NIC Undergrad Review | Volume 4 | Issue 1 by Nova Investment Club - Undergraduate Division

NยบXX - MARCH 2017 $5,00 Vol. IV - Issue 1 FALL 2017

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C H I N A | C LO S E R LO O K

TURNING POINT? NIC UNDERGRAD REVIEW

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CASE II OF FINANCE IN PYTHON

SUMMARY

Editorial

A Travel in Time

The Opioid Crisis

When voters take the risky path

What will the future of Uber be?

China | Closer Look

911: A AAA Investment

Activist Investment in 2017

Cryptocurrencies & Regulation

Breaking down MiFID II

Social Bonds

Off-Topic: The Eternal Sunshine of the Spotless Narrative

Management of Fashion Companies

To be (Catalan) or not to be

Book reviews: Adults in the Room & Thinking, Fast and Slow

PLUS: Case II of Finance in Python

NUR - NIC Undergrad Review Volume IV - Issue 1

30 NIC UNDERGRAD REVIEW

Editors José Alberto Ferreira Maria Dias Pocinho Co-Heads Francisco Gonçalves Tiago Louro Alves

VISIT OUR WEBSITE Soon available at:

novainvestmentclub-ud.com

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EDITORIAL

The time for choices

“What is success? I think it is a mixture of having a flair for the thing that you are doing; knowing that it is not enough, that you have got to have hard work and a certain sense of purpose.” MARGARET THATCHER

José Alberto Ferreira

Maria Dias Pocinho

s economists, we conceive our world as one where prices, wages, or even political regimes and moral values will end up converging to an optimal equilibrium, and that, in the long-run, all economies will grow. The global crisis of 2008 left few untouched, if any at all, and every country had to make some serious efforts to prosper again. The past 9 years were part of a serious test to our limits as economies and, above all, as societies. Non-economic implications were drawn, which even affected the way we see humankind. However, the test is not over: policies and attitudes exercised over this period are shaping the future of the world, many of them quite unexpectedly. This is the framework for this NUR’s edition: a changing world, where individuals are not rational - the Achilles’ heel of Economics -, and no one actually knows how each one of us will react to changes, and how these reactions will affect the reactions of everybody else. This is to say that the humankind is unpredictable and fears its inherent uncertainty. The reason behind the choice of

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NUR’s theme is twofold. On the one hand, we are living an important turning point in history, where the US and Europe are losing its prominence, where China emerges as the new superpower, where populism and protectionism are winning against globalization. Questions about whether this growth is sustainable, or if the next wave of creative destruction will lead to (again) serious disruptions, remain (and will remain) unanswered. The only certain answer is that there is no answer. On the other hand, this is our last year at NIC-UD, and perhaps, at NOVA SBE – an important personal turning point where the most important and difficult decisions of our lives until now need to be made, regarding what specific field of study or career path we want to pursue, what kind of life we aim to have, what passions we should focus on. We keep questioning ourselves whether the amount of appealing opportunities available nowadays helps the decision making or if it makes it even harder – we are millennials, after all. We should do what we love, what we feel it’s right, but we end up aiming too high, doing everything

and nothing. The focus of our goals is, in fact, the worst part of the decision making. Nevertheless, the past two years at NIC-UD were essential for personal and collective accomplishments. This Club cannot be defined in a nutshell. It would be too simplistic, perhaps even perfunctory. That is a reflection of our evolution, which is not quite linear: every semester, a new class of committed and eager to learn members brings in a renewed sense of novelty and excellency. While assembling this publication, we witnessed that on first-hand. Thus, in different ways, the unique contribution of each member to our personality is one of the most valuable assets we bring with us, and we hope you bring our contribution with you as well. This being said, this semester’s NUR pays tribute to all the effort, ambition and passion that you all have put in NIC-UD. This is our thank you.

Our special thanks to Ana Brás and José Azevedo, for their availability to help us with photos and editing.

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A TRAVEL IN TIME: THE DECEIVING ALLURE OF DAYLIGHT SAVING TIME Daniel Soares

Puff Daddy told no lies when he said “It’s all about the Benjamins, baby.” Benjamin Franklin, in an attempt to inspire and enhance the work of future rappers, came up with the idea of Daylight Saving Time when he jested that Parisians could save loads of money on candles if they got out of bed in the morning rather than the afternoon in his essay to the Journal of Paris in 1784. Albeit more theory than fact, ‘his’ idea eventually caught on. Britain tried to pass DST into law in 1908 and failed, but Germany succeeded in 1916. The United States followed suit for some time during World War I and II. In 1966, Congress passed the Uniform Time Act, which established nationwide dates for clocks rolling forward and backward. States are not required to observe time changes, but those that do must spring forward and fall back at the same time. It would be silly to believe that we could fool Mother Nature so easily without shooting ourselves in the foot simultaneously. ENERGY SAVINGS Franklin theorized that going to bed at dusk and waking at dawn could save Paris money on candles, which might be why many people believe time change is an effective trick to save on energy costs today. In 2008, the U.S. Department of Energy presented findings that confirm this theory. Energy Department experts determined that extending daylight savings time by four weeks under the Energy Policy Act of 2005 saved 5 percent more electricity per day for a total of 1.3 billion kilowatt-hours, a hefty amount. Most of these savings, experts said, could be traced back to three to five evening hours. ENERGY CONSUMPTION INCREASES A study authored by professors Matthew J. Kotchen and Laura E. Grant rebuts the Energy Department’s findings. In their study, Kotchen and Grant looked at energy use in Indiana, a state that began observing daylight saving time in 2006. They compared the demand for electricity before and after the change and

found that time change actually increased demand from 1 to 4 percent a year. Air conditioning usage increased in the summer, while the need for heat increased in the winter. Indiana residents began running their AC about an hour more a day — presumably that extra hour of daylight provided for by the time change. Savings on lighting were minimal at best, according to the study. STUNTED PRODUCTIVITY

Filipe Pereira

Theses findings contrast the theory presented by the U.S. Department of Transportation that more daylight hours imply fewer traffic accidents and injuries. HIGHER RISK OF SERIOUS HEALTH ISSUES Grant’s study also found that people are not just at risk for more accidents as a result of daylight saving time; they’re prone to other health incidents, too. She specifically cites heart attacks, stating that they increase during the spring, which she attributed to sleep deprivation. Grant also said they drop in the fall when people begin sleeping normally again. The University of Alabama at Birmingham concurs. Researchers there in 2012 found that heart attacks increased by 10 percent in March in the days and weeks immediately following the time change. Researchers cited some of the same concerns and causes referred to by Grant: lack of adequate sleep and circadian rhythm gone temporarily awry. They also indicate that the time change affects immune function.

Grant, who was part of the Indiana study, said she feels strongly that messing with circadian rhythm is neither healthy nor productive. In an article for the Foundation for Economic Education, she said that springing forward in March negatively affects productivity. Employees are more prone to error because of sleep deprivation in the days immediately following the beginning of daylight saving time, ultimately costing their employers money. And it’s not just the toll taken by that single hour, which might last only a few days. Additional exposure to sunlight inhibits the production of melatonin, a horDECREASED CRIME mone that promotes sleep. Insomnia can result, possibly lasting longer than the first On a more cheerful note, the U.S. Defew days of adjustment to the time change. partment of Transportation indicates that daylight saving time has a lowering effect INCREASED TRAFFIC FATALITIES on crime rates because many crimes tend to occur in the dark. Grant said she agrees, The University of Colorado at Boulder at least in regard to sexual assaults and muconducted a study in 2014 and found that ggings, which statistically occur more ofdaylight saving time accounted for 17 per- ten at night. The Review of Economics and cent more traffic fatalities that were linked Statistics reports on a 2015 study that fouto springing ahead. Similar results were nd that robbery rates dropped by 7 percent not found in the fall, so presumably traffic following the shift to daylight saving time. accidents are a result of sleep deprivation. Daylight Saving Time is most certainly However, the end of daylight saving an impactful part of our lives. Perhaps the time in the fall signals trouble for pedes- negative aspects put forward seemingly trians. Carnegie Mellon University found outweigh the positives but one must not in 2007 that those traveling on foot were forget the series of potential terror attacks up to three times more likely to be struck that have been thwarted when forgetful by vehicles in the autumn after clocks fall villains fail to account for the difference back, mostly right after 6 pm. The study one hour can make in a bomb’s ticker. found that the “per mile” risk for walkers climbed by a significant 186 percent in the first two months after the time change, then dropped again in December as everyone got back in sync with sunset coming earlier. NIC UNDERGRAD REVIEW

THE OPIOID CRISIS An endless search for euphoria and a legacy built on painsity: It generally starts with a family member or friend, “Try it, it’s just one time!” – the shivers, anxiety, and sweats of the next hour’s withdrawal begs you to take another one. Going forward, more and more are to come, one pill at a time, in a hopeless hunt for that first high. It won’t ever happen again; however, the addiction had settled in, the need has been installed in the system and nothing will ever feel the same. Happy little pills destroying America – opioids are psychoactive substances, including natural opium-derivatives prescription painkillers like Percocet and OxyContin, as well as synthetic substitutes such as Fentanyl. Opioids work on nerve cells – inhibit pain signals and lead to a euphoric effect, resulting in a history of misuse and abuse. America was introduced to opioids, specifically morphine, during the Civil War. This drug was administered to soldiers to reduce pain. The post-war addiction was just an omen of the 2017’s reality which witnesses the epidemic killing roughly 90 Americans every day. In 2015, 38% of adults took prescription painkillers; of these, 12 million did so without medical assistance. More than 650 000 people are expected to die over the next 10 years from Opioid overdoses. The epidemic is growing but also transforming itself – a new demographic of opioid users in the hunt for stronger drugs, as Heroin and Fentanyl, is emerging composed by 30-year-olds whites, middle-aged women, and teenagers from “good families”. Overdose rates skyrocketed in smaller interior cities and rural localities. The plight of millions of people started with a very rich family behind a small innocent pill. Until 1996, doctors limited prescription pills to cases of extreme pain, such as cancer patients, due to the well-known addictive properties – that’s when Purdue Pharma introduced a game changer: OxyContin, which magically, as in without withdrawals, relieved pain for 12 hours. The company funded research to prove that the dependence risk was significantly lower and incentivized doctors to prescribe it in stronger doses and for less intense levels of pain. From 1996 to 2001, annual sales increased 6800%, injected for a fuller experience. Later, the company was condemned for “misbranding a drug with intent to defraud or mislead”, but the $634m in fines were more than offset by the now total sales of $35bn. This “investment” made the Sackler family, owner of Purdue Pharma, one of the richest in the U.S. and a lot of addicts seeking stronger, most of the times illegal, drugs. Throughout history, humans have always sought to intoxicate themselves. The U.S. opioid problem is a result of a blurred division between legal and illegal, wide demand and boom in supply for synthetic drugs whose effects are only discovered once they hit the streets, poverty and a pharmaceutical industry which allows for “drugs cheaper than candy”. Drugs have become mainstream and social media, besides creating addiction and exploring human vulnerability, provides increasing access to fast online iffy deals. Mark Zuckerberg warned about the effects of this

Corina Popa

Leonardo Figueiredo

epidemic on people’s attitudes on policy issues – watching their next-door neighbours surrender to addiction has increased American’s fear of crime and spread support of a stronger border defence to stop drugs from coming into the country. Can the opioid epidemic indeed explain the election results of 2016? The effect on substance abusers, families and communities is evident: generations of children witnessing disruption, every 25 minutes a baby is born with opioid addiction, increasing poverty, more crime, higher unemployment, health care costs, loss of productivity – a total yearly cost of $420bn for the economy. A plutocratic Trump promising to make America great again was chosen by white voters without college degrees in counties that are currently losing battles to prescription pills. The President himself admits that he won New Hampshire because the state is a “drug-infested den”, having made several vows during his campaign to help the people after ten months of taking office, D.J. Trump declared the opioid crisis a public health emergency, pleading everyone to be soldiers in this fight, but refused additional funding as opposed to other wars. Reminiscing Reagan’s “Just say no” campaign, the leader of the free world wants to solve the problem but at the same time is cutting on Medicaid, which plays a critical role in reducing the epidemic, and focusing on building a wall. There are no signs of a reverse in the course of this epidemic or anyone to solve the riddle of how to rescue Americans from this poppy tears’ poison. The U.S consumes 80% of the world’s opioid prescriptions and the largest opium producer in the world, Afghanistan, estimates to double its production this year. Corrupt doctors and pharmacists continue to supply narcotics to the black markets, the marketing of prescription drugs stays aggressive and deceptive, and the industry keeps pulling favours worth millions amongst members of Congress. A wall can keep Mexicans away, but the issue is well rooted within American borders. Addiction is a symptom of an ill society – human beings long for connections with others, and with the lack of this kind of trust and intimacy, people turn to drugs seeking relief from the real world. Solving the opioid crisis requires a change in the way our society deals with pain, both physical and emotional.

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THE ECONOMICS OF POLITICAL CHOICE

WHEN VOTERS TAKE THE RISKY PATH

In the last two decades, both sides of the Atlantic saw a rise in nationalist and populist movements. They used to assume marginal roles in national politics, challenging views towards migration, economic integration or free trade, held by mainstream political parties. However, reluctance towards the latter - “safer” - political options has been increasing: electorates are choosing outside the conventional risk-aversion range of parties or individuals. From Donald Trump to Brexit, including the growing nationalisms in Austria, Germany and France, a new pattern of risk-taking among voters who are willing to take up unchartered paths emerges; and they are reshaping the political landscape of the West. To help us get a clearer perspective on the reasons behind such phenomena, Prospect Theory offers a surprisingly current rationale. Prospect Theory – or “loss-aversion” theory – is a Behavioural Economics theory which describes how people act and make decisions considering risk. Two types of individuals offer a useful benchmark: risk-seeking and risk-averse. Most of the time, humans prefer safety – for instance, most individuals would rather earn a guaranteed, yet lower, amount of money than take a bet where they could win the double but also lose all the betted value. This is the way we have long imagined the utility-maximizing Homo Economicus. Nevertheless, Prospect Theory advocates that this is not a permanent feature: we can either be risk-averse or risk-seeking, depending on the referen-

.... if people perceive that their country has been recently experiencing losses, they will probably seek risk, whilst when they don’t feel that, they will avoid it.

ce point we depart from. Consider the example: you have just lost 100€ playing roulette, which is a significant amount for your pocket; you are then offered 2 choices: you can get 50€ for sure or you can take a risky bet, with equal probability (1/2) of receiving 100€ and 0€. Both alternatives get you, on average, the exact same outcome: a mitigation of your 100€ loss to just 50€, which is why a rational agent would be indifferent to these 2 options. According to Prospect Theory, however, we tend to be risk-averse when the possible outcomes of a certain option are perceived as gains (like earning 50€ for sure), while we tend to be risk-seeking when we already feel that we have lost something valuable, in order to reduce the harm (by taking up the risky bet to recover all of our losses). This concept also describes that we value losses and gains distinctively – depending on how the potential consequences of an action relate to our “zero” reference point. The link between this theory and electoral decisions was first established in the late 1980s, by psychologists Tversky and Quattrone. They concluded that if people perceive that their country has been recently experiencing losses, they will probably seek risk, whilst when they don’t feel that, they will avoid it. In the light of this theory, electoral outcomes in the US presidential election or the Brexit referendum can be better understood: “Make America great again” or “Take back control” were appeals to a lost grandeur of the past - the decades following WWII in the US, and an independent UK that once held the largest empire of its time -, a reference point which depicts today as a period of loss, both economically and socially, albeit not reflected in variables such as income, living standards or educational achievement, that could be used as proxies for social welfare. NIC UNDERGRAD REVIEW

Jéssica Pires

José Alberto Ferreira

THE US PERSPECTIVE Donald Trump’s rhetoric during his presidential campaign had a distinct tone of a lost dominance, focusing more often on the country’s losses, instead of assessing the (new) gains that his presidency would provide to the American people. We could also relate feelings of frustration towards society as a whole with the fact that liberal ideas have been rising in the last decades, in subjects such as gender equality, tolerance towards different gender identities, LGBT rights recognition, among others. Such changes have threatened some traditionalist values, widening the gap between educated people and older people or individuals with lower education levels (alarmed with the possibility of being marginalized). Given that, last year, Republicans put into words this increasing tension and worry about a deeply changing culture, voicing the concerns of an essentially white, male, less educated electorate. With such a sense of lost splendour, some Americans became risk seekers: expectations on Hillary Clinton’s performance as the US president were higher (leading most of the polls), but Donald Trump represented unpredictability a more desirable treat – an image was continuously

Source: Institute for Cognition and Culture

fuelled by contradictory statements, ambiguous political positions and an apparent spontaneity and indelicacy, that Trump himself has already admitted to have been strategic. As a result, the hope in a higher utility of Trump’s presidency grew higher than in Clinton’s, which eventually gave him power. What this surprisingly means, under Prospect Theory, is that when a risk-seeking attitude is adopted, people may opt for smaller gain under uncertainty in detriment of the one that had, on average, better forecasts (i.e. expected utility), but little unpredictability.

nment – and a 6-month diplomatic boycott to Austria by its EU partners. The same party is currently negotiating its coalition terms for the new right-wing government – but sanctions, like the one of 2001, are unthinkable. This may reflect a changing paradigm towards nationalisms: after forming somewhat stable governments in Hungary or Poland, and reaching relevant figures in France or the UK (through the UKIP vote), at the same time that some historical, centre-leaning parties have nearly vanished (the French Socialists and the Greek PASOK are examples of that), nationalists are no longer a marginal player EUROPEAN NATIONALISMS in European politics. But who and what is behind their support? Home to a wide range of territorial and In the recent German federal election, economic disputes for centuries, the Old Continent’s political landscape is not impervious to rising nationalisms. And it is not something new: in the aftermath of the Maastricht Treaty, in the early 90s, several Eurosceptic parties were born, imbued with a nationalist rhetoric. That is the case of the True Finnish, the Swedish Democrats, the Danish People’s Party or the UKIP. When, in May 2017, 34% of French voters sided with Marine Le Pen, they were voting for the same party – the Front National - that, 15 years earlier, had successfully placed her father, Jean-Marie Le Pen, against Jacques Chirac in the second round of the 2002 presidential election – which the latter won with an overwhelming 84% share of the votes. Just one year before, the Austrian FPÖ – the far-right Freedom Party, then led by Joerg Haider – had been placed second in the legislative election, earning several seats in the goverNIC UNDERGRAD REVIEW

the right-wing, antimigration AfD – born only 4 years before - achieved 12.6% of the votes, becoming the country’s third largest political force. The bulk of its support came from the former East Germany, where unemployment is above the national average, schooling is lower and foreigners make a smaller share of the overall population. Seemingly, a demographic analysis of the Brexit referendum depicts a tendency for “leave” vote in areas where population is older, travel abroad less, and with lower qualifications. Standard economic theory states that social unrest and inequality drive nationalism. While that might be the reason behind the popularity of Greece’s Golden Dawn during the height of the crisis – when unemployment reached 28% -, the electoral outcomes in Germany and the UK, or in the Netherlands and the Scandinavian countries show that an alternative approach, such as Prospect Theory, is required, to understand the fact that even among the most developed, welfare societies of our times nationalism thrives. This has led researchers to point out a long-term generational shift, translated into a systematic erosion of religious practices and beliefs (Norris & Inglehar, 2011) growingly replaced by more secular values -, a reinforcement of universal freedoms (that sociologists refer to as “emancipative values”) and the spread of a transnational cosmopolitanism, as evident in the World Values Survey database. This change leaves cohorts of the population behind, generating a cultural backlash with respect to ongoing changes, leading Europeans, just like North-Americans, to consider somewhat more uncertain political options, that might offer the possibility – no matter how (un)realistic – of overcoming their perceived losses. Source: Bloomberg.

WHAT WILL THE FUTURE OF UBER BE? Francisca Soares

Uber Technologies Inc. is a transportation private company co-founded in March 2009 by Travis Kalanick and Garrett Champ. Through a mobile app and website, it offers car transportation and food delivery e-commerce services in 83 countries, over 647 cities throughout the globe. As it is a cheaper, faster and more comfortable substitute to taxi cabs, Uber quickly became a phenomenon. Concerning Uber’s financials, the firm’s valuation reached $68.5 billion in 2017, according to Bloomberg. Uber’s net revenues have been growing from 2013 to 2016 at an yearly geometric average growth rate of 139%. As for its gross bookings (total value of fares paid to drivers), they summed up to $685 million in 2013 and hit the $20 billion milestone last year. Recently, Uber disclosed to possible investors that this year’s target is between $38 billion and $42 billion. The question is whether the private company will be able to achieve it or not. Although these numbers sound impressive, the company has been facing several setbacks: negative net income reports, decrease in the gross US bookings, regulatory scrutiny and lawsuits. According to Bloomberg, in Q3 2017, Uber Technologies registered $1.46 billion net loss which represents a 38% increase compared to the $1.06 billion from the previous quarter. Moreover, the decrease in the gross US bookings is also a big driver of fear for investors as the United States are Uber’s most exploited market. 2017 has not been an easy year for Uber. This year, the company lost one lawsuit in London, compromising its operations in the city, which is a setback that might take years to recover from. Also, Uber admitted a hack in December 2016, disclosing personal data of approximately 57 million passengers and drivers, which led to the resignation of its chief security officer, Joe Sullivan. Finally, the technology company business ethics are in the spotlight as the company faces multiple allegations on aggressive competitive business practices, human surveillance and sexual harassment and discrimination in the workplace. These are evidently not positive outlooks for the Uber’s future… So, the questions that arise are: will the lawsuits remain forever? Will the company ever be profitable? And what is a credible forecast of its course of action? Firstly, it is very important to acknowledge driverless cars as an eminent reality. Some companies have been developing this technology for quite some time and it is, in fact, expected to be of use in a few years. This is a vital matter because, nowadays, one of Uber’s most demanding obligation is to pay its drivers. Removing this input from the equation would allow the company to reduce costs and increase its efficiency. Robots don’t need vacations nor pay-out and their interests will always be aligned with the managers’, thus eliminating any arising Agency Problem. However, the company can’t wait for this revolutionary technology. It must take action now since shareholders won’t accept losing money forever. Uber needs to implement

Sofia Moura

a strategy of cutting costs, increasing their gross margin and, if this is not enough to reach a breakeven point, it will need additional funds to keep on financing its deficit. Meanwhile, SoftBank offered to buy $1 billion of new preferred shares from Uber previous valuation of $68.5 billion, injecting cash into the technology company. Besides, as the second part of the deal, the Japanese group has also offered to buy shares from existing Uber shareholders at a discounted price, valuing the company at $48 billion, 30% less than the previous valuation. Although this valuation reflects Uber latest crisis and the normal discount from the nature of the stocks (common shares), it is still important to take into consideration that the company’s value has already written down 15% this year.

One of the possible paths for Uber would be to IPO, which is expected to happen in 2019. This scenario seems now more feasible as the $1 billion possible investment by SoftBank would represent a major contribution to the company’s reform. Still, prior to the IPO, Uber will need to build a strong marketing campaign to improve its image and solve its legal issues worldwide. In order to do that, the company might feel the need to invest in its lobbying powers. Additionally, Uber has been expanding its core business through a service called UberEats. It was launched in 2015 and is already operating in 108 cities. This stemmed namely from a large platform already established which enables the company to easily provide the service to its customers. According to the New York Times, as of July, UberEats has been profitable in 27 of them. In the US, UberEats has, so far, been able to acquire 8 million active users and the company has also spread, this year, its delivery capacity to 40 new cities across the United Kingdom. Summing up, the new CEO, Dara Khosrowshahi, appointed after the pressured resignation of Travis Kalanick earlier this year, faces great challenges ahead. One of them being the implementation of the new mantra: “We Do the Right Thing. Period.”. We’ll have to wait for the next quarters to see what Khosrowshahi and his team will be able to do about Uber’s current situation.

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C H I N A | C LO S E R LO O K

TURNING POINT? Decades ago, Deng Xiaopingâ&#x20AC;&#x2122;s reforms paved the way to private initiative. Today, venture capitalism in China is reaching proportions that few could have expected for a state-controlled economy. Not immune to market pressures, the tight rule of the Communist Party - whose separation from the State is as opaque as ever before -, is also undergoing transformation, as Xi Jinping hints at the return of strongman politics, lost since Mao, with purges involving over 1-million party officials. Businesses and governance are changing in China, in a delicate balance of old and new, capitalism and socialism.

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CHINESE VENTURE CAPITALISM WAVE

THE BLAST AFTER THE BOOM A bat’s wings are now spreading across the world faster than we can perceive - not that we would note this and not that we would care at first sight. Not any bat, not the (mainly) nocturnal mammal is capable of such a sustained flight. For our purposes, our concern is BAT, an acronym that stands for Baidu, Alibaba, and Tencent. These are three Chinese internet giants. Above all, they are three success stories; they are the epitome of China’s latest venture capitalism wave. This booming ecosystem, however, is not the result of an overnight flow of capital. The conditions were set for the Chinese startup scene to become one of the largest in the world, only surpassed by the United States of America. Only last year, $31bn was invested by Chinese venture capitalists, according to a study provided by KPMG. This represents three-quarters of equivalent investment within the United States. Thought this investment might appear to the untrained eye as a hedge against some sort of market instability, what is happening in China is bigger than that. FOMO. Another acronym. It is the biggest factor in this age of investment. Why does FOMO contribute to investors’ anxiety? According to the incredibly well-sourced Urban Dictionary, FOMO is a state of mental or emotional strain caused by the fear of missing out. The fear that if you miss an event you will, therefore, miss something spectacular, that you will forgo the greatest opportunity in your existence. For investors, this opportunity is an investment in the early stage of a startup that could potentially be worth millions (at least). FOMO is the incessant strength that has been fuelling and financing the startup scene in China. However, if we had to consider an economy where rationality is ever-present and all-encompassing, let us then imagine a hypothetical inexistence of FOMO. What else has been driving China’s move in the venture capital industry? Our take lies in three areas

that impact any enterprise: the economy, customers, and technology. ECONOMY Almost 40 years ago, in 1978, members of the Communist Party of China, guided by Deng Xiaoping, started a program for China to embrace free-market principles. Divided into two stages, this program firstly implemented strategies such as: allowing (1) foreign investment inside the country, and (2) individuals to start enterprises (that were not state-owned, as the majority of the industries were at the time). Later, deregulation and privatizations of state-owned companies took place, reducing the protectionism that had become a standard in for the country. These measures allowed the private sector to flourish , and helped the economy at the same time. Another key factor lies in the size of the Asian market, which allows startups to grow big and fast without leaving the continent. Coupled with loosening regulations, this reality created a cycle where the openness of the economy helped new ventures getting funding and flourishing while the local economy profited from these ventures. In fact, from 1978, the GDP growth of the Chinese economy averaged around 10% a year. However, this type of sustained growth has its drawbacks, such as inequality and quick urbanization. According to the Hurun Research Institute, China has the highest number of billionaires - yet, the country is still very much developing, especially rural areas. In fact, China’s GDP per capita is 55% below the global average CUSTOMERS Despite China’s history as a technologically advanced country for nearly 700 years during its scientific revolution, after the establishment of the People’s Republic, in 1949, China revamped its scientific institutions, adopting Soviet measures. This meant people did not have access to new technologies and the wonders of the West. While the telephone was nearly NIC UNDERGRAD REVIEW

Carlos Gonçalves

Diogo Conceição

Manuel de Oliveira

...the size of the Asian market, which allows startups to grow big and fast without leaving the continent. Coupled with loosening regulations, this reality created a cycle where the openness of the economy helped new ventures ...

In fact, it was precisely this interest in technology from both the common people, and those who have made policy in China that allowed for the extremely high levels of investment in the technological field.

fully established, computers were in development, and even the cellphone was appearing, China remained trapped in time. This was the case until the Four Modernizations, which comprised of an increase in investment in agriculture, industry, national defense, science, and technology. Though first proposed in 1963, this only took effect in 1977 following Mao Zedong’s death and the rise to power of Deng Xiaoping. When the Chinese finally began to have access to new technologies, they embraced it completely, and are now considered to be the most tech-savvy customers in the world - , and this trend that shows no signs of stopping, as, according to Guangzhou Daily, “some children use social media as early as 3 years old, go online shopping at 7, and surpass their parents level of internet skills by the age of 14”. This means that Chinese companies (e.g., BAT) need not do not need to sell to foreigners in order to become massive. Their own country’s vast and incredibly tech-savvy population is enough. TECHNOLOGY Already in 1963, Zhou Enlai, who proposed the Four Modernizations, understood the importance of technology to achieve long-term growth. Luckily for the Chinese people, Deng Xiaoping thought the same. The fact that China was so far behind the West technologically, coupled with its immense ambition to become the technological world leader - , with concrete

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goals like creating a moon base, leading in high-performance computing, and surpassing the US’s semiconductor dominance -, have resulted in decades of unparalleled and unprecedented growth. In fact, it was precisely this interest in technology from both the common people, and those who have made policy in China that allowed for the extremely high levels of investment in the technological field. Ultimately, China is now one of the frontier myths of entrepreneurship and venture capital. Regardless of whether this wave of entrepreneurship is justified, it is a fact and it is happening. BAT and other companies like WeChat are very much proof that the startup world in China - and, if truth be told, in much of southeast Asia (at the least) - has tremendous potential. The question now becomes: will it be as sustained as China’s GDP growth? Will its rise accompany the economies of southeast Asia in a manner that is fundamentally sound? Or will we witness a new age of financial shenanigans in a country that is involved in a belligerent trade relationship with the United States and where property rights are not enforced?

XI JINPING CROSSES THE RUBICON A Coup with Chinese Characteristics?

The momentous significance of the 19th Chinese Communist Party Congress was epitomized in the early morning hours of the 25th of October 2017, as the Peopleâ&#x20AC;&#x2122;s Daily was slowly distributed across newsstands all over China. The front page demonstrated, in a succinct and clear manner, a paradigm change in Chinese politics. NIC UNDERGRAD REVIEW

Filipe Pereira

Below, from far away, and barely recognizable, are the chosen members of the Politburo Standing Committee, the highest body in the party’s administrative hierarchy. Although in principle there is no strict hierarchy in the standing committee, it should be clear to anyone who glances at the front page who is in charge: Xi Jinping, the stolid face on top. It is instructive to compare this front page with its equivalent in China’s last political cycle, after Hu Jintao was re-elected in the 17th National Party Congress. Although Hu is distinctly privileged over the PSC’s other members, the contrast between the president of the People’s Republic and the remaining members is nowhere near as clear-cut. In fact, the prominent display of Xi’s figure in the front page draws only resemblance to the Mao era. Of course, there is not much we might infer from the configurations of a front page. Nevertheless, being the party’s mouthpiece, these changes tell us something about what the ruling circle wants to project to the exterior about itself, and therefore give us essential information about inner power struggles. Ultimately, a message seems to be clear. The 19th National Party Congress seems to have signalled the end of collective leadership in China. Or has it not?

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THE PARTY AND THE STATE Before we can draw any conclusions about the recent party congress, it would be helpful to first understand the exact purpose of this event, and for that it is necessary to fully appreciate the framework of the Chinese Communist Party. A defining aspect of the People’s Republic vis-á-vis western democracies is how weak the state itself is - although in traditional liberal democracies political parties are subordinated to the state, in China the state is merely a vehicle for the projection of the party’s influence. In practice, this means that only party apparatchiks are considered for government positions, and ultimately that the country is steered by the Politburo and not by the State Council (although positions in both bodies are generally overlapping). Regarding the party’s organization, its elementary building blocks are local organizations, which are formed in firms, schools and other communities across China. These grassroots units choose, through a plethora of local congresses, 2 268 members who, every 4 years, represent them in the National Party Congress. This Congress’ main function is to draw up the list of members of the Central Committee, which will meet once per year in plenary sessions, and the Central Commission of Discipline Inspection, the party’s anti-cor-

ruption arm, which has gained relevance as the main instrument of Xi’s “crusade” against inner party graft. The Central Committee then decides on the composition of the two top ruling bodies of the party: the Politburo and its Standing Committee. Although this process does seem to be a quasi-democratic election, it is essentially a top-down procedure: the upper rungs of leadership carefully guide the process of selection of decision-makers. Although beyond the scope of this article, the state hierarchy is heavily reminiscent of the Communist Party’s structure. An understanding of this framework greatly aids the appreciation of this year’s congress’ meaning. However, to be able to recognize the consequences of the congress, and to be able understand how it differed from past ones, some historical context is needed.

sus-based approach to governance, which requires “a division of responsibilities among individual leaders in an effort to prevent arbitrary decisionmaking by an individual leader”, according to a party communiqué. Deng Xiaoping was the foremost advocate of this concept, believing that “the key to China’s stability lies in the collective leadership of the Politburo”. Along with this concept, a set of norms regarding the selection of members for the several ruling bodies of the party was drawn. For one, leaders at the top rung are expected to serve at most two five-year terms. They are also expected to retire when they reach 68 years of age. And traditionally, a successor to the general secretary is inducted into the Politburo Standing Committee midway into the current secretary’s term. For Xi, this would be this very congress - however, no potential successor is among the five new faces in the PSC. COLLECTIVE LEADERSHIP AND THE Xi Jinping, however, seems to have FAILURE OF STRONGMAN POLITICS strewn the concept of collective leadership aside. Are we witnessing a watershed moIf one were to take a leisurely drive ment in Chinese politics? across any part of China, one would think Mao Zedong, the People’s Republic first 2012: A YEAR OF NO SIGNIFICANCE General Secretary, is widely revered, not only by the general population, but also From the moment he was chosen as by the ruling class. Mao’s face is plastered the party’s general secretary, in 2012, Xi everywhere: bulding facades, local family- Jinping asserted himself as bold and active -owned shops, giant billboards. One can reformer, distancing himself from the conbuy not only framed pictures, but also ci- sensus-based politics that characterized garette lighters, ballpoint pens, teacups and Hu Jintao’s decade-long tenure. key rings with Mao’s picture on them. Xi’s first substantial undertaking was a Despite this background of adoration, decisive and forceful conclusion of the Bo senior officials are reticent about a return Xilai trial, which also foreshadowed Xi’s to the Mao days of strongman politics. They wide-ranging anti-corruption campaign. have grown to use their political power to The latter, led by “anti-corruption tsar” acquire material wealth, and therefore have Wang Qishan, is remarkable not only for come to be increasingly concerned about its scale, with roughly 172 000 cases inproperty rights. The concentration of power vestigated in its initial year, but also for its on a single person exposes them to the arbi- wide scope: one of the most notable victrariness of strongman rule, and might de- tims of the campaign was Zhou Yongkang, prive them of their ill-acquired wealth. a Politburo Standing Committee member Short-sighted self interest is not the only who controlled China’s security apparatus reason for wariness of another Mao. When for a decade. Such high-level purges have a leader reaches a stature level with that of not been seen since the Mao era. Mao, he is conflated with the state itself. Much ink has been spilled on the exact Going against Mao would be going against purpose of Xi’s antigraft endeavour. It China - his name is peppered all along the would be endlessly naive to assume the party constitution (which, in China, is the campaign is a genuine attempt to clamp state constitution all but in name). As such, down on party delinquency. Such a prothere is zero tolerance for dissent against gram would be meaningless in China tothe leader’s wishes: it is easy to see how this day, where corruption is the grease that mindset paved way for the excesses of the oils the cogs of the state’s bureaucracy. Cultural Revolution. And it is for this very In fact, even though Xi has always been reason that Xi’s successful attempt to graft careful to project an image of moral rechis name to the party constitution should titude, his family holds significant assets, be a concern for anyone with a passing in- among them a £20 million villa in Hong terest in China. Kong, and a stake worth £188 billion in “Collective leadership”, a concept intro- Shenzhen Yuanwei, a property investment duced by the party leadership in the mid company, according to a report by Bloom90s, was the elite’s solution to the problem berg dating from 2012. posed by strongman politics. It is a consenIt is also commonly postulated that the NIC UNDERGRAD REVIEW

antigraft campaign is merely a political instrument to root out elements agressive to Xi Jinping’s clique. This claim, however, does not hold much water either. The sheer scale of the campaign argues against such a notion, with more than a million members of party having been disciplined: not all of them could possibly be Xi’s rivals. In fact, the anticorruption campaign seems more likely to be an organized move to harvest political capital for Xi and his clique. The highly publicized nature of the corruption trials makes sense given such a purpose - politically-motivated purges are more likely to be done in a hushed manner. As such the campaign helps Xi to cultivate a paternalistic image of himself, looking out for the well-being of the people. Another significant trend that has been evident during Xi’s tenure as president of the People’s Republic is the transfer of power from the Chinese government to the party. The State Council, China’s cabinet, has gradually lost its relevance, with decisionmaking being transferred to what are termed “leading small groups”, informal bodies of party members which develop and implement policies on specific areas, many of which are led by Xi himself. This configuration has contributed to a more opaque policy process, although Xi is convinced of its virtues: “The party, government, military, society, education, north, south, east and west - the party leads everything”, he stated on the National Party Congress.

Source: author.

HALF A DOZEN HEROES AND ONE WICKED MAN All this leads up to this Fall’s National Party Congress, and to the climactic moment when the seven members of the Politburo Standing Committee, five of which are new to the body, walked along the red carpet and announced themselves to the world. International coverage of the event was one-sided, seemingly interpreting it as a demonstration of Xi’s consolidation of power. “Only [Xi] matters” of the seven men in the committee, asserted CNBC. The event “was a display of the political power amassed by Xi”, according to the NYT. The FT also toed the line, arguing that Xi “stands at the beginning of a new era of dominance”. And there is much to back these headlines. “Xi Jinping thought” was inscribed in the party constitution, a first since the death of Mao. None of the members of the PSC seems to be poised for succession, as all are near the informal retiring age. However, at closer inspection, the balance of power is not as lopsided as it seems at first sight. Wang Qishan - Xi’s right-hand man and a key element of his anti-corruption campaign - retired, respecting the party’s implicit rules, against rumours that Xi might brush away party etiquette to keep a valuable ally. In this sense, it might be more relevant what did not happen

than what did: Xi did not dare to break the party’s norms of selection. More revealingly, the new Politburo Standing Committee is hardly a group of yes-men. Li Keqiang, who stayed on from the previous committee, and Wang Yang, a new member, are protégées of Hu Jintao. Two of the new members, Han Zheng and Wang Huning, are confidants of Jiang Zemin. This conjunction of factors can qualify the outcome of this Congress as paradoxical. Albeit Xi Jinping asserted himself as China’s strongest leader since Deng, the composition of the Politburo Standing Committee reveals a need to compromise with opposing factions. CHINA’S FUTURE It is very difficult to believe in a return to strongman politics in China. China is a fundamentally different country from the one that Mao lorded over - an emerging middle class has come to appreciate its newfound freedoms, and has grown suspicious of the state’s encroaching on the private sphere. Political officials who depend on technocrats for the day-to-day running of the state have grown less amenable to sending intellectuals to the countryside so they might learn from farmers. Although no successor to Xi was selected for the Politburo Standing Committee, NIC UNDERGRAD REVIEW

western observers have pointed to Chen Min’er, a relatively young member of the Politburo, as possibly the next in the line of succession. In the notably opaque world of Chinese politics, however, we should not take anything for granted - let us remember that Chen’s predecessor as the party secretary of Chongqing was Sun Zhengcai, slated to be Xi’s successor until he was unexpectedly removed from his post in a high-level purge. In light of past transitions, it is likely that Xi Jinping will retire in 2022. However, his political influence will not ebb - it is quite possible that he will keep some degree of control in the backbench, not much different from when Deng ran the country from the chair of the China Bridge Association. Nonetheless, the next transition of power will not be a normal one. Xi has taken unprecedented steps in this Congress that could possibly be interpreted as a prelude to a major power grab. Still, China is far from being a one-man state, and other factions lurk in the shadows, waiting for an opportunity to claim their place in the sun. Xi Jinping might be slowly wading into the cold waters of the Rubicon, but he should be careful lest he drown.

911

A AAA INVESTMENT Dave just bought a new 911 NIC UNDERGRAD REVIEW

he sound can only be described as a pride of lions roaring whilst riding lightning. The feeling — five hundred stallion racehorses right behind you, so close you can feel their warm breath on your shoulders as they hurtle you faster and faster until reaching that all elusive 320kph. The theory of relativity considered, you look down at your wristwatch and notice that time is passing slower. Like a bat out of hell, everything around you ablur, you figuratively stop for a moment and deliberate on how lucky you are. The above describes any investor’s dream: the mythical low risk investment that brings home an astounding five hundred percent return on investment in its first year after being launched — The 911 Porsche (991) R. This blend between art and cutting-edge technology had its debut on March 10th, 2016 at the Geneva Motor Show which given the ROI of this car could just as well be described as an IPO. The MSRP for this car (stock) was listed at $184, 000, not one of the cheapest ways to get from A to B, sure but (and this is a big but) if you sold it today you would cash in anywhere from $500,000 to $1,000,000, depending on its production number and condition. Needless to say, that this was an amazing investment opportunity. Was this undirected and unpredicted though, as Nicholas Taleb famously put it, a black swan? All things considered, it’s safe to say that it most certainly was not. In order to understand the 911R we need to look at what came before it: the notorious Porsche 911GT3RS — one of the best Porsche track cars ever. It too has a flat six engine that thumps out 500hp and does 0-100kph in 3.1 seconds. Needless to say, it was a hit amongst car and Porsche enthusiasts alike, they performed and sold really well. However, you can’t get a Porsche 911 GT3RS with a manual gearbox, it’s only available with Porsche’s PDK transmission. This made many people very, very angry. Porsche decided to make amends though and there’s probably no better way to say sorry than by announcing the four-litre manual only 911R. Porsche kept this R series more streamlined, with many design references dating back to 1967. The car has a six-speed gear-box, not the standard seven-speed that is found in most 911s nowadays. They removed the GT3’s aerodynamic add-ons, removed the sizable wing which is mounted on the deck lid. It has skinnier tires with a lighter body. The weight-saving modifications they bring were notably successful. This car is able to reach 100kph in only three seconds. Couple all of the above with the fact that only 991 (the car’s chassis number) 911Rs were ever produced and you

have a hit. A hit that if you know anything about car or Porsche culture you could be sure was going to appreciate drastically in a very short period of time. Everyone knew this, even Porsche knew this as they condemned Porsche owners for using their cars as investments and not as what they were intended for — they selected many of the current 911R owners to buy this model. What do you have to do to be selected to buy the $184,000 911R? Well, that’s easy — own a 2016 Cayman GT4 (that’s another limited-edition Porsche) that now also sells for, in some cases, nearly double it’s MSRP. It’s not just 911s that are rising in value, it’s any blue-chip car, really. Hagerty data, that combines public auction sales and private sales, shows that the value of these collectibles has been rising relatively consistently over the last few years. The data also shows that the 1967-1977 911s are the ones to keep in your rear-view mirror as they tend to appreciate the most in value. The 911 model has a wrap for being a reliable sports car for the true motor enthusiast. In 2013 Porsche celebrated the 911’s 50th birthday, to date nearly one million have rolled off the German automaker’s factory line. This has earned this model the title of ´Most Successful Sports Car in the World´ — ever. Since its inception practically every edition of the classic 911 has appreciated in value. Just in May this year at the RM Sotheby’s biennial collector car auction held in Monte Carlo a 1997 Porsche 911 GT1 Evolution sold for €2.72million (another limited edition). Business wise, it just makes sense, you have a limited supply and an ever-increasing number of enthusiasts. This uptrend in value seems set to remain constant. According to the Knight Frank Luxury Investment Index, classic cars have reaped nearly 500% returns over the last 10 years, outperforming art and wine by more than 100%. Just as with any other investment though, it has its ups and downs. The notable upsides are: it is a good performance car, it is reliable and relatively cheap to maintain in comparison with other classics and it has plenty of history behind the badge. The main downside is that investors often find themselves having to invest quite a bit more in order to restore the vehicle to mint condition and just as a side note, it isn’t easy to find a mechanic that is up to the task in terms of the expertise needed. All in all, this isn’t your typical investment nor is it your typical car, it’s a blend of the two; it’s something beautiful — a feat of human achievement. Whether or not it’ll beat Bitcoin, the top stock indices or any other investment is up to debate, I just think it’s a hell of a lot more fun. NIC UNDERGRAD REVIEW

....the mythical low risk investment that brings home an astounding five hundred percent return on investment in its first year after being launched: the 911 Porsche (991) R.

Leonardo Figueiredo

ACTIVIST INVESTMENT IN 2017

hareholder activism is nothing new in that it exists since there were voting rights on the shares of companies. However, it was in the last three decades that it reached its golden age. Activist investment can be traced to Benjamin Graham, the father of value investing, in his campaign against Northern Pipeline in the late 1920s. However, it was only in the 80s that shareholder activism revealed an enormous growth. These were marked by activist investors looking for the breakup of companies, as it is frequently called “corporate raiders”, through the purchase of company’s shares activist investors would engage in a proxy contest for the control of the board of the company, as in 1987’s “Wall Street” movie by Oliver Stone. Activist investment was subtly different in the 90s : investors would pursue some minority representations in the board to influence corporate strategy. Shareholder activism has seen a rapid growth since the turn of the century, mainly due to the enormous increase of the number of activist hedge funds, which, as of 2014, held $100 billion under assets. Since 2000, the assets under shareholder activists rose from $3 billion to $170 billion. ACTIVISM AND ITS EFFECTS. So, what is shareholder activism? Shareholder activism consists in shareholders of public traded corporations trying to influence and to change the company’s strategy, financial structure, management or board in order to increase the market value of the company. Activist investors have a wide variety of mechanisms to accomplish the goal of changing the course of a company, acting more or less tough to the board depending on the strategy chosen. More informally, investors tend to prefer private discussions or public communications with the executives, press campaigns. However, investors tend also to put themselves in large “proxy battles” against the board, spending large amounts of money funding these campaigns such as: hedge fund activism (hedge fund or a coalition between investor and hedge fund seeking to trigger a significant change in the company’s strategy); “vote no” campaigns (investors persuades shareholders to withhold their votes from the board-nominated director candidates); sponsoring or criticising a shareholder proposal; and - a much more common approach nowadays - a say on the pay of the executives. The effects of shareholder activism are controversial. On the one hand, we can argue that (1) the success of the sha-

reholders of companies under shareholder activism is more likely in the long run; (2) that activists investors are crucial for change to happen when companies are underperforming; and (3that the demand of the shares after being invested by activists increase. On the other hand, we can argue that activist investors destabilize strong companies, while focusing more on the short term rather than on the long term. THE SECTOR IN 2017. After a weak 2016 for activist investing, 2017 witnessed an increase in activist campaigns. The ongoing disruption in consumer products has put these sectors under focus from activists, while pressure has eased on the often-targeted technology industry. In fact, according to Bloomberg, the latter has slid to fourth place on the list of most activist-prone sectors, whereas consumer discretionary ranks first. An increase in European activity was also noticeable this year, particularly in the mainland. Corporate-governance rules remain stricter in continental Europe compared to those in the UK and, particularly, the US. However, American hedge funds are showing increasing appetite for these companies. In fact, according to Lazard, US activists had deployed 20% of their capital in Europe up to the third quarter of 2017, up from a full-year total of 10% in the past. A lack of opportunities in the domestic market, the uncertainty of Brexit and the record-high levels of cash available to some of these funds stand as the likely causes. Moreover, many see firms in continental Europe as undervalued and as having inefficient organizational structures. As an example one can look at Switzerland-based Nestlé, the world’s largest consumer goods conglomerate, which was targeted by Third Point this summer. The American hedge fund amassed a $3.5 billion stake in the company, or 1.25%, and urged the company to divest of L’Oreal and repurchase shares. Firms such as Ericsson and Maersk are some other European firms that have been under pressure to simplify their holding structure and focus on core operations. THE PROCTER & GAMBLE CASEAnother conglomerate facing significant pressure this year has been Procter & Gamble, in the much-publicized proxy fight with activist Trian Partners. This case highlights some of the abovementioned trends: Procter & Gamble is one of the largest players in consumer discretionary, and a large part of the discussion with Trian has centred on the organizational structure of NIC UNDERGRAD REVIEW

Francisco Logrado

Pedro Sousa

the firm, which the fund deems inefficient. With a market capitalization of $228 billion and $65 billion in revenue in 2016, Procter & Gamble is the largest target of a proxy fight on record. Disruption has been a key theme in some of its product sectors, with large incumbents losing market share to new, smaller brands that cater to niche audiences. Tide, the iconic detergent manufactured by the firm, has seen its sales shrink in favour of environment-friendly brands such as Seventh Generation, while Gillette faces the threat of Dollar Shave Club and Harry’s. As stated on Trian’s white paper, these are sectors where “local brands are growing two times faster than their multi-national counterparts”. Although most large brands have felt these trends — Unilever being a good example —, Procter and Gamble’s relative performance is still seen as disappointing by Nelson Peltz, the founder and manager of Trian. P&G’s cumulative organic sales growth and returns to shareholders have lagged significantly behind comparable peers and the overall market in the last six to ten years. Mr. Peltz argues that this has been in large part due to the firm’s matrix-based organizational structure, which, according to the fund, does not promote accountability. As such, Trian aims to simplify the reporting lines of the company. To this effect, the fund launched a proxy statement in July, with the intention of electing Nelson Peltz to the Board of Directors, against P&G management’s recommendation. Since many of the firm’s shareholders are individual investors — particularly former employees — both sides spent considerable amounts in media campaigns, going as far as to use Facebook ads for this purpose. Following the 2017 P&G Annual Meeting in September, a preliminary vote count showed Mr. Peltz losing the election to the board by a narrow 0.3 percentage points. However, the situation took an unexpected twist when, last October, review of the preliminary results by an independent inspector showed an extremely close win for Trian Partners. However, results are not definitive yet, as Procter & Gamble can ask for further review of the votes. Regardless of the outcome, however, the expensive proxy fight carried out by Trian, together with recent pressure on Nestlé and General Electric, has shown that not even the largest corporates are immune to activism, and even those should look out for barbarians at the gate.

CRYPTOCURRENCIES & REGULATION

Rita Marques Pedro Sousa

Leonardo Figueiredo

A cryptocurrency is a type of currency that is only available in digital form and protected by cryptography technology. By far the most well-known cryptocurrency is Bitcoin, but there are now several other digital-only currencies in use, including Litecoin and Ethereum. One of the main characteristics of cryptocurrencies is the lack of a central issuing authority; and while some believe this gives the currencies freedom from interference, others suggest it makes them a perfect tool for criminals. Currently, all cryptocurrency transactions are carried out through a blockchain. A blockchain works like a digital and decentralised ledger that records all the transactions. An important feature of this platform is that it can be checked without the need for a single central authority. Despite an initially mixed reception, cryptocurrencies have been edging slowly nearer to the financial mainstream. Several major financial institutions and central banks across Europe and Asia are considering dealing with digital currencies, while the use of blockchain technology is also on the rise. Currently, cryptocurrencies operate outside the control of the government, which is why there is concern about the illegal operations and various international security issues that come with such new technology. More transparently, this implies that cryptocurrencies are the only ones that are controlled by the average man rather than governing bodies. Governments across the world are jumping on the cryptocurrency bandwagon, meaning that the entire industry could change dramatically in the upcoming years. US The U.S. federal government has not exercised its constitutional power to regulate blockchain to the exclusion of states or even expressed intention to do so, regardless of the interest of federal agencies. The only concrete statements made about cryptocurrency from federal entities concern how individuals must declare their profits and how they are taxed. Hence, the states remain free

to introduce their own rules and regulations. As an example, although New York did not enact state-wide legislation recognizing blockchain for record-keeping purposes, in June 2015, it became the first state in the U.S. to regulate virtual currency companies through state agency rulemaking. Since then, the most important developments for blockchain´s regulation occurred in Arizona, Vermont, Chicago, and Delaware, mostly dealing with the acceptable use of blockchain ledgers and smart contracts for record keeping and other tasks. EUROPE The overall approach of the European Union towards cryptocurrency is positive and welcoming. The EU appears to be supporting the development of virtual currencies by encouraging the exploration of use cases to test impact and laws as well as giving entrepreneurs confidence that their applications will be more trusted by their target markets. These actions not only encourage an ecosystem of thinkers and doers, but also end up making Europe a prime destination for blockchain development. Earlier this year, the executive arm of the EU revealed that the Commission wants to “pilot projects to foster decentralized innovation ecosystems and help reshape interactions between consumers, producers, creators and among citizens, businesses and administrations to the end benefit of society”. Switzerland has become one of the main European hubs for cryptocurrency and blockchain development. Switzerland has decided to embrace cryptocurrency in a non-regulatory manner. The Swiss Federal Council has stated that while there is no need to regulate cryptocurrency currently, laws on how the financial sector will make use of them are being established to determine their status as securities and taxability. Germany is another prime example of how governments have avoided a tangle of regulatory issues by not labeling digital currencies as “real” currencies. The country’s primary regulatory body recently published a note saying warning for the “risky, highly speculative forms of investment” and NIC UNDERGRAD REVIEW

to the potential frauds these may incur. CHINA The last digital currency exchange in China was shut down as of the 1st of November. With that final closure, the exchange of digital currencies in China officially became illegal. China has officially banned cryptocurrency exchanges after announcing it was considering the move back in September. However, this does not mean that Chinese investors can not be involved in cryptocurrencies business but they are now forced to look to other areas of their trading. Many of the cryptocurrency exchanges that previously were headquartered in mainland China had to move nearby countries such as Singapore, Hong Kong and South Korea in order to “save” themselves from shutting down operations. The Chinese Government did not only banned cryptocurrencies, it was also shut down the Initial Coin Offering Market in China. This was a major blow to tech companies bolstered by blockchain and the cryptocurrency space. Still, Chinese investors looking to move into the initial coin offering space could buy up tokens using offshore accounts. Ironically, Chinese regulators concern about money laundering and illicit activity as reasons for why they shuttered digital currency exchanges in the first place. Nonetheless, being largely decentralized, many investors predict that the cryptocurrency will find a way around the Chinese ban. Investors who are determined enough to continue to place their assets in the highly volatile and fast-moving cryptocurrency market will find a way to do so, even if it is through semi-legal and non-official pathways. In spite of the ban on exchanges and ICOs, the Chinese government indicated it will continue to explore blockchain technology developments. Amongst world economies and governments, cryptocurrency has been a topic of continual debate. Even though many countries across the world permit cryptocurrencies, they have been under scrutiny and seen with sceptical eyes in many others. Certain countries have gone to the extent of banning the currency, making its use, possession, and trade illegal.

BREAKING DOWN MIFID II Where all major assets will be regulated to the benefit of the investor

Francisco Afonso

Markets in Financial Instruments Directive, also known as MiFID, has been applicable all-around European Union since November 2007. It aimed to be the cornerstone of financial marketsâ&#x20AC;&#x2122; regulations in order to achieve more and improved protection to investors that deal with financial instruments. MiFID II was born on October 2011 when the European Commission proposed the revision of MiFID. This new revised and extensive Directive, with more than 1.4 million paragraphs, focuses essentially on (1) boosting the confidence that investors lost with the financial crisis, on (2) moving a great part of OTC (over-the-counter) trading to transparent and regulated financial venues, and (3) on making European markets safer, more efficient, and, ultimately, reliable. This brand-new piece of legislation will have its official launch date on the 3rd of January 2018. Despite controversial, MiFID II will introduce a whole new bundle of regulations that were not even mentioned on the first MiFID. MiFID II brings to its scope products like structured deposits, retail investment products, emissions allowances and the sale of financial instruments by investment firms. It will not only affect all aspects of trading within the EU - banks, fund managers, exchanges, trading venues, high-frequency traders, brokers, pension funds, retail investors and anyone that deals with financial instruments -, but also firms interacting with EU partners or trading EU products. New complex rules aimed to unbundle research payments to fund managers, to capture dark trading, to regulate derivatives and bonds markets or to implement more transaction reporting, record keeping and best execution, will require investment firms from all over the world to make some key commercial and operational changes in their businesses. Until now, asset managers and brokers were receiving research for free, although trading fees were added for the clients. From 2018 onwards, unbundling of research payments will be required, by budgeting separately for research and trading costs. They can either pass the cost to their clients or absorb it (like Blackrock and Vanguard are expected to do). In fact, they will need to find new ways to execute their trades and to show the best available price to clients. Best execution may bring higher returns for investors, and, consequently, more confidence to the financial sector. Nevertheless, this has been regarded as a serious challenge for US brokers. Current brokers cannot receive research payments unless they are investment advisers. With MiFID II, they might not be able to provide research to EU clients, who will be obliged to make these direct payments. Unless EU acts fast to ensure equivalence of rules with

Maria Pocinho

others around the world, this may be a good time to begin preparing for a period of market turmoil. Dark trading is another area of focus for regulators, which constitutes 10-11% of total trading. If trading a particular share in dark pools exceeds certain caps, the pools will be barred from handling it for six months. The problem is that darkness makes it hard to know when these caps are hit. When it comes to derivatives and bonds, these are still traded over-the-counter and are hardly regulated. The main reforms aim to push more for electronic platforms, and away from banks and phones, with record keeping for at least five years and more reporting. Additionally, automatic trading will suffer some changes as well: algorithm traders will have to register their formulae with regulators and introduce circuit-breakers. More technology will be required to cope with all these commercial and operational changes, as well as waves of data, which might drive some traders out of the market. In order to operate in the EU, new authorizations and passports applications are necessary (until 2nd December , 2017). For example, hedge funds Tudor and Brevan Howard have abandoned MiFID licenses this year, in order to avoid new controversial rules. They have secured instead Alternative Investment Fund Manager licenses, which enable asset managersâ&#x20AC;&#x2122; companies to market hedge funds to investors. There were divergent interests when writing the regulation, between nations and bigger asset

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managers looking for liquidity and anonymity, and retail investors who gain from transparency. Nevertheless, the final result may lead to the beginning of a new era. Despite the challenges and pressure felt by investment firms around the world, the rules aim to benefit the end investors. Communication, disclosure and transparency will bring new opportunities to improve technology and trust. The unbundling of research will promote best execution, leading to more returns for investors and more confidence in the financial sector. This is European Unionâ&#x20AC;&#x2122;s opportunity to grow sustainably and to distinguish itself in the world market.

From 2018 onwards, unbundling of research payments will be required, by budgeting separately for research and trading costs... Best execution may bring higher returns for investors, and, consequently, more confidence to the financial sector.

SOCIAL BONDS The ethical investment boom

When talking about the recent trends in modern finance, it is impossible to abstain from mentioning the so called ethical investments. Despite being only a niche a few years ago, this type of investments already has a market value of $12.04 trillion in Europe and keeps getting more attention from investors all over the world. Although the definition of ethical investment is very broad and subjective, because each individual has its own preferences and beliefs, there are certain topics which always fall into this category, such as equality investments, green investments and social responsible investments. Some investors believe that ethical investment portfolios only need to exclude Sin stocks (gambling, alcohol, tobacco, guns), but the majority has higher ambitions. The Environmental and Social Governance (ESG) criteria, serves as way to identify which investments are fit according to a set of rules considered to be ethical and sustainable, with the objective of helping ethical investors to easily filter their stock options. By deciding to invest in these types of securities, people know exactly where they put their money and what its purpose is. As such, on top of the returns, the investor knows exactly what its impact on society was and how he/she can contribute to the most desirable causes. When presented with the trade-off between monetary benefit and positive social and environmental impacts, it is difficult to prioritize society’s needs. Shareholders invest mainly as a way to increase their capital and, as such, this type of investment may look unappealing. However, ESG investments don’t necessarily mean lower returns. It is possible to invest responsibly without sacrificing any gains. SOCIAL IMPACT BONDS Social Impact bonds (also known as Pay For Success Bonds, Social Benefit Bonds or simply Social Bonds) are public-private partnership which fund social projects through a performance-based contract. In these type of bonds the proceeds will be used and applied to finance (or re-finance) new or existing Social Projects. This type of bonds raise funds to promote projects with positive social outcomes that are aligned with the 4 core components: • Use of proceeds for Social Projects • Process for Project Evaluation and Selection Social objectives and how they will be reached • Management of Proceeds – the net proceeds should be tracked by the issuer in an appropriate manner • Reporting – issuers must keep

up to date and available the information regarding the proceeds SIB are not common bonds. Since they rely upon the achievement of the desired outcomes, if the objectives are not achieved, the investors will not receive a return payment and the principal. This bonds are not influenced by interest rates or market risk but they are seen as riskier than normal bonds since the repayment only occurs if the projects are successful, which is a difficult thing to measure. Until now, 89 impact bonds have already been launched. The total amount of capital raised is $322 M and there are over 70 new impact bonds in development. The bonds already launched are being used to improve communities’ lives in issues like workforce development, child and family welfare or adults with complex needs. In Portugal, 4 Social Bonds have already been launched, 3 of them this year. In total, they raised €1.72 M. Deloitte, Montepio Bank and Calouste Gulbenkian Foundation are the investors of these 4 bonds that funded projects in Porto, Fundão and Lisboa. In November, the National Australian Bank raised $384 M to promote gender equality. The proceeds of the five-year loan will offer a healthy return of 3.25% YTM. Although SIB have brought several benefits such as the availability of funds for prevention and early intervention services or the increased transparency of the evaluations due to independence, Social Impact Bonds have been object of several critics such as the fact that funds can be invested in projects, not because they can provide the most positive social impact in that area, but because these projects may be the ones that give the highest return; projects can be influenced to operate in a way that gives investors the highest benefit, not the best social impact. Critics also state that SIB decrease Public’s responsibility Whether by concerns over global warming or just as a way to reduce the costs of a company, there are several environmentally sustainable practices which are being implemented all over the world. The recent and continuous progress in renewable energies and the instability of the fossil fuel prices has made it more appealing for companies to generate their own power. Moreover, it is irrefutable that reputation plays a leading role in a company’s profits in the long run. As such, from big banks to the automotive industry, everyone is moving to a more efficient way of producing, in order to reduce their environmental footprint. Green bonds’ main objective is to collect capital to be invested in projects which aim to miNIC UNDERGRAD REVIEW

Maria Ana Mesquita

Miguel Monteiro

...it is irrefutable that reputation plays a leading role in a company’s profits in the long run. As such, from big banks to the automotive industry, everyone is moving to a more efficient way of producing....order to reduce their environmental footprin

tigate climate change. These projects fit inside a broad spectrum of activities, making it possible to be found in different industries, such as renewables (in the energy sector), sustainable fishery (consumer goods) and clean transportation, for example. These securities were first emitted by The World Bank in 2008, but have since become popular and already amount to a total of $206 billion. The market size is rapidly growing and has immense potential since governments all over the world still have reduced percentages of these type of assets in their portfolios. Why are Green bonds attractive? After all, despite being extremely relevant to have a positive impact on society and on climate related matters, investors need to focus on maximizing their returns. One of the main strengths of this debt security is the fact the earnings are tax-exempt while usually also having the same credit rating as bonds from the same institution. The competitiveness increase given by the tax cut, makes it desirable even for investors which are not only focused on ethical investments. Society’s demand for companies’ contribution for solving environmental and social challenges has been increasing. Ethical bonds have become a profitable way to leave a positive footprint in the environment and society, and also respond to the public’s request. Although the ethical bond market is still small compared to the typical bond market, it is increasing its size each quarter. For the issuers the benefit of social and environmental bonds is also escalating as they reach a new range of investors (mostly pension funds that want to apply their money

in ethical causes). Moreover, reputational advantages brought by these alternative assets create additional implicit benefits for the investors in cause. Even though the latest are challenging to measure, they play a fundamental role in the long run. Over the next few years, responsible investments will certainly grow as individual and corporate investors are having more and more attention to how and where they apply their capital, the tax-exemption on some of these types of assets associated with a return which doesn’t disappoint makes them a specially good instrument to have in every portfolio.

Source: https://www.msci.com.

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O F F -T O P I C

ETERNAL SUNSHINE OF THE SPOTLESS NARRATIVE

How theory fails to model its own pitfalls

Andrey Dmitriev

Miguel Moita de Deus

n 1986 California’s J.Paul Getty Museum had acquired the latest ancient Greek kouros (a statue of a young man) to be discovered. The piece had gone through all sorts of geological analysis – high-resolution stereomicroscope, electron microscope, electron microprobe, mass spectrometry, X-ray diffraction and X-ray fluorescence. The conclusion was clear – it could not be fake – it was made of dolomite marble, and on the surface, it had a thin layer of calcite, which can only be formed over the course of thousands of years. Yet, people who had spent a significant part of their lives looking at real kouroi – experts in ancient Greek sculptures – had their suspicions. None of the invited experts believed it to be real but none could also point out a reason for not believing. The board members of the museum were at a crossroads: on one hand they had a solid narrative for believing it was real, on the other, some subconscious heuristic of the experts was pointing it to be a fake, but they couldn’t provide an explanation. We always find ourselves in need of explanation for phenomena – for a narrative – it is something that comes naturally to us. Throughout history, one of the scariest things for mankind, independently of culture or phenomena to which we are exposed, is the unknown. In medieval and early renaissance maps, lands that were not largely explored were marked with monsters while religions and native cultures were always anxious to deal with new knowledge and experiences. Nowadays, we are overflowing with information, and there’s no shortage of explanations for any sort of phenomenon. In a world where academia and other big institutions have the monopoly over explanations, theory tends to assume a central role in the approach to problems in the real world. However, when we look at the roots of some of the solutions to the most complex problems that were put before man, from complex machines to pharmaceutical products and software developments, practice came before theory – that is, the problem was solved before it was understood. Surely, you must say, there must be some few curious examples. After all, many of us have heard about some of the more popular cases of the accidental discovery of a life-changing technology, which are presented as exceptions, such as Penicillin being discovered by accident or Facebook resulting from a series of unplanned events and interactions between Harvard students. But the general idea is that the best solutions only appear after there is a very thorough understanding of the theory, while tinkering is unprofessional and can be simply a waste of resources. The discussion on the importance of chance for new ideas has been increasing recently, mainly in the form of business books presenting this hypothesis as something new and even post-modern. Also corporate tech giants have been emphasizing the importance they give to random tinkering in their companies, rather than goal directed research and development, such as Google’s X factory, a semi-secret R&D facility where a group of scientist apply, so-called, “moonshot thinking”, that is, coming up with solutions to a given problem that may seem ludicrous in the current theoretical or infrastructural framework, but which are nevertheless pursued with some Google funding. However new and innovative this may appear, the discussion of whether practice comes before theory goes way back. In the first pages of his seminal work, “An Inquiry into the Nature and Cau-

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ses of the Wealth of Nations”, Adam Smith talks about the origin of improvements in machinery. He discusses how many of such improvements originated because of the division of labor, as workers became focused on one given task or process and therefore much more likely to turn their attention on how to improve it or make it easier. Therefore, he continues, most of the machines that are employed in manufactures were invented by common workmen. On the other hand, he adds that not all these machines were developed by crafty workers of manufactures, but also by those who made machine-building to be their trade (that is, engineers) and by those who “are called philosophers or men of speculation” which with the progress of society becomes the sole occupation of an entire class of citizens (apparently referring to what we would call today consultants). Even earlier, Seneca, the famous Roman senator from the first century AD, in his “Moral Letters to Lucillius”, repeatedly criticizes academics, theoreticians and speculators, whom he does not consider to be of much added value to society and ridicules an earlier philosopher for hypothesizing that all inventions are the fruit of the theoretical brilliance and sophistication of philosophers, which are subsequently put to practice by uneducated laborers. Instead, he takes a position similar to the one of Adam Smith that inventions come mostly from the developed intuition of people who have been employed in a given craft for a long time. Although millennia have passed, the debate still seems to be the same – even though it is widely accepted that educational institutions are able to transmit knowledge that is already possessed (whether right or wrong) and promote social mobility (in case it is accessible to all the population), its capability to generate innovations and increase a country’s wealth is still questioned. The current level of technological development has led to some innovations only being made possible with the resources that are made available by universities or other research institutions, yet many examples of where it became possible to make a direct comparison between the work of big institutions doing intensive theory-based directed research and the results of amateur tinkering keep surfacing. Let’s look at aviation for one of the early examples of an already established industry being surprised by absolute outsiders. In 1943, Herman Goering, the commander of the Luftwaffe – the Nazi air force – issued a request for design proposals to produce a new bomber, given the heavy losses suffered from allied fighters, and he came across this, the Horten Ho 229:

For comparison, here are the plans of the most used dive-bomber at the time, the Stuka:

It turned out that while the German military industry had been severely hampered by the Treaty of Versailles, small clubs of aeronautical enthusiasts developed throughout the country. In one of these clubs were the Horten Brothers, who were particularly talented at the craft. When the Nazis revamped Germany’s military industry, the Hortens weren’t taken seriously, as their plans were quite detached from what was mainstream aeronautics at the time, and they did not belong to the “cultural elite” in general, so they joined the Luftwaffe as regular pilots. Eventually, when the tide was turning in the War and the Nazis started to cling to anything that could give them an edge, they unearthed what was one of the most revolutionary aircraft built to date. Luckily, due to very limited resources at the end of the war, the Nazis were only able to build a few and make test flights. The Americans were able to capture one and bring it back to the U.S., contributing significantly to the development of a new class of military aircraft – stealth aircraft: The history of Silicon Valley is full of such examples, if not exclusively built on such examples, thus making government plans to turn a specific area of a city or country into a “startup ecosystem” slightly controversial, as no one ever planned or optimized Silicon Valley into becoming the world’s tech-cradle. In fact, a great part of the Valley’s own startup ecosystem resulted from a counterculture movement, something which is probably hardly reproducible by governments. Outside engineering, in finance, we can also find evidence of theory shunning practice – after the Black-Scholes formula was derived using the Capital Asset Pricing Model, a key element in neoclassical finance, quantitative options trading started to be taught at universities and business schools, later leading to a boom of quantitative finance. Consequently, the general belief started to be that before the Black-Scholes formula being incorporated into CAPM, there was no manner to price options and that options trading was in a sort of “Dark Age”. In fact, since options trading had a long history of practice (in Western Europe, these were actively traded at least

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... when we look at the roots of some of the solutions to the most complex problems that were put before man, from complex machines to pharmaceutical products and software developments, practice came before theory – that is, the problem was solved before it was understood.

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since XVII century in England and the Netherlands), by the XX century traders had developed a series of techniques and heuristics to value options. Besides, these were quite sophisticated, as by the end of the XIX century these indirectly took into account extreme movements. A source from 1927 (Mills) directly states that there may be movements completely outside the Gaussian curve. In short, the heuristic methods used by traders were less “optimizing” than the quantitative traders but were more robust to extreme events. The latter, being heavily reliant on theoretical models, would have incredible returns in the short run, but would blow-up once an event took place that was too far away from the predicted volatility range. What’s striking about experience in more technical and scientific fields is that it’s generally acquired by finding out what isn’t true via trial-and-error, so as to gradually tend to a scientific truth, i.e. a loose description of the scientific method. However, in sciences that deal with matters of economics and finance, such trial-and-error approach can either be only done through government policies –since it’s fairly hard to fire the government for a bad service– or can’t be done at all. At least not on the surface. Think about an asset manager trying to find the best portfolio stratagem by telling clients that he or she is going to use their funds to stress test x amount of ideas and in the end choose the one which brought more returns. That may even happen, yet the asset manager has to cater to the fear of her or his clients, lest they might flock to competition. So the professional must abide by etiquette, put on formal dressing and convince clients they know what they’re doing. Convince them of her or his experience. Going to general finance websites, for example, it’s quite easy to find a similar rationale. Most of these websites sell “beat the market” books by someone not that famous, old, male, suited up and with his arms crossed to give the impression these people know what they’re doing. They might even know what they’re doing, but they must sell the idea that they have the answer rather than the notion that, according to their own heuristics, they have had times where this or that strategy has or hasn’t worked. Regarding governments, on the other hand, the case can come closer to that of a more scientific approach. These institutions are ‘hired’ by the populace for a certain mandate, in the premise that while they’ll fix society’s problems while they’re in power. This means that such organizations have the monopoly on a country’s policies during their mandate, so they enact strategies they otherwise wouldn’t, should they be as easily dismissed as a firm providing services to a client. Some examples include the New Deal policies made by the American Government in an attempt to revert the Great Depression in the 30’s, the financial sector bailouts enacted in the Great Recession of 2008 and the revolutionary monetary policies by Japanese Prime Minister Shinzo Abe being put into practice in the deflationary economy of Japan. All of these policies have and had supporters and contestants, yet both groups have had to contend with these strategies as it’s part of their social contract to do so. So the economists behind these different problem solving approaches had more leeway to experiment and see what works and what doesn’t. Keynesian economics wouldn’t be the same had it not been put

to practice in the New Deal; many economists wouldn’t have done as much research as to whether Wall Street banks should have been allowed to fail or just been given a bigger bailout; and, as we speak, we are observing and learning what is happening and what will unfold with the Japanese Abenomics. Yet, the same can’t be said for the sale of financial services in the open market, since having the plan of ‘seeing if it works’ in managing assets will simply result in clients moving to a competitor whose plan is to convince investors that their approach is to maximise profits. It’s a company’s sub game perfect Nash equilibria to act like they have the answers –regardless of whether they have them or not– because having clients “now”, allows them to keep in business. A client’s dollar can be, therefore, painstakingly more valuable today than it is tomorrow, as companies have to focus more on surviving than in finding better answers from experimenting. This isn’t to say financial services firms don’t innovate, but having as a core value the act of convincing customers they know what they’re doing at all times can result in higher panic and a decrease in credibility when situations like 2008 happen. “The most brilliant minds go to Wall Street, but they couldn’t see the bubble coming.” You may have thought or heard something like this, and it is perhaps a direct consequence of this narrative obsessed paradigm. As previously discussed, mistakes in engineering are immediately observable – if something consistently does not work, it is eventually dropped. In finance, although it is not as straightforward, if a certain model or technique isn’t very appropriate, it will lead to losses or a blowup in the long run. However, in social

What’s striking about experience in more technical and scientific fields is that it’s generally acquired by finding out what isn’t true via trial-and-error, so as to gradually tend to a scientific truth or an optimized solution, i.e. a loose description of the scientific method.

A modern stealth-bomber – U.S.’s B-2 Spirit, looks familiar…

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sciences and the humanities, the tyranny of theory and “experts” takes on a whole new level. Again using the example of finance, if a grad student lands a job at a big investment firm, the new hire will usually be sent to one of the main offices for a month to take a class and learn the principal theory that underlies the work that he or she will do. If a student is from a pure economics or finance background, then it will be fairly easy to follow along as such concepts have, for the most part, already been learned. However, if the student is from a Computer Science background, at the end of the learning program the company will have a grad student who knows the necessary economic and financial theory, a technical field’s level of mathematics and the ability to code. In today’s time, who is the company going to tend to prefer? This clearly indicates a shift in demand of abilities from the financial sector (and others) and the inability of some Universities to let go of a purely theoretical learning program. We no longer live in a time where spreadsheets equal the peak of practical knowledge, so unless academia from social sciences adopt a more empirical approach with the aid of tools such as coding languages, economics and finance graduate students may find themselves struggling to compete with professionals from technical fields – which they already do. Some top Universities have already been doing research on Societal Computing and Quantitative Social Sciences, but nowadays falling behind even a couple of years may result in a University’s stagnation of prestige, since their students simply won’t have the necessary tools to supply the top job market’s demand. So if Universities don’t provide these skills on campus, an economics, management or finance student may today have a higher opportunity cost of not interrupting the degree to pursue ambitions of learning how to code and trying to find more technical work experiences. Perhaps they may even consider shifting to a more technical degree to then pursue their ambitions in finance or economics. Fundamentally, these problems exist due to obsession over theory and narratives. By remaining conservative in the content and method of education, social sciences Universities can end up vexing students of thriving career paths. Students will not succeed if they

...mistakes in engineering are immediately observable – if something consistently does not work, it is eventually dropped. In finance, although it is not as straightforward, if a certain model or technique isn’t very appropriate, it will lead to losses or a blowup in the long run. are just taught theory while the real world demands practice. It is popular to reference that, for practical purposes, it is useful to believe that reality exists outside of our perception, and that our ability to map it is not fully accurate, hence “the map is not the territory”. However, in some fields of expertise, it sometimes questionable whether it is also widely accepted that reality exists outside theory. It goes to the extent that debates between practitioners and theorizers are reminiscent of conversations set in Edwin Abbott’s Flatland, where characters from different dimensions (the characters are lines and squares) simply could not conceptualize the mode of being of each other, that is, of just a line, instead of a square - as if they were speaking different languages. Similarly, in academia, we live in a time where often times theory and practice are viewed as being in different spaces. One may be viewed as obtuse if the idea arises that both realities can yield utility together. By the way, the kouros was fake – it turned out to be possible to “age” dolomite marble in months using potato mold. The art savants still could not agree on what gave it away…

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HISTORY

OF THE

BRITISH AND AMERICAN STOCK MARKETS SINCE 1900

Eduardo Gameiro

leader Robert Gascoyne-Cecil. During this period, the British were still fighting the Anglo-Boer (a war fought between Britain, the Boer States, the South African Republic, and the Orange Free State over who would take control of the South Africa’s gold mines). In 1900, the largest industry to rein in both the United States and the United Kingdom was the railroad industry. A full 63% of the American stock market was devoted to the railway industry, while in the UK it was almost half their total stock market. More than 80% of American firms’ value and 65% of UK ‘s in 1900 were in industries that are today either insignificant or small. Some of these industries were textiles, iron, coal, and steel, but also high-tech industries, like the telegraph industry. In 2017, 62% of the markets’ value is represented by companies from industries that were (again) either small or inexistent in 1900 (about 47% for the UK). The largest industries today in the US are oil and gas, banking, healthcare, and mining, and in the UK are telecommunications, insurance, and retail. LONG-RUN INDUSTRY PERFORMANCE

he largest markets in 1900 were the British and the American markets, the British accounting for 25% of the value of all securities transacted worldwide, and the American for 15%, followed by Germany with 13% of securities, France with 11.5%, and Russia with 11.5%. On the 31st December 2016, the American market held a staggering 53% of all the securities transacted worldwide. Japan, which was practically inexistent in 1900, now holds 8.4% of securities, followed by the UK with 6.2%, France and Germany, each accounting for 3.1% of worldwide transacted securities. As previously mentioned, the US and the UK were in 1900 the largest markets worldwide. In 1900, there were no computers, phones, cars, nor antibiotics. The US president was William McKinley, who led the US to win the Spanish-American war and was a strong supporter of the American long held Gold Standard. The British prime minister was the Conservative

To calculate the long-run industry performance both the capital appreciation and the reinvestment of the dividends’ paid by the companies were considered. A dollar invested in the US stock market in 1900 would have accumulated to about

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$38,225 in 2015, but having invested in one industry or another would have made a considerable difference on the investor’s total return. For example, if one invested $1 in the US market’s best performing industry, the investment would have accumulated to about $6,280,237 in 2015, a whopping 14.6% annualized return, whereas if one were to have invested $1in the worst performing industry, shipbuilding and shipping, the investment would only be worth about $1,255 nowadays. For the UK’s market, the returns were both slightly lower and less volatile across industries, but still considerably different. $1 invested in the British market in 1900 would accumulate to $30,445 in 2015, whereas $1 invested in the best performer, alcohol, would accumulate to $243,152, and if one were to have invested in engineering firms, the worst performers, the investment would only be worth about $2,280. The invention of railroads is a very good example of disruptive technologies and how those created the substantial rise of one industry and the fall of another. The first railroads in the UK were created during the 1st half of the 19th century and enjoyed a subsequent expansion afterwards. However, this large expansion of the railway system in the UK also meant that canals, an important and widely used mean of transportation, before the invention of railroads, subsequently crashed in value.

“Fashion is a form of ugliness so intolerable that we have to alter it every six months.” OSCAR WILDE

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MANAGEMENT OF FASHION COMPANIES Breakdown of Business Models in two of the most fashionable countries of the World

Gonçalo Marques

Fashion is a paradoxical concept that affects our lives through taste, behavior and social standards. Some people say that fashion only exists in the minds of the creators, but everyone can create its own fashion. Some refer to it as a subjective form of expression, while others believe it is a standard accepted by the society. So, what is really fashion? THE DEFINITION OF FASHION: FROM A SOCIAL STANDARD TO AN ECONOMIC ACTIVITY When trying to define the concept, several lines of thought arise. There are metaphysical definitions of fashion, which illustrate it as a universal principle, (…) that involves not only the body but all the means of expression available to people 1. On the other hand, there are skeptics like Georg Simmel that believe that fashion is merely a product of social demands, a system of meanings where the notions of style and aesthetics predominate over functional benefits2. Additionally, there is a more business-centered view of fashion: fashion is the direct result of both creative and industrial process. As Renzo Rosso3 states “Fashion is inspiration, creativity and intuition. But it is also organization, strategy and management”. Then, at a first sight, fashion is deeply connected with social context. In fact, when we look to the Latin word mos (that generated Italian, Spanish and Portuguese word “moda”), we notice that it refers to usage, custom, tradition, good manners and morality. Thus, despite being a unique and individualized form of expression, taste has to contend with a system of social rules, which defines what can be considered fashionable at any time or place. A product or even a social behavior are, hence, considered fashionable if they are widely approved by a specific public in a specific time and social context. This notion of time implies that fashion is non-perennial – 1 In “Il dizionario della lingua italiana”, Le Monnier, 1995. 2 In “Managing Fashion and Luxury Companies”, by Erica Corbellini, Stefania Saviolo (Rizzoli ETAS, 2016). 3 President and Founder of Diesel.

i.e. fashion changes through time – each item has a cycle that starts with its introduction and goes until its decline and substitution. As a result, items experience different levels of acceptance and adoption through their life. This also marks the differentiation between customers: at first there are the fashion innovators, that, in small number, go against the flow of the society and influence opinion leaders; opinion leaders drive the masses by creating the new social standard and then, during the decline, there are the late adopters and in the extreme case the laggards. In addition to this latter point, historically, fashion has been an implicit form to demonstrate occupation, rank, sexual availability, class and wealth. It is then a form of nonverbal communication, that depicts the need for differentiation, or conversely, the need for identification. Fashion is a driver of our social identity. But more than just a standard that drives identities and tastes, fashion is also an economic activity, that generates wealth and employment. It is a business. As any other for-profit firm, fashion companies are based on a solid customer value proposition, targeting one or several client segments, while having a unique value chain and a model of corporate governance.

(e.g. Diesel, Victoria’s Secret) are quite heterogeneous in terms of offer to the market. Nonetheless, they have in common a mix of both industrial and commercial know-how, that allied with a strong marketing, allows for brands to establish the bridge between high-fashion and the mass market. Lastly, Retailers correspond to fast fashion businesses, that quickly respond to market demand, while incorporating concepts from high-fashion. Therefore, brands like Zara, H&M and Gap offer “fashionability” at reduced prices. Now we ask: why should a regular person care about Luxury Brands if he/she cannot afford neither their apparel nor accessories?

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TRICKLE DOWN THEORY: A MODEL FOR THE GENESIS OF FASHION TRENDS

Well, there are several theories that try to explain how fashion trends spread among social classes to, eventually, reach the masses. In particular, one of those is the trickle-down theory. The model states that fashion trends start among the upper class (fashion leaders) and move down to the masses (fashion followers). Moreover, it assumes that there is a hierarchy in society BUSINESS MODELS IN THE FASHION and that people at the top seek distinction INDUSTRY and distance from those socially below. However, fashion companies are extre- Thus, under this theory, we can firmly armely different from one to another. In fact, gue that the (seasonal) concepts of fashion, there are 4 main business models in the which drive society’s standards, come from fashion industry, when we consider the criteria of offer to the market and target. They are: Luxury Brands, Fashion Designers, Premium Brands and Retailers. Luxury Brands But more than just a (e.g. Chanel, Hermès) focus on prestige, by standard that drives selling to a very narrow client segment, and identities and tastes, delivering a value proposition based on exclusiveness, heritage and timelessness. Clienfashion is also an ts are making long-term investments when economic activity, that they buy items of a Luxury Brand. Designers Brands, such as Giorgio Armani, Dolce & generates wealth and Gabbana are known for the seasonal creaemployment. It is a tivity, with its success relying in diffusion of the brand through clothing and fashion business. sides. On the other hand, Premium Brands

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Luxury and Designer Brands, whose products are exposed to the masses not only through marketing and fashion shows, but also through the upper layers of the society, that qualify as their core clients. COUNTRY BRANDING So, when we conduct a countrywide analysis of the fashion industry, two countries come up as leaders in the luxury sector: France and Italy. Along with the US, these two nations are blue chips in country branding, as the respective “Made in” label allows for brands to earn recognition in foreign markets. In fact, more than just luxurious, the products developed/manufactured in these countries carry a distinctive intrinsic value, which confer the (fashion) values of the country as a whole to the owner. Thus, the French way to fashion, based on tradition and individualism, couture and accessories and sophistication and provocation, delivers a sense of luxury to the clients, whereas Italian fashion offers to customers the Italian lifestyle, based on three pillars: craftsmanship and detail; variety and innovation; beauty and sensuality. THE FRENCH WAY TO FASHION As far as France is concerned, the country has always been the flagship in haute couture. Until the 1950s, Paris was the center of the fashion world, with almost every fashion house (maison) having its headquarters there. Since the 19th century that France has been a workshop for the arts and culture, establishing an avant-garde position in the fashion industry, thanks to its social and institutional environment. In fact, one of the main drivers of the fashion revolution in France was

the interaction, within the same environment, of the fine arts with an extremely hierarchical society, in which the higher extracts looked for prestige, luxury and exclusiveness. Hence, the conditions for the creation of haute couture were set. Haute couture refers to the craftsmanship of the French maisons. Designer-tailors of these maisons create unique collections that are made to measure for individual customers and that come with a massive price tag. But the very high price reflects the excellence of service, workmanship, the originality of a unique design and superb materials of the finest quality. Furthermore, besides the quality of the product, the price to be paid is the ultimate barrier that differentiates customers from non-customers, meaning that, in France, fashion was and still is an élite phenomenon.

general, Chanel’s clothing was much more than just the appearance: it celebrated women and their freedom, equality and the ability to express themselves through dress. Despite suffering several setbacks during the 1970s and 1980s, after the death of Coco Chanel, the brand managed to survive thanks to the leadership and disruptive vision of Karl Lagerfeld. The brand became more provocative, shifting from the initial vision of Coco Chanel. Nonetheless, the main characteristics remained the same: Chanel continued to be based on the same three nuclear products (the black dress, the fragrance and the bag – Chanel Matelassé) and the value proposition continued focusing on exclusivity: “Let’s not be thinking about how big we can make this, but about how exclusive and special you can keep it”.

CHANEL Chanel is, hence, an existing haute couture maison, that successfully drove the industry and set the fashion standards. Founded in the 1920s by Coco Chanel, Chanel revolutionized the fashion world by introducing sportswear – comfortable jersey trousers, summer clothes with very light lines, stripped pullovers, blazers in flannel, the first tailleurs, bright colors. In its genesis, the brand embodied the essence of the modern working woman and the style is still contemporary today. Chanel’s style was, therefore, defined by the quality, comfort, proportions, simplicity and distinction. Moreover, Coco Chanel was responsible for the creation of three of the most famous fashion icons: the little black dress in crepe-de-Chine (perceived as the “uniform” for a new woman); the perfume Chanel Nº 5, launched in 1921, that still remains as the top-ranked perfume in sales worldwide; the “Chanel look”, consisting of a wool jersey suit with a straight collarless jacket. In

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“Let’s not be thinking about how big we can make this, but about how exclusive and special you can keep it” Maureen Chiquet, former Global CEO Chanel

THE ITALIAN APPROACH TO THE FASHION WORLD

SO, CAN PORTUGAL BECOME A BLUE CHIP IN COUNTRY BRANDING?

To sum up, fashion is more than a style, more than a standard. It is a system of innovation engineered to meet and encourage seasonal consumer demand, while fulfilling a cultural requirement to define ever-shifting social identities and relationships. Furthermore, country branding plays a big role in the consumer choice, within the fashion industry. Thus, it is time to analyze our country’s position within the worldwide fashion framework and ask: can the Portuguese textile industry and designers create a “made in Portugal” label DOLCE & GABBANA strong enough to compete against the big One good example of the Italian way players? of fashion is Dolce & Gabbana. Founded in 1985 by Domenico Dolce and Stefano Gabbana, the company achieved €1.19B in sales in 2016, consolidating as one Italian giant, side-by-side with Giorgio Armani and Versace. The brand offers a wide range of products, extending from high-end clothing, leather goods, footwear and accessories to beauty, eyewear, watches and jewels (which are produced through licensee partners). But what makes it different is the value proposition: “Sicilianity, Sensuality, Sartoriality”. Domenico Dolce and Stefano Gabbana’s inspiration “has always come from Italian culture and from Hollywood glamour”. Regarding to brand communication, playing “with roles, with opposites, with masculine and feminine, black and white, sacred and profane” was the key for success in the relation with the market. Not only the company has incorporated the Picturesque Sicily in campaigns, while playing with Italian stereotypes, but also in more recent years, Dolce & Gabbana has been disruptive by introducing powerful ambassadors of the brand (e.g. celebrities like Madonna and Kylie Minogue) and engaging on a digital marketing campaign to connect with younger generations. Lastly, Sartoriality concerns store environment. At the beginning, Dolce & Gabbana stores incorporated baroque elements, transporting the client into a picturesque scenario. However, the brand was affected by pressures to expand into other markets, motivating the implementation of a modern, dark generalized environment, and, consequently, a loss of the initial identity. Dolce & Gabbana stores were, then, banalizing, becoming undifferentiated luxury stores. Therefore, in an effort to return to the origins, Dolce & Gabbana introduced Sartorias – spaces dedicated to the most exclusive clients, where they are given a more personalized and luxurious customer experience. Sartorias are, hence, the channels through which “haute couture” and the finest collections are disNIC UNDERGRAD REVIEW 33 played and sold to the wealthiest clients. On the other hand, Italy successfully developed a competitive advantage through the years in the fashion industry. This was a result of the harmonious presence and interaction of designers, entrepreneurs and a high-quality textile industry. And, particularly, Italian leading brands were more capable than the French peers to adapt to social and economic changes and to integrate the industrial system in the manufacturing of high-quality garment

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“Sicilianity, Sensuality, Sartoriality”. Domenico Dolce and Stefano Gabbana’s inspiration “has always come from Italian culture and from Hollywood glamour”.

TO BE C ATA LAN OR NOT TO BE ONCE UPON A TIME

Francisca Anselmo

Miguel Amaral

The world is a constant, ironic paradox. In an age of globalization, we keep watching independence and secession movements. Be they legitimate or not, the fact is that they exist and reasons lay behind. The most mediatic lately has been Catalonia’s declaration of independence. But why has it happened now? It’s important to know that Catalonia has its own culture and language, significantly different from the Castilian one (the majority in Spain), despite the proximity and the coexistence in the same country. That said, it’s natural that the struggle of some for independence still persists after several attempts to become a nation across the centuries. Shall we briefly tell the history from the beginning? The idea of an unified Spain arised only in the 15th century, with the marriage between the monarchs of Spain and Aragon. With the Spanish Golden Age fading away and so its influence, military power and economical health, there were attempts to centralize more and more a country in which many cultures and different traditions coexisted: this created conditions to uprisings, and so the will to have an independent Catalonia. This began in the 16th century (Thirty Years’ War), repeated in the 18th century (War of the Spanish Succession, where Catalonia supported the defeated Habsburg candidate to the throne), again in the 19th century (Carlist Wars, where they managed to support another defeated candidate), and in the 20th century (Spanish Civil War, where they – yet, here it comes again – supported the defeated Republican side, losing for the nationalist one). And so we arrive to the 21st century, with an unified, democratic and European Spain, in which Catalonia is considered an autonomous region, with its own culture, language and rights protected by law.

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“IT’S THE ECONOMY, STUPID!” For many Catalans before, the victory of having the Catalan as an official language alongside the Castilian Spanish would be a dream, as Catalonian identity was repressed in some periods of History (the most recent during the Franco’s nationalist dictatorship). Nevertheless, many Catalans still want to be independent nowadays. That’s why it would be a mistake to justify this movement for independence only based on a cultural and historical argument. The analysis on Catalonia’s situation stubbornly ends up in the same stop: economics. James Carville (a Bill Clinton’s strategist) once stated “It’s the economy, stupid!” and indeed is true - Catalonia’s independence movement departs little from many other autonomy causes across Europe in the sense that economic reasons are the main trigger to these movements. In a multicultural Europe, where the process of integration keeps going on despite its opposition, economical reasons amplified by the recent subprime crisis are the crucial point to discuss. BREAKING IT DOWN TO NUMBERS Catalonia is one of the most economically developed regions of Spain: it stands for 16% of the Spanish total population and 19% of Spain’s GDP (about twice the contribution of Scotland to the UK). Furthermore, speaking of industrial value-added, Catalonia contribution more than doubles the Community of Madrid’s regarding the total industrial sector in the Spanish GDP. We can say without any doubt that Catalonia is the richest autonomous region of Spain: it has almost the double of GDP per capita than the poorest region (Extremadura). Having such discrepancies inside the same territory makes Spain having a progressive tax system across regions. What in theory could be a fair idea, is a reason to lots and lots of debates and political battles in Spain – this point was taken as the main argument of the independentist parties against Madrid. Comparing with identical standards, we conclude that the same wage in Catalonia pays more than in any other region, with special emphasis on low salaries, which have a greater tax pressure comparing to other Spanish regions. However, Catalonia is one of the regions with more public debt to the central government, which makes it more leaning to keep up higher regional taxes (which they do) and then blame Madrid for the under financing they get (which is inferior to the national average). In fact, when in 2015 Rajoy’s government passed a fiscal reform which aimed for a tax relief on the part of the central state, the Generalitat was the only regional government not incorporating that relief into the Catalan’s tax system. Taking leverage of the fiscal reform to tackle the high autonomous debt while blaming Rajoy (who is politically fragilized due to the known Popular Party’s scandals and the economic crisis) with his Madrilenian centralism is the political definition of killing two birds with one stone. Quite smart.

FROM SUBPRIME TO CATALONIA For the sake of the economic argument, one can find a worldwide correlation between periods of economic crisis and uprisings or public discontent. We can interpret the 2014 referendum as a cumulative result of years of economic problems in Spain which somehow lowered the living standards of the low-middle classes during the years after 2008 – people become more willing to make radical changes when conditions deteriorate. In the end, a more binding referendum was held in 2017, which led to a declaration of independence by the Catalan parliament based on a referendum with a turnout of less than 50% - leading the Spanish government to dissolve the Generalitat and calling for elections in Catalonia. Despite the procedure, what matters is that Catalonia is now in a state of tremendous political and social instability which is and will take a toll on its economy. COME FLY WITH ME, LET’S FLY, LET’S FLY AWAY Oryzon Genomics SA, a Spanish drug maker, became the first listed company to take a flight from Barcelona to Madrid, followed by more than 2,000 other companies that decided to move their HQs out of Catalonia. CaixaBank and Sabadell, the region’s largest banks, were amongst the aforementioned as the generated political chaos started to have

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... it would be a mistake to justify this movement for independence only based on a cultural and historical argument. The analysis on Catalonia’s situation stubbornly ends up in the same stop: economics.

a negative impact on deposits. Banks would be particularly harmed by an independence scenario, as Catalonia would likely find itself outside of the EU, its system of regulation and safeguards. Hence, amidst HQs relocations and frozen investments, it is not surprising that the Spanish Government has revised down 2018 growth forecast from 2.6 percent to 2.3 percent. A prediction that turns out to appear quite optimistic given Catalonia’s representing about one fifth of the country’s total GDP. POLITICAL RISK: A WINNING FORMULA? Meanwhile, while some run away from the chaos, others perceive political risk as a winning formula in Europe, this year. PIMCO, one of the world’s premier fixed investment managers, has gathered the largest position on Catalonia’s $6 billion junk-rated debt, claiming that “the chance of independence is very small, and overpriced”. Aggregately speaking, the Californian fund manager held 8.3 percent of the Catalonia’s bonds across all maturities – according to the most recent filings compiled by Bloomberg –, having increased its stake in the February 2020 bond by 17 percent over the past eight reported quarters. Even though the outcome of the December 21st election is far from predictable, PIMCO anticipates a solution where Catalonia does not break away, amidst an outperformance of Catalonia’s versus Spanish government bonds. Accordingly, taking advantage of political risk as a winning formula may end up being an appealing scheme, under an EU opposed to separatism movements and a not so strong political force leading the Catalans’ people.

led “silent majority” goes out and vote in favor of the pro-unity parties, resulting in a pro-Spain majority, it happens that the Socialist Party of Catalonia (PSOE), the People’s Party (PP) and the Citizens’ Party (C’s) are ideologically very different, only agreeing on the issue of unity. Therefore, a formidable challenge would be faced in order to form a stable coalition government that is able to make decisions. These parties would struggle to resolve major political and socioeconomic problems as they simply lie on different sides of the political spectrum. In the end, all lies on the December 21st. Whether pro-independence or pro-unity take the lead on these elections, the prospective is of political instability in the medium-long run, even if the main pro-unity parties make a short-term effort for the sake of the maintenance of Catalonia under Spain. However, if PP, PSOE and C’s are able to put aside their differences to make a stable coalition for the Generalitat, there is a possibility of stability for Catalonia still as an autonomous region of Spain. It’s up to these to define how the 21st century will be for Catalonia.

Having such discrepancies inside the same territory makes Spain having a progressive tax system across regions. What in theory could be a fair idea, is a reason to lots and lots of debates and political battles in Spain.

CATALONIA’S FUTURE: WILL IT OVERCOME THE CRISIS? On the December 21st, Catalans will be called to the polls, resulting from the enforcement of the Article 155 by Spain’s central government, led by Mariano Rajoy. Amidst pro-independence parties either in jail or exile, Catalans give the impression of not trusting Madrid, seeing the actions of the central government not as attempts to resolve the crisis, but as punishment and deliberate humiliation of the Catalan people. In the midst of alike atmosphere, the election campaign will likely do no more than just recall extreme sentiments on both sides and deepen the societal division. Meanwhile, regardless of the result, Catalonia’s crisis seems far away from reaching an end. On the one hand, if pro-independence parties win, even without the proposed coalition by Carles Puigdemont, the ruling People’s Party has already threatened to reapply Article 155 – if the pro-independence parties continue with their push to establish the Catalan Republic proclaimed on the October 27th. That would mean that the newly elected parliament would be dissolved, its government would be suspended, and its members would likely be prosecuted. Then another election would have to be called, dropping Catalonia into a permanent crisis. On the other hand, if the so-cal-

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BOOK REVIEW Tiago Louro Alves

ACTORS IN A PLAY A review of the kiss-and-tell memoir of the year

rockstar and a reasonable politician walk into a bar and turn out to be the same person: Yanis Varoufakis. ‘Adults in the Room’ is the recent memoir of the economist and academic turned politician. The subtitle, ‘My Battle with Europe’s Deep Establishment’, identifies it as a full-blown political account of the events leading and proceeding his role as the Greek Finance Minister from January to July 2015. The book tops just over 600 pages and reads mostly as a political thriller. Its structure is that of a succession of stories and descriptions of conversations presented in chronological order. As a procedural note, good practice dictates that the reviewer should make his preconceived ideas known. In this case, the exercise of annunciating such opinions is the appropriate passageway for the book itself. My conceptions of both the figure, Varoufakis, and the subject, the Greek Crisis, have always been conflicting: on one side, juvenile admiration for the press images of leather jackets confidently wore while meeting heads of state, and, on the other, the sad thought that the Greek political elite had not exercised its power in the right way. Interestingly enough, while reading the book, those three elements were unabatingly addressed: political power, the press, and the persona of Yanis. POLITICAL POWER There are several levels of power games presented throughout the three parts of the book; mainly, one within the Greek and another between Greece and the Franco-German axis.

The first part starts from the financial crisis and gives the background to the events in 2015. It sets the scene by explaining how Greece had come to a quasi-humanitarian crisis. Here, the fingers are pointed at the country’s systemic corruption that led to the first bailouts and at the way in which the recipe of Troika failed. Hence, the political onus was on the Greek authorities and on the external power brokers that preferred the well being of French and German banks over the country they were expected not to harm. Part two takes us into the first half of 2015 when Greece was living on the edge of bankruptcy. It adds Varoufakis to the scene and continues its focus on the fight between the big European players versus the Hellenic proposals for sustainable solutions. It is from this part onwards that the confidential conversations that characterize this memoir are told in first hand by the author; amongst the personalities whose conversations were recorded, there are Christine Lagarde, Wolfgang Schäuble, Mario Draghi, and Jeroen Dijsselbloem. In the last part, the book reaches the apex of both internal and external political plays that lead to Varoufakis’ resignation: the prime minister betrays him and the international institutions win the fight. THE PRESS The media made Varoufakis Varoufakis. That gift had the benefit of worldwide awareness but also the hindrance that the awareness was of someone that did not necessarily resemble Yanis himself. For this reason, Varoufakis addressed and challenged the common views that people hold about him and his views - so much so that, more than once, Yanis’ explanations emerge as a tired lament. Instead of describing himself as a reckless politician with unfeasible proposals, Varoufakis accomplishes to enumerate an extensive list of people and organizations that privately shared their support and, in some cases, even help. For instance, the boutique Lazard, who had been involved in the original loans design, offered the full availability of some workers and its know-how with the objective of redeeming itself for its initial support of Troika. NIC UNDERGRAD REVIEW

THE PERSONA OF YANIS Amidst explanations of past decisions, Varoufakis portrays himself as an erring hero, but assuredly the hero. In this respect, the irony is that he might have been a true hero if only he was willing to play the regularly illogical political games required to get one’s ideas a hearing. Apart from that, it is notorious that Varoufakis seemed to always speak, both in private and public, as if a historical moment was being lived; often alluding to the great epics and with messages of the need for unity and fraternity amongst the European people. In fact, a film based on this book is planned to be released in 2018. Thus, it only seems plausible that the support that he has already gathered with his pan-European movement, DiEM25, continues only to increase with the support of ever bigger audiences from ever broader geographies. At the end, after his efforts resulting in a defeat by the other adults in the room and to writing this book, one could recover the question from the distinguished Larry Summers to Varoufakis, in April of 2015: «There are two kinds of politicians: insiders and outsiders. The outsiders prioritize their freedom to speak their version of the truth. The prize of their freedom is that they are ignored by the insiders, who make the important decisions. The insiders for their part, follow a sacrosanct rule: never turn against other insiders and talk to outsiders about insiders. Their reward? Access to inside information and a chance, though not guarantee, of influencing powerful people and outcomes. So, Yanis, which of the two are you?» By then, Varoufakis already knew the answer. Now, we do too.

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BOOK REVIEW THINKING , FAST AND SLOW

Filipe Pereira

n light of the recent bestowment of the Nobel Memorial Prize in the Economic Sciences on Richard Thaler, it might be worth revisiting one of the main influences on this year’s laureate: Daniel Kahneman, the recipient of the 2002 Nobel. Kahneman and Thaler first crossed paths in the late 70s, when both were professors at Stanford University, and quickly developed a friendship, having ever since each one “a considerable influence on [the] other’s thinking”, according to Kahneman. Thaler’s early works, including one of the founding texts in behavioural economics, “Towards a Positive Theory of Consumer Choice”, were built on top of the work developed by Kahneman in a nearly career-long collaboration with Amos Tversky. The results of this collaboration were among the subjects of Kahneman’s book “Thinking, Fast and Slow”, a broadly popular exposition of the results of his research over four decades, which contributed to the creation of the field of behavioural economics as it exists today. The book itself deals with human intuitive thinking, and delineates the biases and fallacies that informal heuristics fall foul of. Kahneman begins by setting out

a dichotomous framework of human reasoning, built around the antagonic conceptions of the rather unoriginally named “System 1” and “System 2”. The former is defined as the immediate part of human reasoning, acting in an unconscious and effortless manner, although more liable to mistakes. The latter is the more traditional form of thinking - slow, yet less prone to biases and fallacies, and only used when circumstances require. The biases Kahneman notes along his book are generally a consequence of a failure to engage System 2 into action, and relying instead on the more immediate System 1 thinking. Among the most notable biases is “anchoring”, a situation where the planting of an arbitrary number on one’s head influences an unrelated numerical estimate. In an experiment described in the book, a rigged wheel of fortune is spinned in front of the students who participated in the test. Afterwards, they were asked about the percentage of African countries represented in the UN, and whether it was above or below the number given by the wheel. Students who saw the wheel of fortune stop at a high number gave higher estimates than the ones who saw the fortune wheel stop at a low number. Another notable experiment concerns the “representativeness heuristic”, where participants were given a description of “Linda”, carefully constructed as to approach a stereotypical conception of a feminist and then asked to order several scenarios in terms of likelihood, among them being (1) “Linda is a bank teller” and (2) “Linda is a feminist bank teller”. Although (2) is a special case of (1), participants tended to rate (2) to be more likely than (1). This is easily explained by System 1’s fixation with resemblances, and (2) being easier to associate with Linda’s description than (1). The end result was that participants not so focused on the task at hand ended up making statistically impossible assertions. The key idea here is that when we tackle a problem, we try to represent it by means

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of perception and memory, and our posterior judgement is clouded by the flawed nature of these representations - after all, these are mere approximations based on imperfect information. In this specific case, participants constructed a “Linda” based on the description given, and judged her more likely to be a feminist than not, and therefore more likely to be both a feminist and a bank teller than a bank teller (even though the latter category encapsulates the former), because a bank teller is more likely to be associated with not being a feminist than with being one. It would be interesting to relate the representativeness heuristic with finance. Given a company with a recent history of consistent earnings growth, investors will, due to System 1’s constant search for patterns, take its characteristics to be representative of earnings growth potential, despite the fact that the company’s recent record may be nothing more than a lucky run during a random walk. Convinced by this constructed representation, investors will be tempted to pour money into this company’s stock, or other stock taken to be similar to the well-performing firm’s. Ignoring the fact that high earnings growth is unlikely to repeat itself, investors are later disappointed when the eventual reversion to the mean occurs. Understanding of the cognitive biases and logical pitfalls of heuristic thinking is essential to the proper process of decision-making. Kahneman’s book fits that purpose just sublimely.

CASE II OF FINANCE IN PYTHON An implementation of Programming in Nova SBE Curriculum

Tiago Louro Alves

Every single day we are bombarded with news that programming is the skill of the future. From startups to hedge funds, we hear about its use everywhere. With that in mind, we thought it would be interesting to showcase its implementation in our one syllabus and specifically in the Bachelor’s Finance course. Below you will find a walkthrough of the solutions to the second case of Finance. While students were asked to solve it with Excel, these solutions were developed with Python, a programing language. Python is a great choice for this task given that some of its most well-known extensions - in technical terms, libraries - were developed with finance in mind. In fact, we used extensively the pandas library whose creator was Wes McKinney, a hedge fund developer. Even though you might not understand the syntax, we recommend you to read and compare the comments - e.g, ‘# First comment’ - with the code that precedes it below.

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NยบXX - MARCH 2017 $5,00

C H I N A | C LO S E R LO O K

TURNING POINT?

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CASE II OF FINANCE IN PYTHON