IFJ Summer 2015 by The IFJ

SUMMER 2015 • www.theifj.com

“The real attraction is the danger: to sit down to an artistically plated meal in an upscale restaurant with the ever-lingering anxiety that any one bite could be your last.”

“Globalization and technological improvements have simultaneously increased the return to higher education and eliminated well paying unskilled jobs.”

“For people with special needs, or who just want to maintain their diet, the innovation of the 3D food printer could allow the user to decide exactly what they want in their food.”

Blowing up the market

Tipping the scales

Printing pizza

The IFJ Team

Alex Drechsler President EMERITUS Max deutsch General manager emeritus Matthew Ostrow president

Photo by Cadence Lee

Sarah park Editor-in-chief Christopher Dederick Managing editor emeritus Christian ackmann Managing editor Fran Whitehead Managing editor Matthew Janigian Managing editor Amanda beaudoin general manager Claire su general manager Chia chien teng head of web david cohen head of coding Design & Layout Steph Hennings Head of Design & Layout Madeleine johnson assistant head of design & layout Samanee Mahbub assistant head of design & layout antonia chapman, cadence lee, dawei zhang, jonah blumenthal, keegan quigley, linda navon chetrit, Lucia cooke, nikolaos melachrinos, rachel binder, rebecca sarfati

alex lloyd george head of blog lori ebenstein head of social media steph hennings head of design & layout Madeleine Johnson assistant head of design & layout Samanee mahbub assistant head of design & layout Kerry yan head of intercollegiate expansion Yuta inumaru head of intercollegiate expansion linde chen head of marketing

Blog alexander lloyd george Head of Blog Eric Han Editor graham rotenberg Editor michael firn Editor benjamin warner, carter johnson, cassidy wald, edward li, graham gonzales, jeremy sia, jonah goldberg, kali ridley, kerry yan, maria jose herrera, samanee mahbub, samantha sosa, scott theer, stephen stahr, tyler feldman

Michele Narbonne head of external affairs emeritus Katherine Kardomateas head of external affairs angela marie teng head of external affairs emma currier head of advertising Editorial Board Sarah Park editor-in-chief Christopher Dederick managing editor emeritus Christian ackmann Managing editor

Social Media

lori ebenstein Head of Social Media

Arton dokic, julia watson, matthew boney, michelle watt

Fran Whitehead managing editor matthew janigian managing editor Alon Galor Markets editor charles hemsley markets editor

Intercollegiate Expansion

carter johnson political economy co-editor

Yuta Inumaru Head of Intercollegiate Expansion

omar ben halim political economy co-editor

Kerry yan Head of Intercollegiate Expansion

Thomas Pesce Political economy co-editor

Nitisha Baronia UC Berkeley Campus Manager

Rachel Binder personal finance editor

ankit bilgi UNC Chapel Hill campus manager

Liz studlick startups & technology editor

Bill wang unc chapel hill campus manager

John palmer careers editor

Frank Chiang University of Chicago Campus Manager

alexandra nuttbrown head of style

Josh Goldman Columbia University Campus Manager

mirza uddin harvard University Campus Manager Micaela que University of the Philippines Diliman campus manager rowland mayor university of richmond campus manager Dustin cai Vanderbilt campus manager abhi pandya Vanderbilt campus manager angela marie teng, daniel greenberg, katherine kardomateas, kevin coakley, safiya walker, Zachary zapolsky

Senior Staff Writers Adrija Darsha, angela marie teng, carin papendorp, Carly West, eileen maysek, gillian lee, jack du, Jason cheng, kerry yan, michael golz, nikhil kumar, robert ju, stephen kearns, tiffany chang, tiffany chen, yashil sukurdeep Staff Writers agnes chan, andrej arpas, andrew xue, andrew yin, Atty reddy, benjamin

Marketing & External Affairs

lalezari, bill cai, bill wang, Bill Wang, blake nosratian, brielle kronstedt,

Linde Chen Head of marketing

danielle york, eduardo martin, emma cho, emma chow, ethan good,

Michele Narbonne head of external affairs emeritus alyssa toh, arrya luo, casey wu, elizabeth pan, jasmine bala, Joe diehl, kevin li, samantha wong, shivam agarwal, sonia mittal, stephanie chen

ethan grant, frank chiang, gabriel ansarah varela, george reynolds, jeff gortmaker, jeffrey mok, jimmy trinh, john hess, kabir thakral, kerry yan, lindsey currier, michael zheng, nicholas hartmann, rafael schwalb, robert xu, seth rosenbauer, shouri gottiparthi, thee meensuk, Vaibhav

Advertising Emma Currier Head of Advertising Brian lee Head of sponsorships and alumni josh tartell Head of local and lifestyle julia watson Head of professional blake nosratian, cyrus maden, evan chernov, gillian lee, gunbir chadha,

Srikaran, Vishesh Verma Copy editors & Fact checkers Alexandra Nuttbrown Head of Style arielle schacter, Duncan Weinstein, eric hu, kerry yan, maria jose hererra, nathan johnson, safiya walker

jiaying shi, michael bachar, mallika sahaya, shiqi wu, sofia karionova, thomas walker, terrence sinnott, vanessa labrador

Web Chia Chien Teng Head of Web

operations yvette rodriguez Head of operations nikhil patel head of mentorship

David Cohen Head of web development bianca barcelo co-head of web content natalia sabater-anaya co-head of web content

kristina park Head of planning

afra rahman, christina warner, james cohan, kimberly nguyen, pranavan

lily zhao operations associate

chanthrakumar, pratul tandon, raymond holden

Intercollegiate Finance Journal

TABLE OF CONTENTS

4 Blood Money Air France’s Relationship with Animal Testing Fran Whitehead

6 Blowing Up the Market A Study in the Price Elasticity of Pufferfish Sushi Michael Golz

7 No Reservations Why One Restaurant is Selling Tickets — And Revolutionizing the Reservation Industry Matthew Janigian

8 Fool Me Once: The Tech Boom Then and Now Eileen Maysek

9 Crude Collapse Is it Time for You to Join Global Divestment Day? Robert Xu

10 The Once and Future Company The Conglomerate Strikes Back Jinge Du

Political Economy 12 Equal Opportunity Unpopularity Women in Latin American Politics Nikhil Kumar

14 Tipping the Scales The Answer to Growing Inequality Lies Not with Redistribution or Regulation, but with Education Alex Drechsler

15 What Money Can’t Buy Problems with Foreign Aid Sarah Park

16 Frank Underwood’s Hand The President’s Plan in “House of Cards” Thomas Pesce

18 Flying High? Why America’s Economic Air of Superiority May Rest on the Ground John Hess

18 Digital Defense Cybersecurity in Today’s Political Economy Carly West

The IFJ Online www.theifj.com The Blog China’s Newfound Silicon Obsession Scott Theer The Backwardness Behind Springing Forward: Is Daylight Savings Time Worth It? Kali Ridley Selling Yourself: The Brave New World of Legal Organ Sales Kerry Yan Currency Wars: A Controversy of Words Jonah Goldberg Chasing Complexity: Why Africa Needs To Diversify Edward Li So You Think You’re Diversified? Tyler Feldman

Personal Finance 20 Microfinance: Friend or Foe? Assessing the Impact of Microfinance Yashil Sukurdeep

22 (Ven)mo Money, Mo’ Problems How Apps Could Change Spending Carin Papendorp

25 Mobile Money, Mobile Profits How Our Smartphones Change the Way We Invest Stephen Kearns

26 Let’s Talk it Out How Language Affects the Way You Spend Rachel Binder

27 You Win Some, You Lose Some Match Fixing in American Sports Shouri Gottiparthi

Startups & Technology 28 Who Killed Cable? The Rise of Streaming Gillian Lee

30 Wearing into the Market The Future on Your Wrist Tiffany Chang

32 Gazella Leaps into Natural Hair Care FroyoWorld For Natural Hair Liz Studlick

33 Fund Me Please Smart Funding For Your Startup Kabir Thakral

34 Printing Pizza Are 3D Printers the New Microwaves? Angela Marie Teng

Careers 36 On Necessary Design How Bringing Good Design to New Industries can Change the World Athyuttam Eleti

38 Making an Impact A Look at the Real Effects of a New Investing Philosophy Adrija Darsha

40 Hiring at American Intelligence Agencies Recruiting Young Talent in a Post-Snowden Era John Palmer

41 Charity Pay: It’s Not Just About Giving A Look at High Salaries in Charitable Organizations Jason Cheng

42 The Future of American Healthcare How New Career Paths will Revitalize a Dying Sector Robert Ju

Wearing into the market page 30

Markets

Blood Money 4

Blowing up the market A Study in the Price Elasticity of Pufferfish Sushi, Michael Golz 6

No reservations Why One Restaurant is Revolutionizing the Reservation Industry, Matthew Janigian 7

Fool me once: the Tech boom Then and Now, Eileen Maysek 8

Crude collapse Is it Time for You to Join Global Divestment Day?, Robert Xu 9

The Once and future company The Conglomerate Strikes Back, Jinge Du 10

Air France’s Relationship with Animal Testing by Fran Whitehead Photo by Jonah Blumenthal

ould you work for a company that transported animals to labs? Does the type of animal matter? Are monkeys too close to humans to be used as subjects? The closer the subject the more conclusive the result. Do the lab conditions affect the decision of whether to aid animal testing? Dirty hands Some consumers try to avoid companies that engage in animal testing, but what drives certain companies to continue this practice despite consumer displeasure? Air France, for example, has been repeatedly petitioned by animal rights activists group, such as the British Union for the Abolition of Vivisection, to stop the transportation of primates knowingly to laboratories. People for the Ethical Treatment of Animals (PETA) identifies Air France as the only large airline that is still willing to transport primates to labs. The airline industry is fairly competitive, which would allow consumers to choose to avoid Air France and utilize different airlines. Ultimately, this will hurt Air France. PETA runs a provocative campaign to encourage consumers to lobby against Air France. They say that “Scare” France’s slogan, “Making the Sky the Best Place on Earth” is clearly a farce when Air France is “trafficking” animals to be “caged, poisoned, cut into and killed.” So how responsible is Air France for the cruelty? Monkey Business Air France is only transporting animals to their destination, not performing the tests themselves. There are laws and regulations covering the treatment of animals once they arrive at the lab, but these are not enforced or maintained by the airlines. Air France transports primates in conditions that any other animal or pet would receive. They do not personally subject the animals to any cruelty while the animals are under their care. Air France’s statements defend their position, stating that: “We refuse to transport [animals or primates] if the testing protocols do not conform to the Animal Welfare Act of 1966 and we visit all labs [and suppliers we work with] to

make sure this is the case.” If all labs are following all laws and regulations and not subjecting animals to cruelty, then why have so many other airlines stopped flying primates? However, PETA also claims to have a video showing the “torturous conditions” and types of testing conducted in labs that Air France transports primates to, like Covance, which is one of the largest labs in the United States that tests cosmetics, pharmaceuticals, and cleaning products. It could be argued that they are making it easier for these labs to continue to “cage, poison, cut into and kill” animals; For PETA, Air France is aiding and abetting the perpetuation of animal cruelty. Every other airline has succumbed to activist pressure and has stopped transporting animals due to the immorality of the activities performed on the primates at labs. Many executives fear that transporting such animals could harm the airline’s reputation and commercial interest, and they do not want to be associated with “facilities that torture and kill animals.” Lufthansa agreed to stop transporting animals after a PETA action alert generated an enormous response from concerned consumers. In light of a deluge of bad press, why does Air France still transport primates? How can it be worth it if these campaigns are driving customers to other airlines? Going for the Green It is hard to say what caused the sudden dip in Air France’s stock price from $15 in January 2011 to $3.96 in January 2012. It may have been PETA’s campaign, a slumping European economy, or a general stagnation of the aviation industry. However, according to the Airline Reporting Corporation (ARC), Air France is not struggling for customers any more than other airlines. Since March 2014, no other large airline transports live primates. This has left Air France with a significant market share. Colonies of Controversy Air France says that if they didn’t fly primates, smaller carriers and pure cargo carriers would still continue to do so and at higher prices. This would just increase the costs associated with transporting

animals to the labs and limit the number of animals that could be transported and therefore used for tests. Reducing the number of animals would reduce the variety of products and medicine consumers can purchase as they wouldn’t meet current product safety standards or the FDA’s approval. This would be particularly difficult for newer companies with thinner profit margins. Since Air Canada stopped flying primates in 2012, there has been discussion of breeding primate colonies. Martin Pare, professor at the Centre for Neuroscience Studies at Queen’s University, argues the lack of primates in Canada could significantly harm his research on the side effects of Ritalin, and a colony is essential for continuing such research. Breeding a new colony would require huge amounts of money and time, especially in climates the primates are not naturally bred in. This would greatly increase the cost of animal testing, and therefore the cost of products. The reduction of primates for labs to test on would add to the already difficult task of developing new life-saving medication. PETA has publically announced that a total ban of animal testing is necessary, “even if it means [missing out on] a cure for AIDS.” Unfortunately, we are faced with the reality of animal testing until a new effective method of drug testing is discovered that does not use animals. Testing the Limits Air France is not actively participating in cruelty, and so perhaps shouldn’t be considered “animal torturers,” as PETA has levied against the company. Even without their help, the practices will continue on animals that do not need to be transported, such as rabbits and rats. It may even leave humans worse off, since primates are most similar to humans and therefore produce the most conclusive results. The decision to transport them is in an ethical gray area that involves many personal decisions and feelings towards animal cruelty. For consumers and employees, their power lies in choosing whether to continue consuming a product or working for a company that is linked to animal testing.

Intercollegiate Finance Journal • SUMMER 2015

Blowing Up the Market

A Study in the Price Elasticity of Pufferfish Sushi by Michael Golz

una, salmon, and mackerel are just a few of the offerings at a typical sushi restaurant, but there is one fish you won’t find on just any menu: fugu. Japanese for pufferfish, fugu is a delicacy infamous for its ability to kill diners if not prepared correctly, and is subject to strict regulations in Japan and the United States. However, recent advances in our understanding of the life cycle of the pufferfish have led to a substantial farm-raised supply of non-toxic fugu. Yet despite the introduction of the safer substitute, prices for wild pufferfish have remained high. Even worse than Iocane powder The consumption of pufferfish dates back over 2000 years in Japan. Very little is known about why ancient inhabitants of Japan continued to consume fugu in spite of the danger. Some historians speculate that periods of famine may have motivated the search for a way to safely prepare the highly poisonous fish. While such methods were indeed developed, the threat posed by fugu consumption was not ignored by more modern Japanese governments. The Tokugawa shogunate, the last feudal military government of Japan, which ruled from 1603 until 1868, banned the practice of fugu preparation. Punishment for the death of a guest in your home due to fugu poisoning included being stripped of title, or worse. However, after the Meiji Restoration in 1868, the new government lifted the ban, apparently for no reason other than the popularity of the dish among the new leaders. The danger of the fugu comes from a toxin called tetrodotoxin, a potent neurotoxin produced in the fish’s digestive system. Tetrodotoxin causes general paralysis, but it does not lead to unconsciousness. Thus, the victim has the unpleasant experience of being awake while they die of asphyxiation. The toxin has no known cure and is much deadlier than cyanide. In the pufferfish, the poison is present in lethal amounts in the blood and organs, especially in the liver and the ovaries. Japanese regulations require that fugu chefs be trained

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by experts during a 3 year apprenticeship, after which they are subjected to a licensing examination that only around 30 percent pass. These chefs must master the delicate methods by which you can separate the toxic parts of the fish from the highly sought after meat. Only about 20 restaurants in the United States are licensed to prepare fugu, and only after imported fish are inspected by Food and Drug Administration officials in New York City, where most of the restaurants are located. The precautions work: no fugu-related deaths have occurred in a U.S. restaurant. In Japan, modern regulations have been effective as well. There have been no more than six deaths per year since 1966, all of which have occurred when people attempted to prepare fugu themselves without the oversight of a trained chef.

New aquaculture drowns the market In 2004, scientists at Nagasaki University located the source of tetrodotoxin. They figured out that the toxin was excreted into the blood after the fish digested prey containing tetrodotoxin-producing bacteria. By creating a system of strict aquaculture where the raised fugu are isolated from any exposure to the bacteria, they can prevent the fish from ever becoming toxic. In 2009, Optima Food Corp. announced that they had finally designed a system for raising non-toxic fugu, and managed to raise over 50,000 of them that year. With wild fugu being heavily overfished and the flood of this new product into the market, especially an improved version without the threat of death, one would expect to see an impact on prices. Though Optima is not yet competitive enough to sell the fish below the previous market price at predatory levels, the very introduction of increased supply should lead to a drop in the price. This is a basic instance of a positive supply shock. However, we have not experienced this type of price change in the fugu market yet. Since fugu are usually auctioned off by the box, prices can vary wildly throughout the fishing season as chefs excitedly bid each other up. On average, the fish sells for $20 per pound at market, as compared to the $12-$15 for fresh yellowtail tuna. But adjusting for inflation, there has been little to no movement in the average market price, and a fugu meal in a restaurant in Tokyo still goes for up to $200 compared to $40 for a tuna meal. So what gives? No substitute for death The key is to examine what fugu represents at a fundamental level. Most of-

Punishment for the death of a guest in your home due to fugu poisoning included being stripped of title, or worse.

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ten served as sashimi — thinly sliced raw meat — few other elements mask the fish except perhaps an accompanying dipping sauce. However, unlike other types of fish such as yellowtail tuna, the fugu does not have a rich flavor or buttery texture. It has a rather mild flavor, and is extremely chewy unless sliced paper thin. While some fanatics swear by the uniqueness of the texture, in reality, the fish itself is not extraordinary in comparison to many of the other species found in a sushi joint. But then again, we don’t really go to spend $200 on good flavor. The real attraction is the danger: to sit down to an artistically plated meal in an upscale restaurant with the ever-lingering anxiety that any one bite could be your last. It is the Russian roulette of the culinary world and that excitement is what draws customers. In a world where so many products in every market must struggle to differentiate themselves, wild fugu has no such trouble. Every bite is risky business and that’s the fun. Fugu chefs aren’t selling exquisite fish, they are offering a walk on the wild side. Ultimately, that is the reason fugu aquaculture cannot compete in the long run. Price is not an issue when the very idea of the consumption is more important than quality of the food itself. When chefs go to the fish markets to get their hands on fugu, they know that a non-toxic fish will never compete with the essence of the wild fugu. These farm raised pufferfish are not really a substitute in the eyes of the thrill seekers sitting down to a full course fugu experience. At the end of the day, this particular experience is truly unique, and has proven immune to any changes in tradition.

Markets

No Reservations Why One Restaurant is Selling Tickets — And Revolutionizing the Reservation Industry

by Matthew Janigian

nly minutes after releasing the tickets, all of the seats were booked. I didn’t have any intention of actually buying the tickets — there was no way I could fly to Chicago on a moment’s notice. But I was intrigued by the thrill of trying to snag tickets for some of the best seats around: for a table at Alinea, one of the most highly regarded restaurants in the world. Selling Out The idea had been floating around in Nick Kokonas’s mind for some time. Kokonas is unconventional: he studied philosophy in college before becoming a derivatives trader after visiting the Chicago Mercantile Exchange. He left the derivatives business to partner with Chicago chef Grant Achatz to open Alinea in 2005. When they opened Next, a restaurant that changes menu every four months, Kokonas and Achatz decided to revolutionize the reservation system. Instead of having several people on phones all day taking calls from eager patrons trying to get a seat at the restaurant, diners would now have to buy the tickets from the restaurant’s website. It’s simple: make an account, click on the day on the calendar that you want to dine, click the time of day, and then pay for it — similar to buying tickets for a movie or sporting event. By the end of checkout, the meal, tax, and gratuity will have been paid for. The only additional cost is for beverages. Show Stoppers The system is optimized for restaurants. Tables are sold in multiples of two: two, four, or six person tables. That means that there will never be a table of three where a fourth could fit; every seat can be sold. Furthermore, by paying for the meal up front, the restaurant won’t lose money to no-shows. At a restaurant like Next or Alinea, where the meals can last over three hours and cost over $400 per person, that makes a significant difference. Prior to selling tickets, about eight percent of reservations ended up being no-shows. That equates to a loss of

hundreds of thousands of dollars per year in revenue. In addition to complete noshows, Alinea lost about $260,000 per year on short-sat tables — tables where, for example, a party of four was supposed to show up, but one or two people in the party couldn’t make it. Now, with the money for the food already collected upfront, bottom-line earnings before interest, taxes, depreciation, and amortization (EBITDA) are up 38 percent and the no-show rate is down to 1.48 percent. Cooking Up a Storm A further benefit of selling tickets as opposed to taking reservations and walkins is that the kitchen knows exactly how many seats will be filled. That means the kitchen knows exactly how much food to order from suppliers, thus helping minimize waste. Since the restaurant only serves one multi-course menu, the kitchen can predict with greater certainty how a given service will turn out. Kokonas has hopes of licensing out the reservation system to other restaurants, and indeed, that’s what he has been doing. Slowly, he is trying to disrupt the restaurant reservation industry. However, while the ticketing system may make sense for a restaurant like Alinea, it is often not useful for more traditional restaurants. Alinea serves a single, 16 to 20-course, expensive dinner; even one no-show can be incredibly costly. But restaurants that serve a greater volume of people and take plenty of walk-ins probably don’t have much need to sell tickets in advance. Razor Thin In this way, restaurants that sell tickets are typically the ones walking a thin line

between culinary arts and performing arts. A meal at Alinea is nothing short of a well-orchestrated masterpiece. At one moment you may be searching for your food in a wooden wreath; at another there may be a small fire in the middle of your table. To close the meal, a chef just might come out and plate your dessert on the table. The restaurant strives to create an experience, not just to fill your stomach. Similarly to how ticket prices in the entertainment industry vary based on location, ticket prices at restaurants are priced according to the time of the meal. For example, at Alinea, a ticket for 5pm on a Wednesday night might cost around $210 per person. On a Saturday night at 7pm, though, that ticket could be priced at $275. On the rare day of the year when the restaurant might not sell out — for example, Super Bowl Sunday — one spot might only cost $165. And since the kitchen is working anyway, selling the tickets at such a discount allow the restaurant to generate revenue it normally would have lost. Performing arts and entertainment events benefit from selling tickets. It creates hype, certainty, and helps the venue predict the turnout and prepare accordingly. In the restaurant industry, profit margins are already razor thin — between two and four percent. Through ticket sales, Alinea has increased its profit margin to over 10 percent. OpenMinded Alinea and Next aren’t the only restaurants adopting a ticketing system. From San Francisco to Philadelphia, and even in Europe and Asia, restaurants with similar structures are being more

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Intercollegiate Finance Journal • SUMMER 2015

open-minded and trying out the system. The benefits are clear and the system is catching on. Skeptics tend to wonder when OpenTable, the online reservation booking site, is going to crush Kokonas and his ticketing system. Interestingly, it seems like the answer may be never. If OpenTable changes its model, Kokonas estimates they will lose $91 million in revenue because roughly 56 percent of their revenue is from charging restaurants for booking reservations. Thus, it is not in their interest to have restaurants sell tickets directly to customers to reduce no-shows. No Reservations Still, buying a ticket for a meal is a foreign idea to most people. While multiple startups are creating platforms to buy and sell reservation times, the idea of buying a ticket that includes the food, tax, gratuity, and reservation time is still not popular. Not all restaurants try to put on a grand show, and not everyone wants an elaborate performance when they go out to eat. The ticketing system works great for restaurants at the upper echelon of the dining industry, but might fail elsewhere. Even if the market for restaurant ticketing systems isn’t huge, they make an impactful difference in the restaurants where they are used. And with such positive results, those restaurants certainly have no reservations about using the system.

Fool Me Once: The Tech Boom then and now by Eileen Maysek

or everything novel about the tech companies of the 1990s and 2000s that intrigued investors, the tech boom on the heels of the 2008 financial crisis has been fueled by familiarity and accessibility. Investors know the companies as consumers and invest, understanding the consumer demand and popularity of the product. In the first tech boom, established investors saw opportunity and growth in newly emerging technology. Those who followed the market observed trends of fast growing companies in the technology sector, driven by the consumer demand for these products and perceived unending innovation. These investments were made on the basis of a rapidly expanding industry rather than personal belief in the mission of the product or company. This speculation, based on the

notion that stock prices, and market value of these corporations would continue rising independently of the company’s true perceived value inflated the market and destabilized the sector. The frenetic investing made the sector’s quickly growing valuations unstable rather than just lofty. Years after the dot-com bubble burst, innovative technology connects consumers from their favorite websites and applications to the market presence of those companies. The personal stake that some investors have in emerging tech companies differentiates these rocketing prices from those seen by institutional investors in the dot com bubble. The high market caps (market values) seen today are rooted in consumer belief in the companies, not the flawed assumption that putting something online makes it great. If users of facebook, twitter and other expanding tech giants stop using and stop liking these company’s products, tech investments are in danger. Until that time (which may be tomorrow based on the fickle and rapidly changing market) these new tech investments are rooted in consumer belief rather than uninformed investor fascination The People’s Company The Facebook IPO in May of 2012, the first in a series of high profile tech IPOs, came on the heels of “The Social Network” in 2010. No company has ever been as accessible to such a wide range of people as Facebook is today. Everyone from grandparents to moody teenagers use it to communicate with friends and share photos and memories. By the time they made their IPO, Facebook was already a part of our lives: on our phones, computers, and devices, in our email, with our friends; why not in our portfolio? Facebook is part of the entertainment culture; we went to the movies to watch how Facebook — our social network — was

created. Though Facebook was devised as an elite social network for only Harvard students, it soon became the network of students everywhere, and soon after that of their parents and grandparents. Facebook from its college dorm room beginnings followed the patterns of greatness pioneered by the ground breakers of personal computing. Just as the Apples, Microsofts, and Dells of the world had started in the garages of bright and counter-cultural personalities, Facebook was dreamt up by a student, looking for a way to connect, and succeeded despite its humble beginnings with avid and devoted users. Dot-com companies were largely adapting traditional ideas, launching them on the web and hoping that they would succeed. They lacked the innovation of the successful tech companies of the 80s and late 00s and even the survivors of the 90s tech boom: Amazon, and Ebay, among others. One of the most infamous fails of the dot-com bubble was pets.com, which sold pet supplies online. It was not a bad idea, but there was nothing particularly revolutionary about the concept: they put a brick-and-mortar store online. The company was founded in 1998, made an IPO in 2000 and was bankrupt by the end of the year. During the months the company was traded on the NASDAQ the shares dropped to $0.19, a mere 1.7 percent of the IPO price of $11. The company’s business plan was fundamentally flawed; they spent millions on advertising and sold products for all of the years it was open at a significant margin below purchase price. The company was actively losing money, doing little to change their strategy, and investors bought shares anyway because it was a trendy internet company, on which they believed they could make money. Those internet companies that did have cutting edge ideas were perhaps just ahead

Markets

of their time or lacked appropriate business models. Flooz.com sold currency used at online retailers; a decade later Bitcoin entered that space. Kozmo.com delivered anything you needed without a fee. Numerous business have taken over this space: Get it Now, WunWun, Favor and others. In this case, it was likely the fee-free model that brought the company down. In each case the business lacked a solid consumer base on which to gauge interest, and ultimate long-term success of the company, rather than assessing an investment based only on a fad. Social Media: Users before Consumers Facebook lead a trend of Internet giants that put users and social media before consumption and revenue. Zuckerberg refused to advertise till Facebook became popular. These were sites of the people, and when they went public, they became stocks of the people. Users felt Facebook was their company; the average person was excited to be involved with a company to which they related, and lead people who they admired (for their entrepreneurship or popularity through the Hollywood feature.) Investors bought shares not as financiers, who analyzed balance sheets for revenue growth and return on investment; This new breed of investors saw something popular and wanted in on a piece of the action. A year before the Facebook IPO, when rumors of offerings began rumbling, Facebook had a Price-Earnings ratio of 166; The value of the company was estimated to be 166 times the annual revenue. Most investors would think more than twice about this investment, but anyone who understood Facebook’s social impact and cultural influence justified the valuation. The New Tech “Bubble” After Facebook’s tone setting meteoric rise supported by its base of institutional investors and everyday folks, the $38 IPO share price tumbled, not to return to that high for fourteen months. Despite this price adjustment that accompanied Facebook through its first year trading on a public market, many must still have faith in the brand as it continues to trade at about seventy-times earnings. Facebook was a trailblazer in the world of social media and consumer-accessible Internet companies. Historically, these companies have shown more severe drops immediately following the IPO. Twitter’s steep tumble six months after its initial offering is evocative of this trend. The company has come back successfully, but not without experiencing initial shock (of both high and low prices) upon its entrance to the market. Novice investors, excited to be involved with a new, tech-savvy company, are scared off by the inevitable price adjustment that follows an initial “pop” (increase in stock price after initial offering) to bring the company’s valuation back in

line with expectations. Investors to these new firms are excited to be in on the action, sometimes without substantial background or expectations. Alibaba, a notably more matured company that grew up in the Chinese emerging market, took notable steps to restrict and control its price before its IPO last year. Even so, it is now known as one of the largest IPOs ever at $25 billion dollars. This new trend towards investments in large consumer accessible tech investments just might be different than the last tech bubble and bubbles of the past. There is a new demographic invested in these companies, with a new stake in them. They are investors and consumers. They put their money where their mouths are. For that reason investors have larger stakes than ever before and as consumers may have a greater say in the company’s valuation as their usership influences their investment.

Crude Collapse Is it time for you to join Global Divestment Day? by Robert Xu

he Organization of Petroleum Exporting Countries (OPEC) decided in October to maintain its level of oil production. Hydraulic fracturing, colloquially known as fracking, has brought the cost of extracting oil from U.S. oil fields down to the point that U.S. firms can compete with OPEC. Most OPEC countries can produce oil more cheaply than their American competitors, however, and so they

OIL A E D CRU IC R HI STO

$96

$99

can survive any fall in the price of oil brought about by surplus supply as long as it stays above the cost of extraction. This is precisely what happened when a supply glut caused the recent collapse of crude oil prices to a low in the $40s per barrel in January before stabilizing around $60 per barrel in February. Is this drop in the price of oil a signal for worse times to come for oil companies, or are we through the worst of it? Is there an opportunity for value investors to make a quick buck? Dude, Where’s My Rig? The number of operating oil rigs has reached a six-year low in the United States. At the same time, oil companies have slashed their capital expenditure, especially their exploration budgets. Cowen & Co., an alternative asset management firm, estimates this will result in a drop of more than $116 billion of research and development this year. This will eventually lead to a reduction in oil production, although the effects of a fall in current exploration budgets will not be felt for at least a decade. In the short run, people should hold on to oil with the expectation that suppliers will cut production so that the increase in price more than offsets the fall in demand from the decreased supply. Addicted to the Liquid Simultaneously demand is likely to push the price of crude oil up. Due to the lower oil prices, the average consumers are

VER

P R IC AG E

$42

$23 ( D OLLA

$22 BARR PER

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Intercollegiate Finance Journal • SUMMER 2015

being less conservative with their oil consumption habits. According to a January 2015 report from JBC Energy, sales of “gas-guzzling” SUVs and light trucks grew 19.3 percent since January 2014 while sales of more economical cars only grew by 7.7 percent. Additionally, annual world demand for oil is predicted to increase by roughly a million barrels a day and is already picking up in Asia. Is it time to COP some oil stocks? The three biggest U.S. oil companies, ConocoPhillips (COP), Chevron (CVX) and Exxon (XOM), are all trading near their 52-week lows, making them attractive buys for value-investors. All three companies are well-positioned to ride out the market volatility, and could benefit from merger and acquisition activity as well. According to Goldman Sachs’ March market report all three companies are expected to outperform the industry and promises benefits to their stockholders. ConocoPhillip has aggressively cut capital expenditures, maintained large margins and made securing dividend for stockholders its number one priority in 2015. Chevron boasts large amounts of cash as well as attractive price-earnings ratios and five year PEG. Finally, Exxon is the only oil company in the United States and Europe that is predicted to generate free cash flow in 2016, which will help it secure its dividend growth. While many investors would rather invest in a hedge fund managed by Bernie Madoff than oil securities right now, one man’s trash is another man’s treasure. This recent dip in oil prices might be a great opportunity for value investors to beat the market and prove all the risk-averse analysts wrong.

“

“Conglomerates — holding companies that contain operations in a wide array of industries — have a dark past.” 10

The Once and Future Company

The Conglomerate Strikes Back by Jinge Du

ompanies often acquire competitors within their industry to benefit from economies of scale. Similarly, one hears about parent companies spinning off divisions that don’t directly affect their core business in hopes of streamlining operations. So, why do some corporations hold a plethora of subsidiaries in different lines of business if adding these subsidiaries increases operating costs and forces management to plan strategic initiatives that benefit the company as a whole, often at the expense of individual sections? The Reputation of Conglomerates Conglomerates — holding companies that contain operations in a wide array of industries — have a dark past. In the 1960s, when accounting standards were totally opaque, companies eagerly acquired businesses for the sole purpose of using accounting tricks to boost earnings per share. Financial manipulations and tax dodging were eventually exposed, leading to the demise of several notable conglomerates, such as Tyco, WorldCom and Enron. These failures brought into question the idea of conglomerates as a viable business model. To this day, many conglomerates trade at a discount to the values of their individual parts. The Exception to the Rule Over the years, there have been viciously contested debates about whether or not conglomerates are an effective way to organize a company. Though there are advocates on both sides, most experts in corporate finance have argued that the bevy of inefficiencies outweigh any potential gains from aggregation. “Diworsification,” a term coined by legendary mutual fund manager Peter Lynch, describes just that — companies that diversify into areas beyond their breadth. That is why it is so surpris-

ing that Berkshire Hathaway, the conglomerate led by legendary CEO Warren Buffett, has been so wildly successful that it has achieved double the returns of the S&P 500 over the last 49 years. Berkshire Hathaway started off as a textile company, but as its textile business started faltering, it started investing in the increasingly lucrative insurance business, first in the National Indemnity Company and then Geico. Funded by profits from its insurance business, Berkshire began buying stakes in other companies to become what it is today, including Coca Cola, American Express, DirectTV, and BNSF railways. While much has been said about Buffett’s value investing prowess, and though he attributes all of his success to “buying good businesses,” sound investing alone doesn’t seem enough of an explanation for why Berkshire Hathaway has been one of the only conglomerations that consistently beats the market. There must be something in Berkshire’s business model that makes it unique. What Sets Berkshire Hathaway Apart The answer, in short, is Warren Buffet. He is not your ordinary, run-of-the-mill executive, the difference being that Buffett is first and foremost an investor. If you think about it, although Buffet is by name a CEO, he is in reality more of an asset manager, where his fund is Berkshire Hathaway. His investment strategy, as many people know, is to buy and hold bargain companies that he is familiar with and that have strong management. In this way, he doesn’t have to keep a close eye on a company’s dayto-day operations and can vest his full trust in the subsidiary’s CEO to do what is best for their shareholders. He also looks for companies with economic moats, a term he coined,

Markets

which means that the company has a competitive advantage that cannot be replicated by competitors, whether this is a proprietary product or a well-established reputation. Whereas you and I can manage our personal portfolios of stocks, Buffett manages Berkshireâ&#x20AC;&#x2122;s portfolio. Through his extraordinary investing talent, patience, and wherewithal, he accumulated a fortune and Berkshire has become the company to own in your portfolio â&#x20AC;&#x201D; a conglomeration with a peerless investor, rather than

corporate executive, at the helm. A New-Age CEO CEOs of large companies are usually found in-house or plucked from other large firms, and these people normally have decades of experience in the industry, with MBAs, leadership ability, and a regal pedigree. As a soft spoken investment salesman from Omaha, Buffett has never had the quality or charisma of a typical executive. That has, however, warmed investors to his down to

earth style and level headed demeanor. When managing a range of businesses with unique business models all of which require deep industry expertise, it is next to impossible for the average CEO to switch between them. Instead, it might be wise for deteriorating conglomerates to take a page out of Berkshire Hathawayâ&#x20AC;&#x2122;s book and hire an investor, someone with experience reigning in different industries, to be at the helm. A holdings buffet Berkshire Hathaway contains an diversified array of holdings ranging from technology companies (IMB) to beverage manufactueres (Coca Cola).

political economy LAURA CHINCHILLA FORMER PRESIDENT OF COSTA RICA

CRISTINA KIRCHNER PRESIDENT OF ARGENTINA

Equal Opportunity Unpopularity Women in Latin American Politics by Nikhil Kumar

ne year ago, the future looked rosy for women in Latin American politics. Women were at the helm of Brazil, Argentina, Chile, and Costa Rica, which together account for three-fifths of GDP and nearly half of the population in the region. Since then, however, Costa Rica’s president has been succeeded by a man, Argentina’s has been implicated in a major scandal, and Brazil’s is in danger of impeachment. Latin America’s global status as a beacon of gender parity in politics may well be in danger, and the economy is largely to blame. Chinchilla’s Folly Laura Chinchilla became Costa Rica’s first female president in 2010, and by the end of her term in 2014, she had earned another record: at just 9 percent, her approval rating was lower than any Costa Rican president’s in 20 years. During her administration, public debt grew at a dizzying pace, credit ratings agency Moody’s

assigned the country a negative outlook, and the unemployment rate was among the highest in Latin America. When she left office in May 2014, all traces of the euphoria that followed her election had utterly disappeared. Corruption, Conspiracies, and Cover-ups Farther south, Argentine President Cristina Fernández de Kirchner, who was first elected in 2007, has known her fair share of scandal and intrigue. In January, Alberto Nisman, a prosecutor who accused President Kirchner of covering up Iran’s involvement in the bombing of a Buenos Aires Jewish community center in 1994, was found dead in his apartment. In February, a judge dismissed the case against President Kirchner, but not before she had claimed that the prosecutor’s death was intended to destabilize her administration. The mysterious death of Mr. Nisman

is just another blemish on President Kirchner’s dubious record as president. The state of Argentina’s economy is nightmarish: last year, the country defaulted on $100 billion of foreign debt, inflation is above 20 percent, and the current recession is expected to last until 2016. According to Bloomberg’s misery index, Argentina is the second most miserable country in the world, after Venezuela. When President Kirchner’s term ends in December, it seems likely that her legacy will be just as tarnished as that of Costa Rica’s Chinchilla. Continental Contagion Argentina’s northeastern neighbor, the large and powerful Brazil, is led by President Dilma Rousseff, who was re-elected in October of last year. But just months into her second term, the outlook for President Rousseff appears bleak. As The IFJ’s recent article “Broken BRICs: A Shifting Center of Gravity Among the

Tipping the scales The Answer to Growing Equality Lies with Education, Alex Drechsler 14

What money can’t buy Problems with Foreign Aid, Sarah Park 15

Frank underwood’s hand The President’s Plan in “House of Cards,” Thomas Pesce 16

Flying high Why America’s Economic Air of Superiority May Rest on the Ground, John Hess 18

Digital defense Cybersecuriy in Today’s Political Economy, Carly West 18

DILMA ROUSSEFF PRESIDENT OF BRAZIL

MICHELLE BACHELET PRESIDENT OF CHILE

Regaining her former popularity and ability to govern will be a monumental task for Brazil’s first woman president.

“

Emerging Market Giants” noted, Brazil’s economy is struggling. Inflation is on the rise, foreign investment is down, and the value of real currency is declining rapidly. Adding to President Rousseff’s unpopularity on the economic front is the revelation that her party, the Workers’ Party, is mixed up in a corruption scandal with Petrobras, the national oil company. President Rousseff’s approval rating is just 23 percent, and a politician belonging to President Rousseff’s governing congressional coalition recently presented a petition for her impeachment. It is not yet clear how successful the impeachment campaign will ultimately prove — demonstrators throughout Brazil have organized in support of President Rousseff — but regaining her former popularity and ability to govern will be a monumental task for Brazil’s first woman president. An Uncertain Future Chilean President Michelle Bachelet, who served from 2006 to 2010 and was re-elected last March, seems to enjoy the most stable presidency among her female peers. But even her term has not been without its problems, including economic struggles, declining popularity, and a recent scandal involving her son’s ability to obtain a loan. Of course, for anyone who steps up to be the chief executive of

a country, missteps and criticism come with the territory, and countless men in the same position have undoubtedly fared worse. Hopefully, voters will judge the shortcomings of Chinchilla and Kirchner, Rousseff and Bachelet as those that any politician, regardless of gender, might possess. Ultimately, only time will tell what effect the recent struggles of these groundbreaking leaders will have on the future of gender equality in Latin American politics.

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Brazil GDP Annual growth rate Percent Change in Gross Domestic Product 8% 6% 4% 2%

Brazilian President Dilma Rousseff Takes Over

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Intercollegiate Finance Journal • SUMMER 2015

Ti pping th e S ca le s

The Answer to Growing Inequality Lies Not with Redistribution or Regulation, but with Education by Alex Drechsler Drawing by Rebecca Sarfati

nostalgic grandfather might remark that, back in the day, he bought his home for only a few thousand dollars. Today, it often seems instead that homeownership — along with the other basic privileges of life — demand nothing less than a four-year education, a massive student loan, and a lucrative career. Over the past few decades, the United States has confronted two insidious trends: the rising cost of higher education and the simultaneous rise in the importance of these expensive degrees for success. The result has been a growing divide between the incomes of the educated and uneducated, and an America where escaping poverty is more difficult than ever. While the American economy was once abundant with opportunities for the uneducated to enter the middle class, job opportunities today have followed something of an hourglass trend: jobs are available at the very low end of the income scale where little education is needed, and at the very top of the scale where a degree is often a prerequisite. Yet swelling tuition bills have made higher education even more prohibitive for most Americans, resulting in widening income inequality.

Divided We Fall In the wake of the Great Recession, Thomas Piketty brought income inequality to the forefront of American political and social discussion with his 2013 novel Capital in the Twenty-First Century. Yet the widening gap between the wealthy and the rest has been growing for decades. According to Business Insider, the share of American income going to the top 1 percent of all people has doubled since 1979. Today, that top 1 percent of America owns a third of the nation’s wealth and 50 percent of the nation’s stocks, bonds, and mutual funds. CEOs have seen a 300 percent increase in pay since 1990, while the pay of the average worker has risen by only 4 percent in the same period. Inequality has clearly grown, but the reason why is far less clear. Politics has certainly played its part. Deregulation since the 1980s has made it easier for American corporations to pay their executives exorbitant amounts, particularly in the form of stock options and bonus payments. While the income tax is nominally progressive, de facto tax rates have become increasingly regressive. One major cause is the low capital gains tax, which allows wealthy individuals

with large investments to earn returns at a 15 percent tax rate. The decline in union membership since the 1970s, in part due to policies aimed at weakening the bargaining power of the average worker, has also been a contributing factor. According to Brown sociology professor Benjamin Rissing, “the decline in union membership has contributed to 10 to 20 percent of the widening income inequality gap that we see today.” Yet political decisions alone cannot explain this phenomenon. Technological changes can likely explain much of the remainder. Workers could once spend their careers as bookkeepers or travel agents before spreadsheets and Expedia came along. Relative wages in low-skilled jobs have declined as automation has replaced factory labor as the primary means of production. As Brown University economist David Weil points out, “the disappearance of good middle class jobs such as manufacturing” has caused a “hollowing out of the middle of the income distribution.” Globalization has only exacerbated this decline, tipping the scales in favor of the very wealthy — and very educated. Tasks that can be explained simply can be sent abroad, which has especially hurt low-skilled labor. Technological improvement has also led to what economists call the superstar effect, as the highest skilled performers can attract a much larger audience. While being a musician was once a lucrative job for hundreds, now billions of people around the world can turn to Beyoncé and Taylor Swift instead. The same is true for executives, whose skyrocketing pay reflects growing potential for global empires. The Great Equalizer As the scales of income have fallen further and further out of balance, the importance of education has increased. Globalization and technological improvements have simultaneously increased the return to higher education and eliminated well-paying unskilled jobs. This has caused “an enormous growth in the college versus high school wage premium,” says Weil. Yet as any college student today can attest to, high tuition bills — along with the price of housing and textbooks — create high barriers to entry for most Americans. At precisely the same time that education became more important to securing a well-paying job, the price of that education has skyrocketed. According to a 2012 Georgetown University study, the number of jobs requiring a college degree has risen by 2.2 million since 2007, while the number of jobs for high-school graduates fell by 5.8 million.

Political Economy

Yet, as Rissing notes, the average annual cost of a college education was $30,000 in 2014, and increased by another 2.8 percent last year, outpacing inflation. The result has been a slowdown in the growth of higher education, despite its importance for most middle class Americans. Meanwhile, crippling growth in student loan debt plagues the nation, and income for most of the country has fallen. Says Rissing, “in the United States we have a culture of meritocracy and the idea that people can move themselves out of poverty. But for children born into poverty, only 47 percent of those children have the opportunity to move themselves out of poverty.” To attack income inequality and improve the opportunities facing Americans, the country must rethink how it educates its citizens. Living in an Ivory Tower For Weil, the solution is rethinking the model of higher education that has persisted in the West for centuries. “The model where you go off to some ivy-covered place on a hill, take classes with great researchers, stay up late having spirited intellectual discussions with your friends — that is a great luxury, but that is not something that we can provide to everyone in America.” He is right. While America cannot abandon its top higher education facilities, authorities must begin investing in community colleges, which President Obama recently endorsed. America must recognize that a four-year education is not suitable for everyone, and turn towards a more European model of trade schools. Providing improved access to student loans, and student loan forgiveness, is another possibility according to Rissing. Community and trade colleges are inexpensive ways of providing American workers with the tools needed to thrive in today’s economy. Further investments in STEM — science, technology, engineering, and math — may make entering the middle class a reality for a greater number of families. As Rissing notes, “Lowering the barriers to education is one way that people can take advantage of the productive gains of technology itself both here in the United States and for the economies that the United States competes in overseas.” He is correct. Without these investments, the United States risks falling behind its oversea competitors while failing to secure its citizens sufficient opportunities for success. How far policymakers will allow the scales to tip before investing in its counterweight, however, will remain to be seen.

What Money Can’t Buy

Problems with foreign aid by Sarah Park

or many years, the logic seemed simple and intuitive: foreign aid to poor countries would help make them better off by alleviating poverty and social problems. The United States — along with many other developed countries — has used foreign aid as a humanitarian tool for decades. Over the past 50 years, the total amount of foreign aid from official sources was $2.3 trillion, with the United States currently spending about $30 billion a year on helping the world’s impoverished. Although $30 billion is no small number, it represents less than one percent of the annual federal budget. As a result, there are frequently demands that the United States contribute more foreign aid. However, just as money can’t buy happiness, it can’t buy economic development or stability either. Recent studies contradict the longstanding assumption that foreign aid is effective in mitigating poverty and instead argue that it is oftentimes more harmful than beneficial to those countries who receive it. A Primer in Aid Foreign aid in the United States is largely managed and administered by the United States Agency for International Development (USAID), which was created by executive order in 1961 by President John F. Kennedy. According to its website, its mission is to “carry out U.S. foreign policy by promoting broadscale human progress at the same time it expands stable, free societies; create markets and trade partners for the United States; and fosters goodwill abroad.” Over the past decade, the United States has sent aid to 185 countries, although the bulk of these funds have gone to Afghanistan, Pakistan, and Iraq. Aid is used for a wide range of initiatives and programs, such as disease prevention, education, and assistance in the wake of natural disasters, as well as in exchange for political objectives. Although there are undoubtedly positive consequences of providing foreign aid, particularly when it comes to providing humanitarian assistance to countries that suffer natural disasters or disease outbreaks, much of the aid that countries receive is mismanaged or used for corrupt purposes. This is due to the

fact that oftentimes aid is sent to countries with few or no strings attached, giving government officials wide berth and discretion to use the money as they see fit, which often means lining their own pockets. What Money Can’t Buy In these cases where aid is essentially “free,” corrupt governments have no incentive to enact reforms, increase transparency, or deliver public and social services such as infrastructure, health care, or education. In addition, because they are not dependent on their citizens for tax revenue, governments are not held accountable for their actions. When institutions and rule of law are inefficient, citizens are reluctant to innovate or pursue entrepreneurship. Inept bureaucracies boggled down by red tape and corruption make the costs of starting a business prohibitively expensive in terms of both time and bribes that officials demand. Nonexistent or lacking More Aid for africa Higher flows are not necessarily a harbinger of stronger growth (Millions, Constant $2000)

(Constant, $2000)

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475 1975

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property rights also make citizens and foreigners reluctant to start companies. However, simply specifying aid to be used for specific programs or projects is not sufficient to solve the problem as this just frees up other government money to be used for corrupt purposes. Recent studies in Africa elucidate the deleterious effects that foreign aid can have and challenge the notion that more aid, i.e. money, means poorer countries will be better off. Looking at the stark contrast between Africa and Asia’s development over the past half century corroborates the notion that aid does not promote economic development. Although Africa has received over $1

Intercollegiate Finance Journal • SUMMER 2015

trillion in aid over the past 60 years, real per capita income today is lower than it was in the 1970s, and over half of the population subsists on less than a dollar a day. On the other hand, China and South Korea, both of whom have received far less aid than Africa, have developed rapidly and are now formidable global economic players. Cash Equals Conflict? Research shows that aid actually increases the incidence of civil conflict and results in countries with higher levels of debt and inflation, which in turn makes them less attractive candidates for investment. A study conducted by Harvard and Yale economists in 125 developing countries from 1971 to 2006 revealed that a 10 percent increase in American food aid shipments increases the incidence of conflict by about 4 percent. The authors of the study speculate that this may because military groups steal the food, thereby providing them with the strength essential to keep fighting. In fact, Oxford economist Peter Collier found that about 40 percent of African military spending comes from aid from developed countries. Dangerous Addiction Furthermore, many argue that simply delivering foreign aid can actually exacerbate economic woes by making them dependent on foreign aid for survival. Because these countries know that they will receive aid, they have less incentive to enact economic reforms that will perpetuate growth in the long run. In these instances aid is no more than a “BandAid” — alleviating pain in the short run but lacking the ability to support longterm sustainable growth. Dependency on foreign aid suggests that countries lack economic stability or the ability to manage their own finances; this increases foreigners’ aversion to invest. Many also criticize aid for simply being an extension of Western imperialism in the twenty-first century and an example of how the West often believes that its way of doing things is superior and can be universally applicable. Moreover, aid often fosters resentment among countries receiving aid against those who provide it, particularly when it is given only in exchange for conditions set by the donor countries that benefit their interests. For many countries whose income is largely comprised of aid, “Dutch disease” can become a significant problem. Dutch disease occurs when large inflows of money cause the domestic currency to appreciate and make exports expensive, and therefore less competitive abroad. A stronger domestic currency is especially detrimental to workers in poor countries as they are typically employed in

export-focused industries. Critics of aid believe it would be more effective if it were channeled through private, local, non-profit organizations rather than through the government or through international organizations. Private organizations are less likely to engage in fraudulent practices and are more likely to be attuned to local needs, therefore able to more effectively administer aid to where it can have the greatest positive impact. Because they are held accountable to private donors as opposed to government officials, private organizations have the added benefit of being largely immune to political pressures and bureaucratic regulations. The problems associated with foreign aid are significant and must be addressed. It is clear that merely giving money to developing countries is not only futile, but injurious to their future development by keeping crony governments in power and impeding economic and political reform. It is imperative that developed countries change the way that they go about administering aid, or risk continuing to bleed money.

Frank Underwood’s Hand The President’s Plan in “House of Cards” by Thomas Pesce Photo by Keegan Quigley

etflix Original Series “House of Cards” has continued to build on top of a base of fact and fiction to create a parallel universe to Washington, D.C. Writer Beau Willimon has therefore had to perform his own balancing act as he tries to make Frank Underwood’s story captivating but still believable. The main storylines of season three maintained this trend by relying on some of the idiosyncrasies in American politics today. America Works, but Does the Bill? Season three revolves around Frank Underwood’s proposal to reform the American economy. Underwood proposes his “America Works” campaign — funded by cutting entitlement programs Social Security, Medicaid, and Medicare — to add ten million jobs in the United States. Of course, Frank is more concerned about being reelected than creating jobs for unemployed Americans.

However, America Works is a series of reforms that the real United States could actually use. When Social Security was introduced in 1935 by Franklin Roosevelt, there were seven Americans in the workforce for every retired American receiving Social Security checks. Today, the ratio is less than three to one. The large Baby Boomer generation has recently hit the retirement age, increasing the number of retirees receiving Social Security benefits. Thanks to improvements in health over the last seventy years, Americans are living much longer than they did in the thirties. The retirement age, however, has not increased. The result is an increase in the number of years retirees are on Social Security: the average has risen from 12.7 years in 1940 to 19.1 years in 2010. Ace in the Hole In other words, Social Security is stretched thin. Many people believe Social Security simply won’t be around by the time our generation reaches retirement. Underwood is not the only one to call it a broken system. But regardless of whether his plan is a good idea, is Underwood’s plan to implement it legal? In order to circumvent an uncooperative Congress, the fictional president decides to take funds from the Federal Emergency Management Agency (FEMA) to fund his pet project. By using FEMA funds he is able to begin America Works on a smaller scale in Washington, D.C. Could a real president do such a thing? The answer is yes. As mentioned in the show, the Stafford Act, which was passed in 1988 and put the rules in place for FEMA, is very vague in describing the way that FEMA funds could be used. FEMA is a government program designed to aid in emergencies such as natural disasters or a breach in homeland security. However, in the Stafford Act “emergency” is open to interpretation. The Stafford Act describes an “emergency” as “any occasion or instance for which, in the determination of the President, federal assistance is needed to supplement state and local efforts and capabilities to save lives and to protect property and public health and safety, or to lessen or avert the threat of a catastrophe in any part of the United States.” In this sense, high unemployment can easily be called an emergency. After all, the main reason for holding a job is to “earn a living.” Unemployment is defined as the percentage of people looking for jobs who don’t have one. Underwood’s logic is therefore very reasonable: if Americans do not have jobs, then their lives, or at least their way of living, are at stake. The lawyers on “House of Cards” are not the only legal experts who see this as a possibility, either. William

Cummings, a former FEMA lawyer, has said, “The Stafford Act is probably one of the broadest grants of discretion afforded to the president. It is completely discretionary ... no one would have standing to sue him.” Falling Apart While Underwood’s master plan to take executive authority to a whole new level may be possible, it is certainly not probable. It is not that such a president wouldn’t act unilaterally: we’ve seen an increase in the number of executive orders signed during the Bush and Obama administrations. The ultimate problem in Frank Underwood’s plan is his ambition to dismantle Social Security. Touching the subject is anathema to politicians who value their seat in office because of one simple fact: old people vote. Senior citizens are obviously the main recipients of Social Security. They constitute a major percentage of the population that can ultimately swing elections. They also vote more than any other age group in the United States: 72 percent of Americans aged 65 or older voted in the 2015 Presidential Election, while only 45 percent of 18-29 year olds voted and 60 percent of 30-44 year olds. Any politician who plans to cut Social Security or any other benefits to senior citizens will therefore run the risk of alienating the elderly. This is why, in both real life and in “House of Cards,” Congress doesn’t want to touch Social Security. Yet Frank Underwood banks his reelection campaign on his America Works program. He hopes that the success that America Works has in Washington will convince the country that his program will be a success. Yet if seniors voted in their self-interest, they would certainly not vote for Frank. Retirees aren’t looking for a job, after all. Underwood may be right that Social Security needs reform. But any real politician whose sole concern is reelection would probably not go anywhere near the subject. We shouldn’t criticize the show, however, for lacking in accuracy. It is important to remember that “House of Cards” is fictional. America Works is not the only way the series deviates from today’s Washington, D.C. As Kevin Spacey said on The Colbert Report, “It’s obviously a fictional show because it’s also a congress that gets s*** done.”

Intercollegiate Finance Journal • SUMMER 2015

Flying High?

Why America’s Economic Air of Superiority May Rest on the Ground

by John Hess

s the planes get bigger, the world gets smaller. Demand for airports that are equipped to handle larger aircraft and increasing passenger and cargo loads has skyrocketed. Cities with well-planned, efficient trade networks connected by air transportation will hold a distinct comparative advantage in trade against less competitive urban centers. Charting a New Course America’s foremost economic hubs have historically been constructed around transportation potential: water-based ports in Charleston, Los Angeles, Newark, and Houston, as well as railroad transfer stops in Philadelphia and Washington, D.C. But in business, time is money — and this essential currency is always in short supply. Retaining precious comparative advantage in the twenty-first century will require major upgrades at the new, developing transportation hubs: airports. Experts today consider it intuitive that a need for speed and connectivity among global businesses necessitates a central airport location. This need, combined with rapid globalization in the information age, has spawned what aviation expert John Kasarda calls the aerotropolis concept. Improve and Adapt Enter the aerotropolis: an urban planning form designed to effectively map the needs of the city it serves — a giant airport city, surrounded by industrial parks, entertainment, hotels, and trade complexes. Business development in the aerotropolis will be spurred by time efficiency and the fast-paced needs of global demand. In a world that is rapidly evolving around minute-to-minute needs and wants, the aerotropolis is a natural response — constantly improving and adapting. Kasarda argues that these massive complexes will inevitably rise even if not spurred by either government or private investment: “If there is not appropriate planning, airport-area development will be spontaneous … and ultimately unsustainable … the aerotropolis model brings together airport planning, urban and regional planning, and business-site planning, to create a new urban form that is highly

competitive, attractive, and sustainable,” he says. In fact, aerotropolises have already been taking shape around the world.

Hartsfield-Jackson International Airport for an airport city — a tentative step toward an application of the aerotropolis concept designed specifically for the area.

Modeling the Aerotropolis The aerotropolis concept has sprouted new roots at some of the world’s major airports in the last decade and represents a growing number of future airport plans. Much aerotropolis development has occurred in rapidly developing Asian countries. In China, government approval has been given for a behemoth second capital airport in Beijing. At a cost of over $13 billion, the new airport will feature high-speed rail lines feeding directly into the city and the ability to handle 130 million passengers annually by project completion in 2025. The world’s largest airport for international traffic, Dubai International, is projected to support almost one million

Where to? Since the concept is still taking roots in most major airport development projects, economic implications of the system have not fully been realized. Notable aerotropolis growth is still mostly evident in countries with massive discretionary budgets and few political barriers. As flight and freight demand increase in the United States, however, officials will be faced with the decision to take action to maintain the global, breakneck speed of airport economic development.

Aerotropolis Model Design

Digital Defense

Cybersecurity in Today’s Political Economy by Carly West

jobs — a whopping 14.3 percent of GDP — in Dubai by 2030. With incredible amounts of currency pouring into the coffers of both private and government enterprise in these aerotropolises, all involved parties are beginning to see green. Meticulous aerotropolis growth has been initiated at some major airports in the United States as well. At Denver International Airport, executives are excited with the prospect of an aerotropolis: a Westin hotel, rail service to the downtown area, and 9,000 acres of potential commercial development are all in the works. “We’re not talking about a corner of the airport we’re going to lease,” said Denver airport CEO Kim Day to USA Today regarding the plans, “we’re talking about a major real estate opportunity.” Elsewhere, proposals have been submitted at Atlanta’s

n February, President Obama announced an executive order urging companies to share cybersecurity-threat information with one another and the Department of Homeland Security’s National Cybersecurity and Communications Integration Center. This would allow companies to share information on their clients and users with the government outside of the traditional standard parameters of the Wiretap Act and the Electronics Communications Privacy Act. Obama said the prospect of a cyber attack is one of the nation’s most pressing national security and economic issues. Notably absent at Obama’s announcement of the new initiative were senior Google, Yahoo, and Facebook executives, who turned down invitations to the event. Relations between the U.S. government and technology firms have been strained since former National Security Agency (NSA) contractor Edward Snowden exposed NSA electronic surveillance practices in 2013. Many analysts continue to be skeptical of government surveillance, and are concerned that the cybersecurity proposal fails to adequately protect civilians and erodes standards for privacy. They believe that Obama’s solution to “enhance information sharing” and “mandate national data

Political Economy

breach reporting” is not likely to make much of an impact. As harshly and eloquently put by Marc Goodman, a global strategist and consultant who has worked for the United Nations and Interpol, Obama’s claim that “these measly offerings would make any meaningful difference in our global cyber-security is akin to applying sunscreen and claiming it protects us from nuclear meltdown — wholly inadequate to the scare and severity of the problem.” While Obama claims that these new measures would anonymize data, this is a very doubtful reassurance. A 2013 MIT study shows that when locational cell phone data is anonymized, only four data points are enough to reveal users’ identities 95 percent of the time. Obama’s plan is also at risk of backfiring in that a section of the legislation would amend laws in a way that could charge hackers, computer scientists, or even just Internet users with felonies if they detect flaws in security-related websites. The criminalization of more research would create greater vulnerabilities and threats. In other words, this legislation threatens the computer security research that would make the defense against external or terrorist attacks. The Electronic Frontier Foundation (EFF) warns that the new laws could “chill the computer security research that is a central part of our best defense against computer crime.” What’s Really at Stake? New frontiers and vulnerabilities in cyber hacking mean all of our data and infrastructure is now at risk. What are the implications? In December alone, during the media frenzy over the Sony attack

— where the the corporation’s database was hacked and exposed to the public — two major incidents involving critical infrastructure occurred abroad. First, hackers successfully gained access to computer systems at a nuclear power plant in South Korea. Second, hackers caused massive damage at a steel mill in Germany. In addition to Sony, there have been a slew of high profile cyber attacks of late, including on Anthem Inc., a leading U.S. health insurer, and companies such as Target, Home Depot, and J.P. Morgan Chase. Millions of customers’ personal information was targeted and vulnerable. All of our financial, intellectual, and personal data is at risk. The threat has grown exponentially with the recent mass digitalization of the global economy. Some of these high-risk areas include hospital records, medical equipment, mobile payment systems, undersea communications cables, wireless sensors for the Internet of Things, and most threateningly, critical social infrastructure. The black market is flooded with credit card information, and data security is often weak within healthcare facilities. Medical records are the new easy target, along with medical devices like heart pacemakers, insulin pumps, and defibrillators, which are usually connected via Wi-Fi networks. The Department of Homeland Security has been investigating about two dozen cases of suspected cyber-security flaws in medical devices and hospital equipment. Submarine communications cables are another example of critical assets that lack basic defenses to cyber threats. 95 percent of intercontinental communications traffic — as in email, phone traffic, and money transfers — travels underwater on nearly 300 fiber-optic ca-

bles around the world, with a combined length of over 600, 000 miles. Underwater infrastructure threats also extend to deep-water drilling and offshore rigs in the Gulf of Mexico that account for nearly a quarter of total U.S. oil and gas production, a number that is set to reach 40 percent by 2040 according to the Department of Energy. The implementation of robust cybersecurity measures, or lack thereof, will largely determine the success or failure of widespread adoption of Internet connected devices, or the “Internet of Things.” This theoretical network is valued at a $14 trillion market opportunity by 2022, with potentially 50-billion plus wireless sensors connected to the Internet. Linked to this is the risk of cyber threats to cars, as security researchers have demonstrated that they can take remote control of a vehicle to control its braking systems. BMW just recently fixed a security flaw that could have enabled hackers to unlock the doors of up to 2.2 million Rolls-Royces, Mini, and BMW vehicles. Since automobiles are becoming even more computerized and connected to the Internet, they are increasingly threatened by hackers. The stakes are high. Though Obama’s plan has its pitfalls, it is undeniable that cyber defense can only be addressed effectively with active engagement from the most senior business and public leaders. Indeed, a McKinsey study found that “The risk of cyber-attacks could materially slow the pace of technology and business innovation with as much as $3 trillion in aggregate impact.” As argued by Marc Goodman, now more than ever is the time for a “Manhattan Project” for cyber-security.

Personal Finance Microfinance: Friend or Foe? Assessing the impact of microfinance by Yashil Sukurdeep

icrofinance was lauded as a revolutionary tool in the fight against poverty, hunger, and gender inequality around the world. Nearly half a century after its inception, has the microfinance industry delivered on its lofty promises? Micro-revolution In the 1970s, Bangladeshi social entrepreneur and economist Muhammad Yunus founded the Grameen Bank. Based on the premise that loans are better than charity to fight poverty, the Grameen bank pioneered the provision of financial services to poor people living in rural areas. This simple, innovative idea proved to be a sweeping success in Bangladesh. It enabled poor people to successfully start small business enterprises that generated income for them. The Grameen Bank’s success would go on to inspire similar initiatives across the world, which revolutionized the industry of financial services and the fight against poverty. Risky Business Some of you might be questioning whether providing loans to poor people is an effective way to reduce poverty. Indeed, we have to remember that poor people living in rural areas generally tend to lack verifiable credit history or steady employment. Moreover, poor people usually lack collateral, that is, assets that might be seized by lenders in the event the borrower is unable to repay his or her loan. Isn’t it therefore too risky to provide loans to the poor? Solidarity Circles Microfinance firms have developed interesting techniques to ensure high repayment rates. One of these techniques involves the use of group-lending schemes. They provide small loans, called microcredit, to individuals that form “solidarity circles.” A solidarity circle is a group of borrowers that provide mutual encouragement, information, and assistance in times of need. Solidarity circles ensure high repayment rates in the microcredit industry. This is because a person’s ability to receive a loan is contingent upon the successful repayment of a loan by another member from the same solidarity circle.

Leave it to the ladies Microfinance firms tend to lend primarily to women as they have higher repayment rates than men. Trust the Women Lending money mainly to women is another technique used by microfinance firms in order to guarantee high repayment rates. Although the Grameen Bank initially lent money to both women and men, it observed that women tended to accept smaller loans than men, and that they had far higher repayment rates. Consequently, the Grameen Bank now provides 96 percent of its loans to women, and over 75 percent of all loans in the microfinance industry are being given to women. Some believe that women tend to make more productive investments than men, which enables them to obtain increased incomes more easily, and therefore pay off the loans without too many difficulties. Although the techniques used by microfinance firms in order to ensure high repayment rates might seem unorthodox, they appear to work. The Grameen Bank has reported that it has a 95-98 percent repayment rate. Micro-finance, Macro-benefits The most significant strength of the microfinance industry has been its ability to reduce poverty by increasing employ-

ment and raising the incomes of people who live on less than $1.25 a day. According to a report by the Economic Research Group in Dhaka, microcredit lifted 10 million Bangladeshis out of poverty between 1990 and 2008. This reduction in people living below the poverty line led to improved nutrition and improved education across many

(ven)Mo money mo’ problems How Apps Could Change Spending, Carin Papendorp 22

rural regions in the developing world. Moreover, microcredit schemes have the ability to empower women, which helps to reduce gender inequality in the developing world. For instance, the fact that over three-quarters of microcredit loans are given to women has reduced the financial dependency of women on their husbands. The microfinance industry has also given women access to capital and to networks that have enabled them to become entrepreneurs and make strong social impacts in the developing world. Developing doubts However, over the last few years, concerns have been raised regarding the true impact of the microfinance industry on the developing world. To begin with, critics have argued that although microcredit can reduce poverty, it cannot alleviate it. Poverty alleviation involves mechanisms that can help people get out of poverty — and stay out. But why do microcredit schemes fail in bringing about poverty alleviation? Loan Sharks The Grameen Bank and other firms in

Mobile Money, Mobile Profits How Smartphones are Changing Investments, Stephen Kearns 25

Let’s talk it out How Language Affects the Way You Spend, Rachel Binder 26

the microfinance industry sometimes act like loan sharks. They provide loans to poor people at incredibly high interest rates — 22.3 percent on average. This drives some households into what is called a debt trap. Debt traps occur frequently in the developing world when the increase in the income of a household is not sufficient to pay off the exorbitant interest on their loans. When this happens, some borrowers are forced to sell off their assets, such as their land, jewelry, or cattle, in order to raise money to pay off their loans. Selling off assets prevents poor people from accumulating wealth, which prevents them from getting out of poverty. In extreme cases, poor borrowers might be unable to sell their assets, or more worryingly, might not have any remaining valuable assets to sell. In these instances, the borrowers have to default on their loans; this inability to pay back loans can lead to social humiliation, depression, and even suicide. Eating up the money Some studies have shown that poor people do not always make productive investments using the money

You win some, you lose some Match-Fixing in American Sports, Shouri Gottiparthi 27

they receive from loans. Extenuating circumstances often force them to use the money to purchase durable consumer goods (such as furniture) or items like food or clothing. This situation prevents them from generating any kind of sustainable source of income, which further diminishes their ability to get out of poverty. What next? With increasing criticism regarding some of the practices in the microfinance industry, some argue that we might be witnessing the death of microcredit in a few years time. Advocates of microfinance argue that improvements in the industry can genuinely bring about poverty alleviation and sustainable gender equality in the developing world. In order to gain a more in-depth understanding of the effects of microcredit on poverty reduction, an increasing number of studies are being carried out on the impact of microcredit in the developing world. Shedding light on the microfinance industry is crucial for the sustained growth of not only the industry itself, but also the developing countries in which it is so prominent.

(Ven)mo Money, Moâ&#x20AC;&#x2122; Problems? How Apps Could Change Spending by Carin Papendorp Photo by Keegan Quigley

Intercollegiate Finance Journal • SUMMER 2015

In 1888, college dropout and science fiction author Edward Bellamy predicted the invention of the credit card, with which a consumer could buy “whatever he desires whenever he desires it.” “This arrangement, you will see, totally obviates the necessity of business transactions of any sort between individuals and consumers,” he wrote in his utopian novel Looking Backwards. He would’ve flipped out had he known about Apple Pay. Mobile payment apps such as Venmo, Apple Pay, and Square Cash are rapidly changing the way we spend money. And it’s not just apps specifically designed to revolutionize payment that are getting in on the trend: companies such as Starbucks, Cumberland Farms, and Subway have incorporated automatic payment into their branded apps. It’s easier than ever to spend money. However, these apps may be changing not only how we spend, but also how much. For those trying to watch their budgets, mobile payment may be too much of a good thing. Paper or plastic? One of the fundamental principles of economics is that money is fungible: a dollar is worth a dollar, no matter what. But in practice, this isn’t always the case. Since the 1970s, behavioral economists have observed what they call a “credit card premium”: when paying with a credit card, consumers consistently spend more than they would with cash. In a 2001 paper cheekily titled “Always Leave Home Without It,” researchers at MIT’s Sloan School of Management found that MBA students bid more than twice as much for Celtics tickets when they were told they had to pay by credit card. Exactly why credit cards have such a dramatic effect on spending is still debated. Perhaps they lessen the innate human fear of loss, or simply condition consumers to spend impulsively and lavishly. But in any case, in what Apple CEO Tim Cook has declared “the year of Apple Pay,” the decades of research on credit cards are more relevant than ever. Breaking up (with your money) is hard to do Every time we make a purchase, the disutility of losing money is weighed against the utility of the good in question. When the pain of loss exceeds the pleasure of gain, a person is loss averse. As Lance Armstrong puts it: “I like to win, but

more than anything, I can’t stand this idea of losing.” Loss aversion is powerful: it’s why investors hang on to underperforming stocks and why free trials can be such an effective marketing tool. Paying with cash requires us to count out the bills and feel the money physically leaving our hands, a tangible reminder of our now-decreased wealth. Meanwhile, credit cards abstract the act of paying from the loss of money, making it psychologically easier to spend more. Apps that allow users to pay with the touch of a button only further insulate them from the pain of payment. For example, Uber is linked to a user’s credit card, PayPal account, or Google Wallet. The app automatically calculates and adds a tip, so all the consumer has to worry about is finding a ride. This effortless payment may lead people to use Uber even when they wouldn’t have otherwise hailed a cab. As one Brown University student remarked, “I don’t think about paying, I just hop in and hop out.” But shouldn’t this effect wear off when people eventually notice their bank accounts emptying? Primed for purchases As it turns out, credit cards can increase willingness to pay just by their existence. In a study by Richard Feinberg, subjects paid more and reacted more quickly when MasterCard logos and replicas were present in the experimental setting. Similarly, the MIT researchers found that subjects shelled out more in a gift certificate auction after being told to type in four digits of their credit card number (as opposed to a random sequence of four numbers) as a personal identification number. Even viewing the words “Visa” and “MasterCard” as opposed to “ATM” during an unrelated verbal reasoning task evokes a credit card premium. Evidently, just pulling out a credit card can turn a shopper into a spendthrift. This seems to be a case of classical conditioning: the presence of a credit card cues people to splurge and associate paying by card with the pleasurable feelings of spending. It’s easy to see how this effect could extend to mobile payment apps, which have even more personality

and branding than static cards. This conditioning effect may be one reason why Venmo requires users to write a few words describing every transaction: scrolling through the app reads more like a news feed than a credit card statement. Similarly, ride-sharing apps like Uber and Lyft that aggressively advertise free rides, and apps like Starbucks that offer loyalty programs, encourage users to associate these “freebies” with using the app. Perhaps these rewards can help to explain how and why mobile payment has managed to stay so relevant since its introduction almost 20 years ago. The rise of mobile payment In 1997, Coca-Cola rolled out vending machines where thirsty customers could pay via SMS. Although this particular technology never made it to the United States, the concept caught on. A few years later, consumers could complement their Coke with pizza when Motorola and Domino’s teamed up to launch Pizzacast (which does exactly what it sounds like it does.) However, it took a tsunami before mobile commerce really flooded the market: in the aftermath of the 2004 Indian Ocean earthquake, concerned onlookers around the world could text to donate for the first time. With the increasing ubiquity of smart phones, developers moved away from these text- and email-based models towards the creation of specific apps. Now, mobile payment features have spread to even the most seemingly unrelated apps. In November, Snapchat added a feature called Snapcash that allows its users to send payments through the photo-sharing app. Facebook is said to be planning a similar update. Clearly, mobile payment’s popularity is not going to wane anytime soon. Splitting the bill with consumers Venmo stands out from its competitors in part because of the lack of fees. Its website touts that Venmo is “all about making payments between friends stressless and fun, so it doesn’t make a lot of sense to charge you for grabbing dinner with your friends or getting paid back.” Unlike other major payment providers like PayPal and Google Wallet, which charge about 3 percent on all transactions, payments directly from bank accounts and debit cards are free on Venmo, while transfers from a credit card cost the sender 3 percent in processing costs. So if Venmo’s only fees go towards processing costs, how does the app make money? Currently, Venmo does not profit from transactions between friends, but it does make a commission from partnerships with businesses (for example, food

Personal Finance

trucks.) Its growth has been so impressive that profits from individual transactions are all but irrelevant. In the first quarter of 2014, Venmo reached the same payment volume as the Starbucks mobile app: $314 million. The smartphone premium? Particularly impressive is the fact that Venmo has managed to capture such a large payment volume at a low cost to users without the pre-existing technological infrastructure of companies like Visa, Google, and PayPal. With these apparently lowered barriers to entry, the mobile payment industry is no longer limited to banks. And as the transfer of money becomes more and more integrated with social media and mobile devices, consumers may feel more insulated than ever from the sting of spending. Apps that simplify spending certainly provide convenience — soon the frustration of splitting a dinner bill or tipping the cab driver will be an anachronism. And from a macroeconomic standpoint, they increase the money supply by eliminating the need to carry around a stash of cash. However, consumers trying to watch their spending should beware that this convenience comes at a price.

Mobile Money, Mobile Profits HOW OUR SMARTPHONES CHANGE THE WAY WE INVEST by Stephen Kearns

rowing your money is easier than ever now that we can control our finances through our smartphones. University of Minnesota sophomore Mitch Rydeen, 20, has recently started investing some money he earned over the summer by using Robinhood, a commission free brokerage service for mobile phones. “I am half invested in ETFs and half in an index following technology firms,” Mitch explained in a recent interview. This concept encourages millennials to be more active with their money by eliminating brokerage fees, which have been discouraging young people from making trades. With more and more investing applications being released, more people are participating in the stock market. Invest the Change Acorns, just one of many mobile money-managing applications, invests spare change from debit transactions, creating

Change to spare The investing app Acorns rounds up your transactions to the nearest dollar and invests that change into a diversified portfolio. a unique opportunity for returns on savings. Once a user links his or her account, any purchases made with a debit card are rounded up to the nearest dollar. This difference is deposited into the Acorns fund and the investment account slowly grows. By asking users several questions about their income and risk tolerance, Acorns quickly and automatically invests the cash on deposit, however small, into a diversified collection of exchange-traded funds (ETFs). An ETF behaves essentially like a stock in how it is bought and sold, and derives its value from indices, commodities, or bonds. These ETFs serve to represent larger segments of the market, so with less than $100 an individual can collectively invest in small companies, real estate, and emerging markets. The draw here is that the user is relinquishing control of their money. This could be appealing to those who don’t have the knowledge to invest wisely. On the other hand, more financially-minded users may become frustrated with the lack of control over which ETFs are bought. The account “risk level” can be adjusted, but this feature simply disperses funds into ETF categories at some new proportion in the app. Consequently, this format is best suited for people who know they should invest but don’t know how. Ticking a few boxes and linking a bank account is the only skill one really needs to become involved in the market with Acorns. Support Free Trade New investors often grapple with unavoidable trading fees and have to make decisions about their broker based on what the broker charges per trade.

Robinhood eliminates this problem by offering commission-free trades, so users are free to buy and sell at will. Currently Robinhood has no revenue, but the company plans on introducing a premium service that will allow users to trade on the margin. Margin trading is when an investor borrows money from the broker to buy stock. Currently, a big part of Robinhood is exclusivity. The process of creating an account is not immediately available upon download. Users must supply an email address and are placed on a waiting list for access. You can move yourself further up the list by referring friends via email, Facebook, or Twitter. When Mitch Rydeen first downloaded Robinhood, there were 11,000 users ahead of him in line. After getting several of his friends to sign up, Mitch’s name was quickly moved up the list and he was able to create an account. “So far it’s worked well. It takes a couple of days to process orders and you can’t short or buy on margin, but they say those features are coming soon,” Mitch said. Robinhood prides itself on having an average user age of 26, a demographic that most financial institutions are unable or unwilling to tap. Young people are typically seen as irresponsible with money, and a contributing factor could simply be a lack of experience. Robinhood provides an innovative form of entry into the investment game and gives access to a new generation of traders. Smart Phones, Dumb Money? Millennials are drawn to these kinds of apps because they make investing easier. The problem is that some of these new

Intercollegiate Finance Journal • SUMMER 2015

investors may not be making informed decisions about what they buy. Reading a Buzzfeed article about how great Chipotle’s food is does not make the restaurant’s stock sound like a long-term investment. Similarly, how is a college student supposed to make an accurate assessment of his or her risk tolerance? Most students will be repaying student loans when they graduate, so exposing their savings accounts to market turbulence is likely not a wise move. While Acorns presents generous projections for each risk tolerance, it fails to explain what they mean. The app illustrates to the user that the riskiest strategy is projected to make them the most money, but users ultimately must take into account their own risk tolerance. It is very easy to get caught up in the excitement of new technology and make poor financial decisions. Just ask anyone who bought the first generation iPad. Young people are participating in the stock market, which is a good thing, but they need to do so intelligently and responsibly. It is important for applications like Acorns and Robinhood to be as transparent as possible with their customers about how their apps manage and protect investments. At the same time, these apps have significant benefits. They cater to a group that has been previously ignored by investing firms, and they take a huge risk in doing so. Education and experience are the keys that open the doors to financial prosperity. No one should be locked out, so Robinhood succeeds in expanding access. If the 2008 financial crisis taught us anything, it’s that even experienced investors can make poor decisions. If these new mobile investing apps can do more to educate investors, their services can be a real force for good.

Let’s Talk It Out How Language Affects the Way You Spend by Rachel Binder

he lure of temptation is oftentimes unavoidable. The seemingly trivial decisions we make on a day-to-day basis — like whether to eat that second cookie or how much of our paycheck we should spend or save — pit the instant gratification of the present against our future well-being, including our mental, physical, and financial health. While many believe the ability to resist temptation is inherently tied to willpower or self-control, behavioral economists think there’s more to it. They have discovered

that something as simple as the language you speak can have a profound impact on the way you make decisions regarding the future. Back to the Future Keith Chen, a professor at the UCLA Anderson School of Management, has found that the structure of one’s language can affect one’s conceptualization of future events. As a speaker of both Chinese and English, Chen noticed a difference in how he thought of the future depending on which language he was speaking. Because the Chinese language does not distinguish the future from the present tense, he found that when speaking Chinese Savings rates from 1985-2010 Average Total Savings Rate (% GDP) 45

On average, countries which strong-FTR languages save 4.75% less

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Weak-FTR language countries

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Strong-FTR language countries

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his thoughts and his actions were much more future-oriented. This discovery fueled his interest in the dynamic interrelation of linguistics and behavioral economics. Chen has studied the effects of language based on the strength of what he calls “future-time reference” (FTR), a term used to describe the extent to which a language distinguishes its future tense from its present tense. Speakers of German, which is a “weak future-time reference” language, can predict rain tomorrow by saying “Morgen regnet,” which translates to “It rains tomorrow.” This may sound a bit silly to speakers of English, a language that requires markers such as “will” or “is going to” when speaking about the future. When translated to English, German’s present and future tenses are seemingly indistinguishable. The German language is considered to have a weak future-time reference because the listener is required to distinguish the future solely from contextual clues rather than from the structure of the language. English, unlike German or Mandarin, is a “strong future-time reference” language, meaning that embedded in the structure of the language is a distinction of the future as a separate time from the present.

The Procrastination Game So what does the role of the future tense have to do with a person’s spending patterns? Many believe that strong-FTR languages, which require the distinction of the future when speaking, create a sense of distance from the future. When you have to say “I will be going to the concert tomorrow” as opposed to “I go to the concert tomorrow,” the concert feels further away because it’s less connected to the present. This feeling of disconnect from the future is what drives us to spend when we really should save, or to continue to smoke cigarettes and promise to quit later. Speakers of Mandarin, on the other hand, use the same tense to identify the present and future, which drives them to more readily adapt future-oriented behaviors like saving, exercising, and eating healthier in the present. And the numbers don’t lie. Chen discovered that speakers of weak FTR languages were 30 percent more likely to save money and exercise regularly than speakers of strong-FTR languages. He also looked at countries like Switzerland, with speakers of both strong- and weakFTR languages. He found that even when controlling for country, age, and number of children, there were still statistically significant differences in future-oriented behaviors between strong- and weak-FTR language speakers. Talking Big This distinction is not only seen at the individual level. The influence of spoken language impacts the way entire nations spend and save their income. Looking at national spending across 75 OECD countries, Chen found a statistically significant difference in the savings rates between countries that speak strong-FTR languages and countries that speak weak-FTR languages. On average, between 1985 and 2010, countries that speak strong-FTR languages, or languages that require a distinction for the future, saved 4.75 percent less than countries with weak-FTR languages. These findings indicate that the structure of a nation’s language can have a large-scale impact on the health and wellbeing of that country. In the attempt to recover from one of the worst financial crises in the past century, understanding the implications of a seemingly small yet unavoidably influential factor in decision-making can be crucial. Chen’s findings, and the growing literature surrounding the notion of language and decision-making, provide insight into how speakers of strong-FTR languages can better prepare for the future. Acknowledging the limitations of a strongly distinguishable future tense can make the individual, and the nation at large, aware of the subtle mind games that we sometimes play with ourselves.

Personal Finance

You Win Some, You Lose Some Match-Fixing in American Sports by Shouri Gottiparthi

“t

hey didn’t really win, it’s rigged!” Almost every sports fan hears this accusation after major sporting events. Yet as expected, arguments over these topics generally occur over Internet boards with opposing fan bases making accusations and champion fan bases disregarding the accusations. So what do logic, history, and economics indicate to be the likelihood of match-fixing within the four major sports leagues (NFL, MLB, NBA, NHL)? The instigator The first piece of the puzzle is the instigator. Who is the actor fixing the matches and what is the actor’s motive? The most obvious actor is the gambler, who has the economic incentive to make money on games he bets on. The other possible actor is the league itself; Major American sports each have some form of revenue sharing among teams, and the league has the incentive to fix or alter matches in a way that increases revenue for the whole league. For example, it may benefit the NBA if the Los Angeles Lakers, with its huge fan base, goes far in the playoffs rather than the Sacramento Kings with its relatively small one. TV ratings would be higher, merchandise purchases would skyrocket, and the league would generate much more revenue. The Method An instigator has three routes of access to bribe individuals into altering the outcomes of games: players, coaches, and officials. Because it is illegal to fix games, the person accepting the bribe must alter the game in a subtle way where no one can definitively know it is occurring. If a coach accepts a bribe and suddenly does not play any of his starters in a championship game, an investigative body will clearly see that something is going wrong. Moreover, the instigator must bribe an individual who has large control over the game. Bribing one hitter in a baseball game to perform badly may not alter the game enough to change the outcome, but bribing the umpire who determines the strike zone may. Although these circumstances are restrictive, each sport has individuals who fit them. Officials in all four sports can reasonably alter games by making a few bad calls, while coaches in the NFL and MLB in particular have great control over the game due to the number of breaks in game action when play-calling can be altered. Although players must not be too obvious in altering the game, certain players such as goalies in the NHL

and star players in the NBA can alter their performance in a way that gives the other team an advantage. Making the Right Call? One interesting In American match-fixing, situation occurs if the referees are typically the most instigator is a referee, viable method of access for player, or coach. There gamblers. is no bribe here, and the individual could extremely high to quell these concerns. bet on his or her own games. This situation Although the International Criminal Police must be considered in analyzing the likelihood Organization (INTERPOL) suggests that of match-fixing. sports gambling is now a $1 trillion industry, it is highly unlikely that the instigator and the History player/coach can agree on a bribe high enough Sporting scandals are prevalent around the to satisfy both parties. And even if they do, it world, especially in soccer. A February 2013 would be hard to hide such a high bribe from report by Europol identified 680 rigged the IRS and FBI, making it unfeasible to fix a matches in 30 countries, with 380 in Europe. match in this way. In fact, the FBI has a unit Games from the English Premier League dedicated to catching individuals who particito various international tournaments were pate in match-fixing. This predicament leaves accused of being influenced by gambling. the only viable method of access the referees, However, America has escaped these gambling who do not make nearly as much money issues, largely due to investigative bodies such as the coaches and the players and are more as the FBI, as will be explained later. susceptible to corruption. However, the IRS The two biggest sports scandals in Amerand FBI issues still extend to smaller sums of ican sports history that involved match-fixing money in the tens of thousands of dollars rather were the Chicago “Black-Sox” scandal of than millions; it is very hard to transfer money 1919, when players were played to throw the without anyone noticing. World Series, and the Tim Donaghy scandal This unfeasibility is especially true when the of the mid-2000s. However, the 1919 scandal league is the instigator; both the NFL and NHL occurred during a time when athletes were not are nonprofit organizations, and all financial paid the large salaries that they are today, and transactions must be recorded. In the case of the therefore they did not have as much to lose by MLB and NBA, the corporate structure makes throwing the World Series. The money they it very hard for one individual to instigate were given by the gamblers outweighed any a bribe and move money without another concerns of repercussions, which is not what individual within the company realizing what would occur today. is going on. However, the Tim Donaghy scandal of the However, the referee gambler who directly mid-2000s falls perfectly in line with the conbets on games that he or she referees rarely has clusion of the logical argument. Tim Donaghy these issues. It is extremely difficult for the NBA was an NBA referee who bet on games he to gain information on the referee’s gambling, was involved in during the 2005-2006 and and because sports gambling is legal in many 2006-2007 seasons. Kevin Carpenter writes places, the IRS would not be able to intervene in the Berkeley Journal of Entertainment and either. Therefore, the referee-gambler seems to Sports Law that Donaghy was caught by have a feasible method of match-fixing as long the FBI’s division responsible for handling as he or she is capable of making subtle calls match-fixing after a series of one-sided calls without invoking the interest of the FBI. affecting the spread during multiple games in the 2006-2007 season. Likelihood of match fixing Overall, any type of match-fixing involving Economic feasibility large transactions of money does not seem to Although there do seem to be routes of access be possible in American sports. The FBI and for potential match-fixers in each major IRS act as too significant of a deterrent for any American sport, there are many logistical individual who wants to make money off of complications in the bribing process that gambling, and the structure of the four major may make it unfeasible. First, the value of the sports leagues makes it even harder for one bribe must be acceptable to the individual in rogue individual to pay off players, workers, the game. This is complicated in American and coaches. The most feasible method of sports because almost all major coaches and match-fixing seems to be the referee who players who have great control over individual bets on games he or she officiates, but as the games make millions of dollars a year in both Tim Donaghy example shows, it is extremely contracts and endorsements. Partaking in difficult to alter the game without making it match-fixing is an illegal action, and getting obvious to the authorities. At the end of the caught means these individuals would lose all day, the championship team most likely really of this money, face legal action, and tarnish did win their championship. their reputations. The bribe would have to be

Startups & Technology

Who Killed Cable? The rise of streaming Photo by Jonah Blumenthal

by Gillian Lee

Wearing into the market The Future On Your Wrist, Tiffany Chang 30

Gazella leaps into natural hair care FroyoWorld for Natural Hair, Liz Studlick 32

Fund me please Smart Funding for Your Startup, Kabir Thakral 33

printing pizza Are 3D Printers the New Microwaves?, Angela Marie Teng 34

THE REVOLUTION WILL BE STREAMED Streaming services like Netflix are taking over network television’s turf of original programming.

f “House of Cards” were to make its debut a decade ago, the show likely would have belonged to a major television network such as NBC, and watching the show would have involved a television set, a remote control, a cable box, a heap of tangled cords, and a pricey cable subscription. Instead, “House of Cards,” which released its entire third season on Feb. 27, 2015, is a Netflix original series. Watching it simply involves a laptop or phone, headphones, and a $7.99 subscription — and can be instantly streamed in almost any location, whether it’s at home or at the gym. In recent years, online streaming services such as Netflix and Amazon Instant Video have released a number of original hit TV shows. Internet TV has revolutionized the way people watch TV, and Internet streaming services are winning people over, one original series at a time. Stealing the Stage At the forefront of the Internet streaming services is Netflix, which offers subscribers a vast collection of movies and shows for a single subscription. A competing online streaming service is Amazon Instant Video, which is available to subscribers of Amazon Prime. Both services boast critically acclaimed original series. Shows by Netflix and Amazon Instant Video were well-represented at the 2015 Golden Globe Awards. Amazon Instant Video original series “Transparent” took home two Golden Globes, and Netflix’s “House of Cards” won one for Kevin Spacey’s performance. On the other hand, network television was almost entirely shut out of the TV categories. These shows’ triumphs highlight how online streaming is slowly becoming the mainstream trend for watching television. Fans of Netflix original series “House of Cards” and “Orange Is the New Black” can rejoice, as the company plans to release 320 hours of original programming this year, budgeting about $3 billion to create original content. Amazon carved out a similarly large chunk, estimating that it plans to spend $100 million in the third quarter alone on developing original material. Netflix has stated that its original series do not account for a substantially large viewership — typical subscribers still spend the majority of their time watching shows that appeared on major broadcast networks, such as “Parks and Recreation” or “Breaking Bad.” So why are these streaming services bothering to spend so much on creating original series?

Intercollegiate Finance Journal • SUMMER 2015

Maintaining A Competitive Edge The visibility of original series is a testament to the fierce competition raging between various streaming companies extending beyond just Netflix and Amazon. An increasing number of channels such as CBS, ESPN, and Nickelodeon are making their content available through Internet programming. HBO, which has been one of Netflix’s long-standing competitors, has partnered with Apple to release a digital streaming service called HBO Now in April. The service will initially be exclusive to only those with Apple devices, and at just $14.99 a month, subscribers will have access to all of HBO’s original movies and shows, including the muchloved “Game of Thrones.” As the Internet revolutionizes the way people watch TV, a growing number of networks are shifting their sights toward making their content easily accessible and portable. Therefore, in order to maintain their competitive edge, Netflix and Amazon Instant Video are in constant competition to attract the biggest names and create content exclusive to subscribers. For example, Netflix released the original series “Unbreakable Kimmy Schmidt” in March, which was co-produced by Tina Fey, and Amazon recently reached a deal with Woody Allen, who will create his first TV series for the company. Despite the large expenses of creating original content, Netflix and Amazon know that the shows will attract fans. For companies whose gains are based largely on subscription numbers, original series are a worthy investment that are likely to yield returns. The Slow Death of Cable As Netflix and Amazon vie for dominance against other streaming services, cable television is struggling to win the war against the Internet. A recent study by the Consumer Electronics Association found that 51 percent of millennials consider Netflix subscriptions to be valuable, while only 36 percent of millennials find cable subscriptions to be of value. These findings are quite apparent, given that binge-watching Netflix has become a quintessential pastime for college students. Cable television is beginning to lose its appeal for many millennials, leaving the future of cable to be rather tenuous. Millennials have grown up in a time of rapid technological change and innovation, and Netflix perfectly satisfies their tastes and expectations for speed and convenience. Before long, the future of entertainment will rest in a $7.99 subscription and its original series, while cable companies slowly fade away.

Wearing Into the Market

The Future on your wrist by Tiffany Chang

ince Google Glass made its splashy debut in 2012, complete with skydivers and a feature by Diane von Furstenberg during New York Fashion Week, the phrase “wearable technology” has evolved from the whispered stuff of dreams in the halls of the Google X lab to a media buzzword. Critics of Glass — and there were many — blasted its invasion of privacy, poor battery life, and abundance of bugs. The Glass Explorer program came to an unexpected end in mid-January 2015, exiling the smart eyewear back to the depths of the lab for product refinement with only a vague promise of its return from Google. Nevertheless, other wearables have captured market interest. Berlin-based technology market research house IDTechEx predicts that the wearable electronics market, from jewelry to textiles to footwear, will be more than $70 billion in 2024 compared to $14 billion now. If done right, the troubled fate of Glass could be avoided by other wearable devices. A Timely Invention Smartwatches are one wearable capturing significant attention. They make notifications even more accessible than a pocketed phone, have the benefits of being fitness monitors by tracking heart rate, and can be integrated with favorite mobile apps. Startups such as Pebble and tech-giants such as Samsung alike are getting their hands wet with the device-ofthe-moment. Apple is currently releasing its first iteration of the smart timepiece, the Apple Watch (not called the iWatch, to the chagrin of Apple iJunkies). Critics have wasted no time voicing their opinions on smartwatches. A main drawback is that the first models have been clunky in design, and for many, watches serve dual functions between a timepiece and a style-piece. A few models, such as Motorola’s Moto 360, disguise themselves as traditional watches with a round face and analog screen, but most are boxy creations which look like they came from the toy aisle. Many users have complained of poor battery life and of steep price points relative to their functionality. Distracted driving is also a concern, as a study has shown reaction times are worse for drivers distracted by smartwatches than by mobile phones. Still, smartwatches have the potential to make a lasting impact on the consumer

market. They offer more than wildly popular fitness trackers such as the FitBit, and their non-disruptive integration into daily life sets them apart from Glass. Sci-Fi turns into Reality Then there are novelties like Nixie, the flying selfie-cam (and update to the selfie-stick). Nixie, the winner of a $500,000 grand prize in Intel’s first wearables competition last year, is a drone worn around the wrist which when thrown like a boomerang promises to capture the moment without interrupting it. Similar to the GoPro, it markets itself on its ability to shoot from unique perspectives, but with a fun twist. Wearables like these capitalize on the current obsession with social media and experience-sharing. The health consumer market is also a promising space for wearables. A pregnancy monitor by Nuvo Group, which keeps track of a growing baby’s vital signs and also pumps music for a baby’s developing ears to enjoy, was debuted at London’s Wearable Tech Show in March. The startup Bainisha is developing wearable sensors which pinpoint muscle movements and could be used to track degenerative muscle diseases. Wearable sensors are of growing importance in the health and fitness sectors. According to Transparency Market Research, the wearable sensor market is expected to grow to a whopping $656.7 million by 2020, over thirteen times its 2013 valuation of $50 million. And what of Glass? Perhaps instead of the consumer market, smart glasses are better suited to industrial, military, and scientific use. Similar products have found niches with employers as tools to perform employee training due to their ability to provide real-time personal and visual communication. And, NASA recently announced an initiative to develop a pair of “augmented reality smart glasses” for usage by astronauts in space flight — as wearables turn sci-fi into reality.

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Smartwatches have the potential to make a lasting impact on the consumer market.

Startups & Technology

HANDY DEVICES Smartwatches are becoming increasingly popular despite their limited uses.

Maddie Photo

Gazella Leaps Into Natural Hair Care

FroyoWorld For Natural Hair by Liz Studlick Photo by Cadence Lee

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Sensing a key gap in the market, Brown imagined a utopia of natural hair care, with ingredients that customers could choose and mix in-store — a Froyoworld for hair.

Morgan Brown Brown ‘16

Photo by Cadence Lee

Intercollegiate Finance Journal • SUMMER 2015

Startups & Technology

fter years of chemical relaxation, experimenting with heat and hair dyes, and seeing the damage to her hair, Morgan Brown, Brown ’16, decided enough was enough. In the December of her freshman year, she cut all her hair off with her roommate’s sewing scissors. Faced with a fresh start, she made a vow: only all-natural products from here on out. Easier said than done. Although the market for black hair care is huge — $684 million in 2012 — products like chemical relaxers and weaves typically dominate, as Chris Rock’s 2009 documentary, “Good Hair,” explored. The natural hair movement has been picking up steam in the past decade, with companies shifting to accommodate demand for natural and transitioning hair products. But Brown still had trouble finding what she needed. “I would read labels of products and I wouldn’t recognize half of the ingredients,” she recalls of her first forays into drugstores. “So I looked up all-natural oils to put in my hair, but when I would tried to get them at Whole Foods, they wouldn’t have half of them.” Froyoworld for Hair Sensing a key gap in the market, Brown imagined a utopia of natural hair care, with ingredients that customers could choose and mix in-store, “like Froyoworld for hair,” she explains. She met with Alan Harlam, director of social entrepreneurship at the Swearer Center, to see if she could make her dream, which she named Gazella, a reality. With his help, she adjusted her vision slightly to start with an online service, with a direct sales model to follow. Brown spent a semester doing an independent study, learning business fundamentals and planning her launch. The Brown Venture Launch fund gave her some initial capital to do product development. Gazella launched this past December, nearly two years after her fateful dorm haircut. The site allows users to customize skin and hair care creams and oils, picking all-natural oils like apricot, avocado, and golden jojoba, as well as fragrances like honey almond and vanilla, which Brown then mixes into a final product. Healthy Roots Gazella is part of this year’s Brown Entrepreneurship Venture Fellowship, which means Brown has a hands-on semester working with mentors and her peers to strengthen her brand, marketing, packaging, and business model. Finding suppliers to meet her fair trade and environmentally friendly requirements is challenging; she eventually hopes to have direct relationships with the farmers growing her ingredients. Being the founder of a startup means becoming an expert on your niche, from

marketing, to web design, to training members to join the team. “Entrepreneurship is great — and challenging — because there are so many different projects,” Brown says after explaining the difficulties behind designing high-end packaging and teaching herself how to code. And that’s on top of classes and a part-time job. “I don’t sleep,” she kind-of jokes. Fortunately, Brown has benefited from the University’s recent focus on entrepreneurship. Having the initial funding to get off the ground, as well as the mentors to help Brown refine her business models, have been crucial for Gazella. She described the other fellows in the program as supportive and full of helpful suggestions, although her venture is the furthest along in the cohort. New Growth Although the site has been launched, there’s still plenty of work to do. Brown updates Gazella’s site continually, reworking her ordering system and adding videos so customers can get to know her. Up next is training representatives so they can have Tupperware-party-style sales events. Brown has also benefited from a larger network of entrepreneurship on campus. She will speak and man a booth at an upcoming natural hair care event in the coming weeks, and plans to attend the SEEED Conference for social entrepreneurs in April. Although launching and managing her company has been a balancing act, Brown recommends getting involved in entrepreneurship while still in school. “Everything I’ve learned while doing Gazella is going to be useful in my future,” she says, adding, “You have access to so many resources while you’re here.” And though there’s still a long road ahead, she can always focus on the Froyoworld for Hair at the end of the tunnel.

Fund Me Please Smart Funding For Your Startup by Kabir Thakral

housands of college students dream up big ideas in their dorm rooms amidst day-old pizza and ramen, but only a select few turn those ideas into cutting-edge startups. Over the past decade or so, well known college startups have been showcased as proof that America continues to dominate in the areas of innovation and technology. The success of college startups like Snapchat and Dropbox has given hope

to college students all across America. Unlike Snapchat and Dropbox, however, most college ventures fail. In fact, according to the Wall Street Journal, 3 out of 4 startups fail to return investor’s capital. Whether it is lack of funding or funding from the wrong source, the vast majority of startups are unable to get their ideas out of their dorm rooms and out into the world. Founders should think hard about where their money comes from. All in the Family Friends, family, and other personal relationships are all potential investors, especially in the early stages of forming a startup. Wealthy relatives and friends or even good old mom and dad will usually be willing to invest a small sum if the entrepreneur presents a solid business plan with clear goals in order to ensure a return on investment. This can be one of the easiest ways to get funding, and close previous ties ensure trust. Snapchat, for instance, was launched in CEO Evan Spiegel’s parents’ living room. Started by Stanford University students as part of a class assignment, Snapchat would not have survived if not for the support it received from the founder’s family members. While some entrepreneurs may feel that asking family and friends presents an informal obligation on their part, it is important that any investments made are taken seriously. Proper documentation and contracts should be drawn up, as family fights have been known to cause problems even in the largest of companies. For example, when Dhirubhai Ambani, an Indian business tycoon known for founding Reliance Industries, passed away in 2002, his two sons fought each other tooth and nail for control of the company. Despite the two sons already being billionaires in their 40s, the feud ended only when their 68-year-old mother stepped in and split up the business between the two. Accelerators, Angels, and Investors...Oh My! Startup accelerators are relatively new institutions that have become popular with both the private sector and with universities. Silicon Valley accelerators like Y Combinator, TechStars, and 500 Startups give young entrepreneurs business advice, initial funding, and access to the next level of venture capital. University accelerators like the Berkeley SkyDeck bring together resources not only from the university and the private sector, but also the National Lab and local government. These

Intercollegiate Finance Journal • SUMMER 2015

accelerators utilize both the university’s resources as well as private sector help including consulting services and entrepreneurial mentors. While most accelerators take a percentage of profits from their successful businesses, some university accelerators (including SkyDeck) do not. Angel investors, simply referred to as angels, are typically wealthy investors looking to hold a stake in startups. Angels typically listen to pitches from startups in their early stages, and usually invest less than $1 million. It’s important for entrepreneurs to look for angels with proven track records of success and expertise in the field the startup is entering. Angel investors can be found via AngelList, U.S. Angel Investors, and SF Angels Group. Although Snapchat was able to receive venture capital funding without having to find angel investors first, numerous companies have become successful because of the angel investor dynamic, including Facebook and one of its most notable initial investors, Peter Thiel. Nothing Ventured, Nothing Gained Venture capital is usually the final and most prestigious source of funding for startups, as venture capitalists are professional investors seeking high returns in the companies they choose to invest in. Receiving funding from a VC firm is a sign that a startup has serious potential. But entrepreneurs must be careful not to give up too much control or get distracted by a large and immediate influx of cash. Such was the dilemma presented to Snapchat and its executive team after the company and its signature product took off. After Snapchat received nearly half a million dollars in funding from Lightspeed Ventures in 2012, the company soon saw astronomical growth, resulting in a $10 billion valuation in 2014 by the powerhouse

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firm Kleiner Perkins. Its founders were careful to balance the need for funding with staying true to the company’s mission and business strategy, and were able to successfully navigate their way through Silicon Valley. VC firms in the Bay Area and Silicon Valley are a dime a dozen, but names like Andreessen Horowitz and Sequoia Capital bring both money and influence to the table, along with strong track records. VCs tend to flock to a select number of schools; Entrepreneur.com lists Stanford, UC Berkeley, and MIT as the three top universities for VC-backed entrepreneurs. Sweet Smell of Success Regardless of the source or amount of funding a startup receives, a few guidelines are essential for success. Whether working with a globally-recognized venture capital firm or a close family member, it is important that entrepreneurs act respectfully and professionally. When someone’s hard-earned money is on the line, entrepreneurs must understand the responsibility and burdens they must bear. There are many reasons behind Snapchat’s incredible success, but the most important are quite easy to understand. The founders of Snapchat had an innovative idea, great family support, and were careful and patient in dealing with Silicon Valley venture capitalists. Eschewing short term riches for long term wealth, the company stayed true to itself and never lost control. Due to the variety of avenues for funding, startup founders should look carefully at their options — and respond well to rejection. Many startups fail not because their ideas lack traction, but because the motivation behind the idea falls short. Dealing with failure is essential in the tumultuous arena that is the startup business, and the best startups are a product of tenacity and determination.

According to the Wall Street Journal, 3 out of 4 startups fail to return investor’s capital.

Printing Pizza Are 3D Printers the New Microwaves? by Angela Marie Teng

few decades ago, having a microwave in your home was considered an American novelty. People were incredulous with the way it worked — just pop some food into it and, voila, it’s heated in three minutes. The technology boom, however, has made that idea into a common reality, equipping many homes with a microwave. In 1997, the U.S. Bureau of Statistics reported that over 90 percent of American households had a microwave — a huge jump from the initial 1 percent in 1971. Today, a similar innovation is working its way into the market: the 3D food printer. Printing Your Dinner Natural Machines, a tech startup, just launched its 3D food printer, Foodini. Lynette Kucsma, co-founder of the company, mentions that Foodini is not too different from the technology used in regular 3D printers — it uses edible ingredients rather than plastics squeezed out from stainless steel capsules. While some people may be skeptical about the concept of 3D printed food, Natural Machines assures its consumers that Foodini is completely safe — and healthy. Through the use of small capsules loaded with fresh ingredients, the Foodini is able to create delicious, chef-grade, and healthy meals. The open capsule model allows the user to prepare and place his own ingredients into the machine, rather than just relying on market-sold capsules — which Natural Machines is soon to create, with the help of its partner retailers. Using the machine — which is connected to the Internet — is relatively easy. It has a built-in touchscreen on the front, which, along with devices like laptops and tablets, allows the user an interface to select what type of meal he wants to produce. After the user chooses the recipe, the Foodini will display instructions regarding what capsules to insert into the machine. Depending on the recipe chosen, the user can fill these capsules up with homemade or store bought ingredients. Once the capsules are positioned inside the Foodini, it’ll start printing! The New Microwave This fresh idea creates a new recipe of possible success. “In essence, this is a mini food manufacturing plant shrunk down to the size of an oven,” Kucsma says in

Startups & Technology

a CNN interview. With its own touchscreen, which can connect the machine to the Internet, the Foodini has great potential. While Natural Machines already has orders pouring in from professional kitchens and restaurants, they plan to commercialize it so that everyone can have their own Foodini. The Foodini 3D food printer is supposed to be available to consumers sometime this year at a projected retail price of $1,000 per machine. Despite this seemingly high initial price, Natural Machines foresees that the Foodini could be as common as the microwave sometime in the near future. Comparatively, microwave ovens were initially sold in 1954 at the staggering price of $2,000 to $3,000 per piece (or $18,000 to $26,000 in today’s dollars)! However, after technological advances, the price of microwave ovens rapidly fell; they now cost only $50. The Foodini may follow this trend, initially starting off at a steep price but eventually becoming an integral machine for cooking. Despite this revolutionary idea, the

question of phasing out traditional cooking methods remains. While Natural Machines guarantees that the Foodini could work on almost any food and can create most of the common dishes we make at home, they also mention that it will not eliminate the need for basic cooking skills. Actually, Foodini encourages its customers to be creative and to continue acquiring and learning how to create basic foods from scratch. Their emphasis on healthy, fresh, unprocessed, unpackaged, and home-made foods presents Foodini users with a kitchen appliance that is both beneficial and fun to use. Trick or Treat The 3D food printer also encourages us to think about what it could mean for disciplines outside cuisine and 10 minute meals. If successful, the Foodini could provide airline customers with fresh and delicious food, a huge leap from the current status of airplane food today. Kjeld van Bommel, a research scientist from the Netherlands Organi-

zation for Applied Scientific Research, underlined how this could affect the senior citizen population or people on a special diet. The food that they eat typically looks unappetizing — but with 3D printing, that could change. Van Bommel and his team have already started printing out 3D carrots for senior citizen consumption. Instead of serving senior citizens mushed-up food, food printers could provide them with specialized and healthy food that looks appealing. The possibility of customized nutrition is also a huge leap for the medical industry. For people with special needs, or who just want to maintain their diet, the innovation of the 3D food printer could allow the user to decide exactly what they want in their food, whether that be sugar content or carbohydrate intake. With more and more companies venturing into food printing — XYZPrinting specializing in sweets and cookies, Gumlab.uk printing out chewing gum — could the 3D food printer really be the new microwave?

WHAT IS NEEDED TO PRINT FOOD?

FRESH FOOD

CAPSULES

FOODINI

HOW DOES FOODINI WORK?

Choose fresh ingredients

Prepare food for capsules (cook ingredients if necessary)

Load capsules in Foodini

Put prepared food in capsules

wait...

Start printing

Printing finished

No Does the printed food need to be cooked prior to eating?

Yes

Cook

Eat and enjoy! 35

Careers When critical systems suffer from poor design, the effects can be disastrous. Bad design killed Jenny.

FarmLogs Inc. is building intelligent solutions for farmers to keep track of their fields.

On Necessary Design How bringing good design to new industries can change the world by Athyuttam Eleti

n a recent article, Jonathan Shariat, a user experience designer, shared this story: “Jenny...was a little girl who had previously been in the hospital ward for cancer for four years and was discharged. Then a while later she relapsed and had to be given a very strong chemo treatment medicine. This medicine is so strong and so toxic that it requires pre-hydration and post-hydration for three days with I.V. fluid. However, after the medicine was administered, three nurses, who were attending to the charting software to enter in everything required of them and make the appropriate orders, missed a very critical piece of information. Jenny

was supposed to be given three days of I.V. hydration. But the three nurses, with over 10 years experience, were too distracted trying to figure out the software they were using, they completely missed it. When the morning nurse came in the next day, she had died of toxicity and dehydration. For two shifts, she had missed her hydration and all because the three, very good nurses, were stuck trying to figure this out…” The accompanying screenshot on the top left of this page illustrates the interface the nurses were stuck with. When critical systems suffer from poor design, the effects can be disastrous. Funding,

bureaucracy, and competing goals may all be factors that affected the the final product, but the fact remains — bad design killed Jenny. What, then, is good design? Design is fundamentally about solving problems. While often perceived as just the visual appearance of a device or interface — the colors, typography, layout, and graphics — design goes far beyond. It defines how, and more importantly, why, something is the way it is. Good design is informed by an acute and considered understanding of the user, their industry, and their work. What are the needs of a stressed-out nurse handling multiple patients at 3 a.m.? How do you design an interface that helps makes her job easier? Such a human-centered approach to designing products is a growing trend in consumer technology, with companies such as Facebook and Apple putting together talented design teams, conducting years of user research, and building simple, intuitive products. The need of the hour, however, is to take this thinking

Making an impact A Look at the Real Effects of a New Investing Philosophy, Adrija Darsha 38

Hiring at american intellignece agencies Recruiting Young Talent in a Post-Snowden Era, John Palmer 40

Charity pay: it’s not just about giving A Look at High Salaries in Charitable Organizations, Jason Cheng 41

The future of american healthcare How New Career Paths will Revitalize a Dying Sector Robert Ju 42

ATM design needs both accessibility and usability improvements.

PlanGrid’s iPad app allows construction workers to easily carry blueprints, formerly only accessible by carrying physical rolls of plotter paper.

to the interfaces in need. Interfaces in Need Dental software, point-of-sale solutions, assistive technology for the paralyzed, government portals, ATMs — the list goes on. Even consumer technology companies like Facebook grapple with design challenges around privacy, suicide prevention, disaster relief, and internet access. As millennials, it is very easy for our generation to solve problems that we ourselves face. Far too often though, these are pseudo-problems. Think Uber-for-massages or home-delivered groceries. To create meaningful change, however, we must pick the right problems, the ones that matter most, and come up with the right solutions.

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This is not an easy task. It means understanding a whole new industry, learning existing contexts and data relationships, cutting through bureaucratic lines, facing financial and logistical constraints, and making slow progress. Not everyone “moves fast and breaks things.” Sometimes you’ll design for Windows XP. But you’ll be solving real problems. Many up-and-coming companies are recognizing the importance of solving problems in varied fields using technology. Farmlogs is a Y-Combinator backed startup in Ann Arbor, MI, that’s building a platform for farmers to track rainfall, manage crop yields, and plan for the future. PlanGrid, based in New York, allows construction workers to carry

What are the needs of a stressed-out nurse handling multiple patients at 3 AM? How do you design an interface that helps makes her job easier?

their blueprints digitally, track issues, and collaboratively lead building projects. These are fields traditionally untouched by technology, but even a small step has a huge impact. Companies like Farmlogs and PlanGrid highlight the growing prevalence of technology across all industries. What’s more important, however, is that their success stems from great design. In industries that have operated the same way for years, resistance to change is only natural. Good design, by being intuitive and elegant, not only solves a problem, but also helps that solution be welcomed and implemented. So, where do you start? If you’re a designer, reach out and find projects in need. Work with local non-profits, support university efforts, or find projects online that need design help. In the long term, consider where you want to have impact. Don’t allow trends amongst peers decide for you where you are going to concentrate your efforts. No matter what you do, remember that even a small contribution to a project in need will improve the experience for many and truly have an impact on the world.

Intercollegiate Finance Journal • SUMMER 2015

Making an Impact

A look at the real effects of a new investing philosophy by Adrija Darsha

PHILANTHROPIC DONATIONS Charitable giving with no expectation of financial return.

PROGRAM-RELATED INVESTING Donations given as seed capital with expectation of operational sustainability through mentoring by investors. VENTURE PHILANTHROPY Return of the principal investment expected; possibility of market return, as well as of social performance. IMPACT INVESTING Investment in companies whose primary goal is delivering social and environmental good, whilst also delivering competitive market returns. ESG INVESTING Limiting investments to companies that track and evaluate their performance against key environmental, social, and governance metrics. SOCIALLY-RESPONSIBLE INVESTING “Do no harm” investing in listed stocks that avoid ethically questionable companies (e.g. tobacco, coal, casinos). TRADITIONAL INVESTMENTS 100% driven by maximization of short-term financial gain. 38

or some time now, startups have been “the investor’s buffet.” With no shortage of companies looking for funding and a wealth of venture capital firms, investors can choose a startup to back with very practical hopes that it will return an appreciable profit. In fact, in August 2014, a mobile security company called Lookout raised $150 million in venture capital, taking advantage of the rising demand for cyber-security products. This enthusiasm for the advancement of technology can be seen all around the nation, and it’s growing. But what if this same excitement and innovation for raising money could be applied to social and environmental issues? What if people began investing in the well-being of our planet and our people as forcefully as they do in new smart-phone apps? The possibilities are numerous — and the good news is, it’s already happening. A New Type of Finance The term for this idea is “impact investing.” According to the Global Impact Investing Network, impact investments are investments made into companies and organizations with the intention of generating social and environmental impact, along with a financial return. In the past, this was done in the form of philanthropy, regulation, and socially responsible investing. Large companies and organizations would play their part by simply avoiding investing in certain companies with negative effects, or actively supporting those that were in line with the companies’ moral beliefs. For example, some businesses would avoid investing in alcohol, weapons, or contraception. Around 2007, the term “impact investing” emerged, and with it, a culture associated with investing in the good of society. Soon, impact investment firms, such as Imprint Capital and Global Partnerships, started popping up around the country. These firms aim to work with clients to develop impact investment programs in line with their specific mission objectives and financial parameters. They also offer comprehensive financial and impact reporting to clients, so that they can see what their money has achieved.

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Careers

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These significant drawbacks suggest that the true popularity and financial success with Tesla lies not in its eco-friendly claims but rather its aesthetic allure.

Initiative Fund enables women-run businesses in Africa and Latin America to export into markets that pay premium prices for their products and generate higher incomes for women and their families. While these organizations are not too well-known, the small steps they take towards social and environmental change pave the way to a better, progressive society. On the other hand, the most wellknown “success” story with impact investing is Tesla Motors. Since its inception in 2003, Elon Musk, the owner of Tesla Motors, has maintained that the company’s primary long-term goal was to create affordable electric vehicles. Tesla Motors has garnered high-profile investors such as Google co-founders Sergey Brin and Larry Page, former eBay president Jeff Skoll, and Hyatt heir Nick Pritzker. In 2006, Musk received the Global Green product design award for the Tesla Roadster. However, recent reports and user reviews show that Tesla cars are not all that they are cracked up to be, leading to an interesting case within impact investing.

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Investing in Social Change One firm that Imprint Capital has invested in is Dayspring Programs, a not-for-profit organization in East Baltimore that supports parents recovering from substance abuse. Dayspring Programs provides children with a stable environment through safe housing and education. Funds invested in Dayspring have allowed it to expand and serve more people throughout Baltimore. Another firm Imprint Capital has invested in is Lyme Timber, a timber investment management organization focused on the sustainable management of forestland and rural real estate with high conservation value. With the help of impact investing, Lyme Timber currently has over $175 million and 450,000 acres of timber assets under management in the United States. In addition, more than 90 percent of its properties are protected under working forest conservation easements and are certified by the Forest Stewardship Council (FSC) to enhance ecological value and community benefit. What Goes Around Comes Around The two preceding organizations show high social and environmental impact. Meanwhile, other Imprint Capital investments, such as The Women’s Initiative Fund, result in financial return as well as social change. The Women’s

Keeping Up with the Hype? While they are certainly growing in popularity, Tesla motors are not as environmentally safe as one would think. For one, the electricity the car runs on requires coal-burning power plants that emit not only carbon dioxide, but other harmful gases such as nitrogen oxides and sulfur dioxide. In addition, the processes used for manufacturing the lithium-ion batteries used in the cars are more environmentally destructive than those used to produce gas-powered cars. These significant drawbacks suggest that the true popularity and financial success with Tesla lies not in its eco-friendly claims but rather its aesthetic allure. While impact investing has a lot of potential, as seen with Dayspring Programs and Lyme Timber, the actual im-

pact of investments made in the name of societal benefit do not always work out as planned. In some cases, as with Tesla Motors, the actual “impact” they have do not seem to have as much of a priority as it is a nice accent to add to a primarily financial investment. The effectiveness and true lasting impact that impact investing has had on our environment and society is largely debatable. With organizations like Dayspring Programs and The Women’s Initiative Fund, the impact has been local, but very tangible — many lives have been changed for the better because of these programs. However, the improvements large companies such as Tesla Motors have made on the environment are a little harder to gauge. Fortunately, there are people truly interested in investing in social and environmental good, and companies like Imprint Capital are there to help them make educated investments. Many large companies are certainly jumping at the idea to endorse companies and organizations with values they believe in. Given the current state of affairs, impact investing seems to be a growing trend. And only once its effects can be more rigorously examined is this trend likely to change its course.

Intercollegiate Finance Journal â&#x20AC;˘ SUMMER 2015

NSA Headquarters Office

Hiring at American Intelligence Agencies

Google Headquarters Office

Careers

Recruiting Young Talent in a Post-Snowden Era by John Palmer

n Feb. 20, 2015, director Laura Poitras and the cast of “Citizenfour” accepted the Academy Award for Best Documentary Feature. The film covers Edward Snowden during his initial leak of classified NSA documents, most of which occurs in a hotel room in Hong Kong. In her acceptance speech, Poitras thanked Edward Snowden for his actions and warned of the severity of surveillance in the United States. The film’s celebration by the Academy highlights how widespread the news of these leaks has become, and underscores how important Americans believe this issue to be. While it is a controversial one, the story of Edward Snowden has evoked similar feelings amongst younger Americans: those of support for Snowden and anger towards government agencies’ betrayal of citizens’ privacy. These sentiments only add to the number of difficulties facing government intelligence agencies when it comes to recruiting, and a cultural shift in this direction could have huge effects on the future of these agencies.

ects you cannot work on in industry. If you get the right job, it is like being a kid in a candy store.” Providing that kind of access to advanced technology might be the greatest strength these agencies have in their recruiting arsenal today, but they also might have a new greatest weakness. In the past, those working in intelligence agencies felt a sense of nobility towards their work, and many still do. The entire purpose of these kinds of agencies is to protect the United States from potential dangers. The problem is that that kind of mentality is being toppled by younger generations’ sentiments in a postSnowden era.

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A Separate Culture In recent years, it has become more and more clear that while still doing highly technical work, these agencies differ significantly from other tech companies in terms of culture. While most tech startups today strive for a highly relaxed work environment, intelligence agencies maintain a higher degree of rigidity. In May 2014, FBI Director James Comey stated that the agency was “grappling with the question right now” of whether or not to change its policies on marijuana. As the policy currently stands, no FBI job applicant may have smoked marijuana in the past three years, or have used any other illegal drug in the last ten. While the policy may seem like a tiny detail, the FBI has lamented the fact that because so many potential employees smoke or have smoked marijuana, recruiting top candidates can be difficult.

What’s the Attraction? Despite details like these slowing them down lately, agencies like the FBI and the NSA have still succeeded in hiring talented employees in the past. Even amongst differences in culture and pay, employees at intelligence agencies have a few strong reasons for choosing to work there. A former NSA employee writes, “Places like NSA, NASA, and DARPA have proj-

While most tech startups today strive for a highly relaxed environment, intelligence agencies maintain a higher degree of rigidity.

Charity Pay Is Not Just About Giving A Look at High Salaries in Charitable Organizations by Jason Cheng

hat is the purpose of a charity? The prevailing answer to this question is simple: to facilitate the donation of money to those in need. When it comes to charitable organizations, nothing is more important than the appropriate allocation of funds. However, conflicts arise when charities don’t play by these rules. In recent years, controversy has surrounded reputable charitable organizations giving high salaries to their CEOs. CEOs of the largest charities in the United States earn salaries exceeding $1 million, according to a 2011 study by Charity Navigator. In the public benefit category, the highest paid CEO, Jonathan W. Simons of the Prostate Cancer Foundation, received a compensation of $1.2 million. In stark contrast, the median pay for CEO’s of public benefit charities is $151,197. Many people would chastise the irresponsibility of such charities, since donations should be used to improve the lives of those in need, not to fulfill the material needs of high-ranking executives. Furthermore, involvement in charitable organizations should not be for monetary gain. The problem with the existing paradigm is that many fail to realize charities require the same resources and freedoms that for-profit businesses enjoy in order to be effective stewards of their funds. Instead, charities should be encouraged to act like private businesses in order to achieve success.

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Looking Forward A 2013 poll by USA Today showed that 60 percent of people aged 18 to 29 believed that the leaks by Snowden served the public. These young Americans have shifted from seeing intelligence agencies as a source of protection to more of an invasion of privacy. Without the dignified reputation in the eyes of Americans, these agencies risk a severe loss in the number of new applicants. The next several years will reveal a lot about recruiting at government agencies, but it’s likely that we’re in for some significant changes. As current employees at these groups grow older and begin to retire, agencies will rely more and more on the availability of young recruits. And if public perception robs intelligence agencies of a positive public image, there may not be enough left to attract the best and the brightest.

Importance of High CEO Pay One of society’s toxic beliefs about charities is criticized by Dan Pallotta, an American entrepreneur and humanitarian activist, during a 2013 TED talk. Specifically, charities are discouraged from incurring high compensation costs because society dictates that it is morally wrong and practically irresponsible for a charity CEO to earn large sums of money while helping others. What many fail to realize is that a high salary is more likely to incentivize talented individuals to become involved in charitable work. Furthermore, talent

Intercollegiate Finance Journal • SUMMER 2015

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CEO Compensation packages Median Compensation vs. Highest Compensation

part of the solution. The other part involves the medical community — rising to the challenge, they have come up with both occupational and technological innovations that will push health care in a new direction.

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and quality human capital is instrumental towards an organization’s success. In a 2013 Georgia State University study, CEO talent is found to have a substantial impact on firm value, although it varies across industries. In the same way, a charity can succeed if it attracts top talent with high salaries. Subsequently, the charity will be driven forward by the CEO’s vision and enhanced through a stronger organizational culture and greater efficiency in utilizing funds. On the other hand, high CEO salaries are only justified if the charity is using other funds responsibly and effectively. Wasteful spending on failed ventures draws little sympathy from donors and funds will begin to dwindle if the CEO does not guide the charity in the proper direction. How then can charities effectively evaluate whether or not a CEO deserves a high salary? For one, consistent performance appraisals must be carried out. CEOs should be rewarded based on tangible measures of the charity’s success, as well as their ability to lead, strategize, manage, inspire and innovate. Such evaluations hold CEOs accountable to the charity and its donors and ensure quality performance. Necessary Costs A paradigm shift in understanding charities also allows us to embrace other “wasteful” charitable costs. In the talk, Palotta challenges the belief that charities should minimize overhead costs in advertising, marketing, and fundraising. Many people are convinced that spending on overhead costs is wasteful, but such prejudice is unfair. Expenditures on promoting the charity and its cause are essential in bringing awareness to the organization and the parties it serves. Furthermore, advertising has the potential to bring in greater sums of money by reaching

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audiences who might otherwise be oblivious to the cause. The same applies towards marketing and fundraising, as both activities achieve the ultimate goal of charities: to increase resources available for a good cause. Response Despite society’s major advances, poverty and injustice remain and the impact and resources of charities are more necessary than ever. However, it is important to remember that charities, like all other organizations, need money to survive. Attracting talent through higher salaries and spending more on “wasteful” activities are indispensable factors that contribute to a charity’s success. Charitable work is not merely an emotion-driven gift to those who are desperate, but rather a business model that requires sustainable income and impact.

The Future of American Healthcare

How New Career Paths will Revitalize a Dying Sector by Robert Ju

et’s face it: American healthcare is in poor health. With the Affordable Care Act sending shockwaves through the medical community and other issues like defensive medicine, perverse incentives, and a lack of transparency plaguing our healthcare system, it’s clear that something needs to be done. The Affordable Care Act definitely tries to solve the problem, but is only

IS THE AFFORDABLE CARE ACT THE SOLUTION? Five years ago, President Obama signed a piece of legislation that would fundamentally change the structure of the American healthcare system. Among other things, the ACA increased Medicaid eligibility and established an individual mandate on insurance with the goal of increasing accessibility to healthcare. But the law seems to produce other points of concern at the same time. One major element of the ACA is the establishment of the Hospital Value Based Purchasing (VBP) Program. The VBP Program essentially grades hospitals on a variety of criteria and penalizing healthcare providers if these standards aren’t met. The issue with the VBP Program is that it creates perverse incentives for physicians to color within the lines of the criteria. For example, since one of the outcome benchmarks is the hospital’s 30-day mortality rate, the Kaiser Health Organization notes that physicians may now think twice about admitting sicker patients. Another perverse incentive that the ACA introduces is the idea of dodging the federal mandate. For example, although it is still being debated in the Supreme Court, the King v. Burwell case could potentially strip eight million people from their insurance who otherwise would receive it from ACA provisions. King, among others, are suing because they believe that the state and federal subsidies granted for the individual mandate under the ACA exceed the authority granted to Congress. This Supreme Court case runs counter to the spirit of the ACA. Regardless of whether it is net beneficial or not, it’s clear that the ACA creates new issues in the process of fixing the old ones. CONCIERGE MEDICINE: THE DOCTOR NEXT DOOR Two of the largest issues with health care right now are the expansion of coverage and the increase in insurance paperwork. The ACA expanded insurance coverage to 34 million more people, and the new health care diagnosis codes make insurance paperwork substantially harder to complete. The overall result? Patients are going to wait longer in line for their turn, and doctors are going to spend more time with insurance forms and less with patients. In light of these problems, an emerg-

Careers

ing trend among doctors is the practice of concierge medicine. Concierge doctors charge their patients a “membership fee” on a monthly, quarterly, or yearly basis. In return, their patients get unlimited access to most services provided by the physician in his or her office, with vaccinations, lab work, and other more uncommon services provided on a separate for fee basis. Concierge doctors see fewer patients than hospital doctors, with the average clientele ranging between 50 to 1,000 patients. In contrast, the average traditional physician sees 3,000 to 4,000 patients per year. This private model essentially fixes both of the aforementioned problems — patients will enjoy the increased availability of concierge doctors, while doctors will appreciate how little paperwork they have to do in comparison to their previous insurance paid jobs. Concierge medicine is unique because it alters the patient-doctor dynamic. With a much smaller patient load, concierge doctors get to spend more time with each patient as opposed to rushing through them on any given day. While this will strengthen the patient-doctor relationship, it comes at the expense of exacerbating the physician shortage.

patients not only save hospital space for those who need it more, but also save themselves as much as 19 percent on bills. THE FUTURE OF HEALTHCARE We, as a country, have a lot of work to do to repair some pieces of our

broken healthcare system. But the key is not to cling onto the methods of yesterday, but rather to embrace the emergence of new innovative trends. Time will tell whether these particular methods stay relevant in the future, but one thing’s for certain: the future of healthcare is changing.

CONCIERGE MEDICINE

Breaking Down Modern Concierge Medicine

REMOTE CARE: WEBMD BUT ACTUALLY LEGITIMATE The American Association of Medical Colleges estimates that by 2020, the United States will face a physician shortage of 44,000 specialists and 8,000 primary care physicians. Luckily, our physicians are forward-thinking and already have a few ways of combatting this. Certain specialist physicians have already begun the movement towards decentralized care. Instead of working at the hospital, which has traditionally been the center of healthcare, they now manage their patients remotely. This method has great appeal with radiology specifically, as radiologists can now read images from home or a remote office as opposed to reading them in hospital. The upside of this is that now one radiologist can read images from several local hospitals, reducing the shortage burden. On the primary care side, physicians can reduce their burden by selectively treating patients. Groups have already developed a program called hospital@home in which low-maintenance patients who traditionally would have been admitted into the hospital are now treated at home with a nurse visiting once or twice a day. According to Ezekiel J. Emanuel MD, hospital@home

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