The founding father of artificial intelligence Marvin Minsky once said that his ultimate goal was not so much to build a computer he could be proud of as to build one that would be proud of him. MIT Sloan Professor Andrew Lo mentioned this anecdote in a recent piece about financial advisers in TheWall Street Journal. In essence, he poses the question: Can a robot do the job?
Lo says that while tech-savvy millennials would be just as happy interacting with an app as with a human adviser, robo advisers can’t take into account the emotion of investors. “When the stock market roils, investors freak out,” Lo explains. “They need comfort and encouragement.” During the recent stock-market rout, he notes that Vanguard Group was so besieged with calls from jittery investors it had to pull staff from across the company to handle the call volume. “Investing is an emotional process,” Lo says, and “robo advisers don’t do emotion.” At least not right now.
Integrating human feeling into the digital advising process is probably the greatest challenge of financial technology. Lo likens the present state of digital financial advising to a rotary phone in an iPhone world. He points out that investing is much more complex and nuanced than tasks like driving, “which is why driverless cars are already more successful than even the best robo advisers.”
Exchange rates—they don’t exactly make the world go round, but when they fluctuate, they can give it a bumpy ride. As MIT Sloan Professor Kristin Forbes wrote on the commerce website MarketWatch recently, movements in exchange rates can significantly affect a country’s competitiveness. On a macro level, they can have an impact on everything from export competitiveness to GDP growth and can make it harder to repay foreign debt and reduce earnings on foreign investments. On a micro level, exchange rates can push up or down the prices of key merchandise, from oil to oranges.
“Currency movements also have big implications for the outlook for inflation,” says Forbes, who is an external member of the Monetary Policy Committee for the Bank of England. “This relationship is known as ‘pass through’…it captures how changes in the exchange rate pass through to import prices and inflation…for those of us tasked with setting monetary policy, understanding how currency movements pass through into inflation is critical to our decision on when to adjust interest rates.”
Smart data, and lots of it. Brian Beachkofski, SF’ 12, and John Grossman, SF ’12, are leveraging it to improve the human condition. Beachkofski (senior director) and Grossman (co-president and general counsel) work for Third Sector Capital Partners, Inc. The nonprofit consulting firm evaluates extensive sets of data to guide governments, social service agencies, and private funders in building social programs that successfully address critical challenges.
The innovative “pay-for-success (PFS)” social service model works this way: A government agency identifies a critical social need—chronic homelessness, for example. Then, funders like banks or charitable foundations provide upfront capital to a high-performing social service provider that can help meet that need. If the providers achieve predetermined outcome levels, as verified by an independent evaluator, the government repays the private funders’ initial investment. Third Sector, a leader in developing PFS initiatives, serves as a facilitator and advisor to all parties in the process, using data as the basis for modeling the project and projecting the benefit to the at-need population.
One example of the success of the PFS model is a Third Sector project in Cuyahoga County, Ohio. Beachkofski, Grossman, and their team partner with nonprofit and government agencies to reunite families with children who have been placed in foster care. The children originally were removed from their homes because their families were struggling with domestic violence, substance abuse, and homelessness. Data indicates that such children spend significantly longer lengths of time in foster care and suffer the loss of consistent caregivers.
Using a PFS model, the county government partners with a local nonprofit service provider to support these fragile families with access to housing, mental health, and other social services. As a result, they are reuniting families faster and improving lives while creating greater accountability for government spending.
The African continent is, in many realms, an untapped frontier, and many global business analysts believe that one of those areas is entrepreneurship. “East Africa, in particular, is very green ground for basic entrepreneurship,” says Flavian Marwa, SF ’10. “Here, it’s more important to execute a simple idea well than to come up with an idea that no one has thought of. You don’t have to be a sophisticated technologist to take advantage of this environment.”
A consultant with the International Finance Corporation (IFC), an arm of the World Bank Group, Marwa uses his insights into the continent to advise the IFC on how African countries can implement policies that stimulate the creation and growth of small and medium enterprises (SMEs). “The idea is to bring in the private sector as much as possible. We know this approach leads to sustainable development. To be effective, however, policies to support SMEs also must address impediments in the value chain of targeted sectors.” Impediments like the skills gap, lack of mentorship, and information asymmetry.
Marwa says that leaders who are committed to a robust education system—from primary to secondary to university levels—will enable their citizens to develop a keen eye for opportunities and empower them with the skills to launch businesses. He notes that in Tanzania and other East African countries, the IFC is encouraging multinational companies to collaborate with universities to develop curricula that are relevant to what is actually happening in industry.
After a precipitous free fall beginning in 2008, the Spanish economy, the fourth largest in the Eurozone, is beginning to climb out of recession, and there is nothing serendipitous about the recovery. José-Maria Fernández, SF ’10, Director General of the Spanish Treasury, and his team devote a major share of their working life to in-depth analysis and strategic thinking on how to finance the country and the implications for taxpayers in the short, medium, and long terms. “All our thinking translates into a relatively small number of decisions and actions,” Fernández says—actions, of course, that have wide-ranging impact and potentially long-term consequences.
“We raise approximately 240 billion euros a year selling bonds and bills globally to investors while executing only 50 or 60 funding transactions annually,” Fernández adds. “We probably spend 90% of our time designing, evaluating, and revising our financial strategy in light of market, economic, and budgetary conditions. That means only 10% of our activity is devoted to execution.” The equation, he believes, is as it should be.
“When written in Chinese,” John F. Kennedy once said, “the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity.”
MIT Sloan Distinguished Professor of Finance Deborah Lucas believes that the 2008 financial meltdown is a case in point, triggering a tectonic shift for policymaking within government financial organizations. “If you’re looking for silver linings in the 2008 crisis,” says Lucas, “the chance to focus attention on financial literacy and transparency in the public sector is a big one. A large segment of the policy community agrees that we must act now to improve the accuracy of our risk assessments.”
Like so many of civilization’s great conundrums, the quest for a cure for cancer needs more money. Drug development can take a decade and close to a billion dollars, so funders aren’t exactly queuing up to help commercialize innovations.
MIT Sloan Professor Andrew Lo and his colleagues have devised a revolutionary way of financing drug development through “securitized debt.” In an article in Nature Biotechnology, Lo and his coauthors Jose-Maria Fernandez, SF ’10, and Roger M. Stein of Moody’s suggest that a large megafund comprising long-term bonds issued by leading drug companies could help investors justify the funding of risky biomedical research.
It’s common to criticize many of the world’s mega-organizations for being resistant to change, but reinventing large organizations—across borders, across cultures, across governments—can be a daunting feat. Nevertheless, the World Bank Group, with 188 member countries, is tackling an unprecedented reinvention in an effort to boost the organization’s impact.
As the Middle East North Africa regional manager for the Trade & Industry Competitiveness Program of the International Finance Corporation (IFC), the private sector investment arm of the World Bank, Hazem ElWassimy, SF ’09, is on the front lines of the historic transformation at the World Bank Group (WBG). For the last two decades, he has been working for and with multilateral organizations and government entities to generate investments and spark innovations that help countries modernize and expand economic opportunities.
Is the dominance of the U.S. dollar waning in the international marketplace? We asked that question of MIT Sloan Fellows alumni from Sao Paulo to Moscow, and we’ll be sharing those perspectives in this forum over the next few months. We start with Jim Walker, SF ’06, COO and Head of Business Development at Private Bank-Americas, Credit Suisse. With clients all over the world, Walker’s business is as global as global business gets. Does he see an immediate threat to the hegemonic status of the dollar?
“Enduring factors drive the demand for dollars globally,” he says. “As our clients build substantial wealth in their countries of origin, they want a significant portion of that wealth to reside in the U.S.—and you have to own U.S. dollars to buy U.S. assets. Even our Chinese and Brazilian clients want their children’s assets to be U.S.-based.” Walker notes that many are willing to accept a negative yield just to park some of their wealth in the relative security of the U.S. dollar. The reason, he thinks, is fairly straightforward: among central banks, only the U.S. Federal Reserve has consistently demonstrated a capacity for timely and decisive action in times of turbulence.