ&#x20AC;&#x2122;t shy away from giving your elevator pitch, but make sure you give as much importance to asking questions and listening to that individual. RING RING Informal phone calls are also an excellent way of getting your foot in the door and facilitating professional relationships. By setting up short, 15-minute conversations with professionals, you can clarify any doubts about a certain role, receive an honest opinion of a firmâ&#x20AC;&#x2122;s culture, or simply pick someoneâ&#x20AC;&#x2122;s brain about an industry trend. This allows you to gain in-depth perspectives on potential careers you are considering. It also avoids the stress of squeezing all questions into a short time frame, as can often happen at larger information sessions. It is crucial to limit this first one-on-one talk to a simply informative one and avoid asking about job openings. Save those inquiries for a second call or a follow-up e-mail. The art of networking lies in being as authentic as you possibly can. Networking is truly beneficial when the person you are engaging in conversation with gains a better understanding of your personality and true passion for the industry, firm, or role. This skill, in addition to your presentation on paper, can actually lessen your job search time by turning personal contacts into interviews and, hopefully, job offers.

HOW THE HONG KONG JOB MARKET IS AFFECTED BY THE PROTESTS by Francesca Whitehead

he Chinese Communist Party sparked the recent Hong Kong protests by rescinding a 10 yearold promise made in 2007 to stop handpicking Hong Kong’s election candidates by 2017. Many people, angered by the lie, took to the streets. Their current demands are to have Hong Kong Chief Executive CY Leung resign, and to give full autonomy to the Hong Kongers. The fear of many is that this will affect Hong Kong’s labor market in the long run by reducing the number of jobs available to Hong Kong graduates. Hong Kong’s economy has four traditional pillars that have driven growth: financial services, trading and logistics, tourism, and consumer retail. The sectors that have suffered the most from these protests are tourism and retail — two of the four pillars. It has been estimated that in the areas of the most concentrated protests retailers have already suffered 20 to 70 percent losses. The average hotel occupancy rates have fallen from 80 percent to 50 percent since the start of the protests. Will Hong Kong’s main economic sectors continue to shrink as protesters and the government reach a stalemate?

Under the Yellow Umbrella

WHERE CAN I BUY A ROLLS ROYCE? A recent interview by Bloomberg with Chow Sang Sang Jewelry ’s CEO, Vincent Chow, highlighted some of these problems. Chow mentioned that, “In October, we probably saw a 10 percent drop compared to last year.” The Greater China luxury jewelry company had to close down many of its stores in the central shopping districts of Hong Kong. This is particularly problematic as it was during Golden Week, a Mainland Chinese national holiday, which is usually one of their most profitable weeks of the year. Chow was quick to point out that at least Chow Sang Sang has “a large enough network [of retail stores] so that the impact is less painful.” He expressed sympathy for single shop smaller businesses that could no longer operate.

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Luxury brands may move their headquarters or flagship stores abroad if they are forced to keep their doors closed for a long time. Hong Kong has benefited for many years from being seen by many companies as the economic gateway between the East and the West. But this strong position is fading as other big cities in China become easier to access and Singapore’s economy continues to develop. China is a big consumer of Hong Kong luxury brands due to high luxury taxes on the mainland. Many Mainland Chinese flock to Hong Kong to purchase the likes of Chanel, Loro Piana, and Bulgari by the suitcase. Student protesters and bloggers have expressed increasing anti-Chinese sentiments toward Chinese tourists, which may be deterring Chinese tourists from visiting Hong Kong. THAT 5-STAR LIFE Hong Kong’s $296 billion tourism sector has expanded significantly since China started issuing more visas to Mainland Chinese for access to Hong Kong. Chinese tourists make up about two-thirds of Hong Kong’s tourism sector. Many of these tourists are short stay tourists and arrive by the bus-full. China suspended issuance of tourist visas to Hong Kong, as of Oct. 4, due to the politically charged situation. This reduction in a key sector, which contributed 4.9 percent of GDP last year, will have an impact on the employment prospects of many Hong Kongers. Besides, with the protesters lining the streets the buses wouldn’t be able to drive through the city at the moment anyway. Yiu Si-wing, the tourism representative of Legislative Council of Hong Kong stressed the impact of protests on the tourism industry. “We expect those protesters to know that their behaviors do not just affect one region, one person, the store or the traffic, but more importantly, our tourism industry on the whole,” he said. A recent CNN article stated that resentment is causing “clashes between locals and tourists on public transportation and in restaurants … caught on video, rapidly gone viral.” As one Chinese tourist commented, “The

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Hong Kong has benefited for many years from being seen by many companies as the economic gateway between the East and the West. But this strong position is fading as other big cities in China become easier to access and Singapore’s economy continues to develop.

people here in Hong Kong are more polite and self-disciplined, they queue up for everything. But in China, no one will ever queue up and they will fight for things.” This vocal resentment from Hong Kongers risks driving away the growing demand from China, which in the long run will harm the students. This is particularly dangerous in a slowly recovering world economy where there is high unemployment across the world. MONEY, MONEY, MONEY However, the Hong Kong finance sector remains lucrative. Hong Kong is viewed as one of the world’s financial capitals. It is often characterized by its transparent regulations and high degree of liquidity. In 2013 it was the 5th largest foreign exchange turnover in the world and had an average daily turnover of $200.9 billion in the HIBOR in April 2014. The list goes on. The key is Hong Kong’s importance for China. Hong Kong still acts as China’s economic bridge to the world. Hong Kong is used by many Chinese businesses to raise their IPOs, because they want to take advantage of the fair financial system, freedom from corruption, labor freedom, and rule of law in place. The Government of Hong Kong Special Administrative Region says that it “abides by the principle of keeping intervention... to a minimum and has endeavored to provide a favorable environment in which business operates...There is a strong emphasis on the rule of law and fair market.” These rights are not as strong in China which highlights the “one country, two systems” and

This vocal resentment from Hong Kongers risks driving away the growing demand from China, which in the long run will harm the students.

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still allows Hong Kong to distinguish itself from the rest of China. During the protests, the main complaint of business people was the extra time added commuting. There was traffic from the roadblocks that made them late for important meetings and it looked as if it would affect this powerful sector in Hong Kong. However, Hong Kong has a very efficient underground system, which allowed most people to continue with their daily lives. Some businessmen started working from home to avoid any tardiness; a Fidelity Worldwide Investment spokesperson said it was very much “business as usual.” Clearly the finance sector is able and willing to adapt to stay on top, allowing it to keep many jobs available in Hong Kong.

HOW BLEAK IS THE FUTURE? China has undeniably strong economic power and Hong Kong has become increasingly dependent on China over the years. There is a fear that the Chinese government may become fed up with the annoyance and retract businesses, visas, and even goods. However, even if this happens Hong Kong will continue to be competitive as one of “Asia’s tiger economies” which will keep opportunities for graduates. Hong Kong has had annual protests for the last 10 years, and although this one is the longest and largest Hong Kong has experienced, Hong Kong has historically persevered through the protests. There may be political unrest but it is still a city with many competitive advantages, including its rule of law, limited government, regulatory efficiency and open markets. If retail and tourism continue their downward trends, this would leave space for a potential new sector to emerge. The large appetite of Chinese consumers is unlikely to stop and will therefore continue to benefit Hong Kong’s economy. Many analysts remain hopeful for Hong Kong’s future and believe the protests will not have long lasting effects.

Are you ready for the real world? Ready to get a job, compete, and succeed?

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