{"id":2366,"date":"2011-05-06T05:13:34","date_gmt":"2011-05-06T10:13:34","guid":{"rendered":"http:\/\/www.vanderbilt.edu\/magazines\/vanderbilt-business\/?p=2366"},"modified":"2015-07-07T20:18:55","modified_gmt":"2015-07-07T20:18:55","slug":"smart-money","status":"publish","type":"post","link":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/smart-money\/","title":{"rendered":"Smart Money"},"content":{"rendered":"
\"Miguel
Miguel Palacios<\/figcaption><\/figure>\n

Generations of MBA graduates have mastered pricing models designed to evaluate companies based on capital assets like equipment, land and raw materials. But as the world economy shifts to one that increasingly places a premium on brainpower instead of horsepower, there are few, if any, reliable methods for analyzing the financial value of human capital.<\/p>\n

To help bridge that gap, Vanderbilt\u2019s Financial Markets Research Center brought together researchers last October to look at the value and risk of human capital and how it affects a firm\u2019s business and financial strategy. For the event\u2019s organizer, Miguel Palacios, Assistant Professor of Finance, the pursuit of this new model is more than just an interesting theoretical exercise\u2014it\u2019s personal.<\/p>\n

The Colombia native is co-founder of Lumni Inc.<\/a>, a Miami-based company that has developed investment products to help send promising students to school who otherwise would be shut out of higher education by soaring costs. Operating in four countries, including the U.S., Lumni was cited by Businessweek<\/em> in 2009 as one of America\u2019s most promising social ventures. More recently The Economist<\/em> highlighted the company in a piece about innovative new microfinance ventures designed to help students pay for higher education.<\/p>\n

With co-founder and fellow Colombian Felipe Vergara, a former McKinsey consultant, Lumni has financed education opportunities for 1,800 students using more than $10 million. The company raises money from investors such as the Inter-American Development Bank, foundations, universities and wealthy donors. Students commit to paying a fixed percentage of their income\u2014never more than 15 percent\u2014into a Lumni-created fund typically for five years after graduation. In turn, that fund pays out proceeds to investors.<\/p>\n

As The Boston Globe<\/em> has described it, \u201cThese contracts, proponents say, would allow more kids to finish college. They would free graduates from crushing debt. And they could liberate youngsters to pursue socially valuable but low-paying work such as teaching.\u201d<\/p>\n

But it is not just save-the-world types who would benefit. Palacios and others point out that this model would also help fund the next generation of doctors and lawyers as a way to spread investor risk through a broad pool of students.<\/p>\n

\u201cThe best analogy is insurance,\u201d Palacios says. \u201cNot everybody crashes. If you pool everybody together, you are in a much better position.\u201d<\/p>\n

\"Lumni,
Lumni, a company that Palacios co-founded, has developed investment products to help more kids finish college and avoid crushing debt.<\/figcaption><\/figure>\n

The analogy may end there, however, for unlike insurance there is no set of accepted standards for quantitatively measuring risk or reward when it comes to education. How, for example, does the value of human capital change when a person adds a medical degree versus a bachelor\u2019s in philosophy?<\/p>\n

\u201cThis is the largest asset that most people have,\u201d says Palacios, who estimates that human capital accounts for about 90 percent of aggregate wealth.<\/p>\n

Palacios says human capital poses a particular challenge for researchers because, while it represents the single largest asset class in the world\u2019s economy, one cannot directly observe its value or dynamics. \u201cWe merely observe wages, human capital\u2019s dividends,\u201d Palacios wrote in a 2009 paper. \u201cThus, we need a framework to determine human capital\u2019s value.\u201d<\/p>\n

Researchers continue to look for a breakthrough model in the field, and so far Palacios\u2019 work indicates that human capital is less prone to economic shocks than equities, bringing a new level of empirical rigor to academic colleagues and potential investors alike.<\/p>\n

Yet there are other, more practical concerns for the student-investment concept beyond technical valuation, namely how to guard against a student putting off a career because there is no pressure to repay loans. To address this, Lumni draws on psychologists to help screen its applicant pools and designs the student contracts in such a way as to deter abuse of the system.<\/p>\n

There is also a risk that potentially high earners\u2014medical school students, for example\u2014would avoid signing up because they could end up paying out more to Lumni\u2019s investors than they would to a private student loan company. In such a case, the company offers better terms such as a lower percentage of income to be repaid.<\/p>\n

Lumni is not the first company to attempt this invest-in-students model; its conceptual roots stretch back to the 1940s and 1950s when economist Milton Friedman first proposed the idea. More recently the companies MyRichUncle, a U.S. student financing company that is now out of business, and German-based CareerConcept, launched versions of the idea. MyRichUncle began experimenting with these types of student contracts in 2001. CareerConcept, however, has seen success since it began offering student investment funds in 2002. It has sent thousands of students to school across more than 20 countries, mostly in Europe, through eight funds totaling 40 million euros.<\/p>\n

For now, Lumni is trying to establish itself in the Americas, with a goal of financing 1 million students over the next 12 years. Vergara told Businessweek<\/em>, \u201cMy vision is to create a revolution in investing in human capital to show it\u2019s possible to receive an education despite low income.\u201d<\/p>\n

But companies like Lumni can only execute on that vision if they have the analytical tools being developed by Palacios and others to correctly value the contracts they sign.<\/p>\n

Read more about Palacios.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Generations of MBA graduates have mastered pricing models designed to evaluate companies based on capital assets like equipment, land and raw materials. But as the world economy shifts to one that increasingly places a premium on brainpower instead of horsepower, there are few, if any, reliable methods for analyzing the financial value of human capital. […]<\/p>\n","protected":false},"author":341,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[66,12],"tags":[39],"class_list":["post-2366","post","type-post","status-publish","format-standard","hentry","category-departments","category-inside-business","tag-spring2011"],"_links":{"self":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/2366","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/users\/341"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/comments?post=2366"}],"version-history":[{"count":1,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/2366\/revisions"}],"predecessor-version":[{"id":8832,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/posts\/2366\/revisions\/8832"}],"wp:attachment":[{"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/media?parent=2366"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/categories?post=2366"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.owen.vanderbilt.edu\/vanderbiltbusiness\/wp-json\/wp\/v2\/tags?post=2366"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}