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NEWS FROM THE INSTITUTE AT CLAREMONT MCKENNA COLLEGE

CMC PRESIDENT VOLUME 10, SPRING 2010 Pamela Brooks Gann BOARD OF ADVISORS James B. McElwee ’74 P’12 (Chair) Director’s Report Weston Presidio by Eric Hughson Kenneth D. Brody Taconic Capital Advisors, LLC William S. Broeksmit ’77 P’12 THIS YEAR WAS academic careers, and it is our job to help Deutsche Morgan Grenfell Justin Hance ’06 the seventh year for students get where they want to go. We think Harris Associates, LP Brent R. Harris ‘81 the FEI. The FEI is that in addition to the courses they take, the Pacific Investment Management Company the finance research research that the students do that is associated Alan C. Heuberger ‘96 Cascade Investment arm of the Robert Day with the FEI helps prepare them for success Kurt M. Hocker ‘88 Union Bank School of Economics in their chosen careers. Gregg E. Ireland ‘72 and Finance, which Some of our academic efforts are, Capital Research and Management Company Eric Hughson Grant Kvalheim ’78 P’12 provides data and however, more practical. This year, we are Barclays Capital (Retired) John R. Shrewsberry ‘87 research support for faculty, and more building a course around the CMC Student Wells Fargo Bank importantly, provides research experience Investment Fund. The objective is twofold. Cody J Smith ‘79 Goldman Sachs & Company (Retired) for students. Last year, I reported that we First, we want to provide academic content Robert P. Thomas ‘99 The George Kaiser Family Foundation had an article co-authored with a student in valuation and asset allocation to better BOARD ASSOCIATES accepted at the Journal of Financial Economics . help students justify their investment Patrick S. Adams ‘94 OppenheimerFunds Next year, this student will be joining the decisions. Second, we want to improve the Scott A. Ashby ‘95 Morgan Stanley MIT finance doctoral program. Lest anyone quality of the feedback that students get on Brian L. Badertscher ’96 Societe Generale think that this is unusual, we have another their presentations. This second objective Brad A. Barrett ‘00 collaborative effort (with entirely different will be accomplished by enhanced video- Capital Research Global Investors Justin W. Braun ‘98 co-authors—Tejas Gala and Professor Fan conferencing so that finance practitioners can Independent Consultant Yu) which has a revise-and-resubmit at the observe and provide feedback on student James B. Carroll ‘77 LongRun Capital Management, LLC Journal of Financial Economics . presentations remotely. We know how hard it Kerry Fanwick ’76 BRE Properties, Inc. Of course, few of our students pursue Russell Greenberg ‘79 See Director’s Report on page 2 Altus Capital Partners Carol O. Hartman ‘86 The Caldwell Partners International Susan Matteson King ‘85 In This Issue: Jim Koon ’81 TCF Bank PG 2: Director’s Report Continued; FEI Christine Huk Mann ’87 Goldman Sachs & Company FinancialEconomics Summer RAs & 2010-2011 BGI/Larson INSTITUTE Michael Nutting ‘97 Fellows The Gores Group John O’Brien ‘02 PG 3: 2010 NYC Networking Trip Cascade Investment Adam J. Prager ‘01 PG 4: Kyle Casella ’10 Summarizes Wayne Warner Brothers Entertainment, Inc. Ferson’s Ath Talk Nicholas M. Shurgot ’95 The Financial Economics Saddle Peak, LLC Institute fosters education and PG 5: Spring 2010 Student Research Kevin K.C. Tan ’86 Analysts The Northern Trust Company research in financial economics by Joseph W. Vencil ‘85 PG 6: Where Will FEI Students Be AlphaWorks, LLC offering a unique undergraduate Robert C. Wetenhall, Jr. ‘94 Working? Royal Bank of Canada curricular program, the Financial PG 7: Maria Löhner ’10 Summarizes Peter DIRECTOR Economics Sequence, supporting Eric Hughson Bossaerts’ Ath Talk ASSOCIATE DIRECTOR state-of-the-art databases, and Lisa Meulbroek encouraging student-faculty PG 8: Recognizing FEI Seniors and ASSISTANT TO THE DIRECTORS Upcoming Events Terri L. Van Eaton interaction on research. 2 THE FINANCIAL ECONOMICS INSTITUTE

research on investment management topics. about 70 percent of the class had plans. Director’s Report from page 1 As you know, the job market for our Regarding our rising seniors, for this is for those particularly on the East Coast to students has been less good the last two years summer, 19 FEI students and former RAs interact with our students on a regular basis. than it had been previously. Hence, our have outside internships and one will be We’re hoping this will help increase the students need to look more competitive. As a working at the FEI. amount of interaction. result, the FEI has initiated a series of resume Finally, we are very pleased to welcome This year, we sponsored three public evaluations and practice interviews (both in- new FEI Board Advisors, Kurt Hocker ’88 lectures by respected finance academics at person and on the phone) to help students and John Shrewsberry ’87. Kurt is currently a the Marian Miner Cook Athenaeum. prepare for (1) interviewing for internships Senior Vice President and Manager, National Professor Chester Spatt, from Carnegie in late January and (2) interviewing for Banking at Union Bank. He replaces Phil Mellon University and former chief permanent jobs in September. The Flynn ’79 on the Board. Although we are economist at the Securities and Exchange interviewers for internships are senior very sorry to lose Phil, who took a position at Commission, spoke in November about the students who have been through the process, a bank in Wisconsin, we are very happy to efficacy of government regulation associated and the interviewers for permanent jobs will maintain our relationship with Union Bank. with the current financial crisis. In March, be young alumni(ae). The first practice super John Shrewsberry is an Executive Vice Professor Peter Bossaerts (see article in this day was successful enough that to the FEI’s President and Group Head at Wells Fargo. issue) of Caltech spoke about the frontiers of relief, it was taken over by our Robert Day We also wish to announce the addition of neurofinance. Finally, in April,Wayne Ferson School Placement Director, Michelle two new FEI Board Associates, Christine (see article in this issue) of USC spoke about Chamberlain, and has been expanded to Mann ’87 and John O’Brien ’02. In addition, how portfolio managers should use alpha. serve also the Robert Day Scholars. We have there has been a change at Cascade Next fall, we will have a visiting scholar, also tried to make sure that on our New Investment. We are sorry that Justin Hance Jonathan Berk from Stanford University, on York Networking Trip, students interview ’06 will not be continuing as an Advisor, but campus for a week where he will give a talk for internships. At least four of the trip’s his shoes will be well-filled by Alan for students as well as a research seminar for participants landed an internship based on Heuberger ’96, who was formerly an faculty and students. The support for these contacts made on the trip. Associate. John O’ Brien will be taking Alan’s activities is made possible by generous On the job front, 22 of our 28 seniors place as an Associate on our Board. Last, we contributions from our Board of Advisors and have firm plans for next year—only six are wish to welcome Christine Mann ’87 to our Associates and the BGI Fellowship Program, still looking. This compares favorably with Board as an Associate. She is currently a Vice which provides support for faculty-student last year’s , where at the same time, President at Goldman Sachs. L

Congratulations to the FEI Congratulations to the 2010-2011 Summer 2010 RAs: BGI/Larson Asset Management Fellows: MAXWELL CHAMBERS ’12, Economics/Mathematics major

REED HOGAN ’11, Economics major SAMANTHA BASTIEN ’11, Economics-Accounting major

SAUMYA LOHIA ’12, Mathematics/Economics major NATHAN DOCTOR ’11, Economics major

ROSABELLA MAGAT ’12, Economics/Mathematics major RAJAT GUPTA ’11, Economics/Mathematics major

NICHOLAS COADY SMITH ’12, Economics/Mathematics major ANDREW OETTING ’12, Economics/Mathematics major

SZE WAI YUEN ’12 , Economics-Accounting major GRANT PARKER ’11, Economics-Accounting major BRETT SPENCER ’11, Economics major CLAREMONT MCKENNA COLLEGE 3

2010 New York City Networking Trip By Maria Löhner ’10, FEI Student Research Analyst

DURING THE WEEK OF JANUARY 11, 2010, the Financial Economics Institute sponsored the seventh annual New York City Networking Trip, which provided an extraordinary learning experience for 3 sophomores, 10 juniors, and 4 seniors. This was the first year that the trip was organized by students. The student-run committee was comprised of a group of four seniors: Maria Löhner, Kyle Casella, Noah Franz, and Nikolas Miller. The students met on a weekly basis to organize everything from firm visits to networking events. During the week, the students visited eight firms including: Deutsche Bank, J.P. Morgan, Atalaya Capital, Morgan Stanley, Royal Bank of Canada, the Capital Group, Deloitte Consulting, and Goldman Sachs. In addition, they were invited to an opening dinner, a cocktail party, and a young alumni panel. 16 of the 17 students who toured Wall Street in January 2010. The week in NYC began with an introductory reception and dinner that was overview of the firm’s private equity group, in Morgan Stanley, where Managing Director hosted by Julie Spellman Sweet ’89 at particular, discussing its strategy and Scott Ashby ’95 hosted the students for an Cravath, Swaine & Moore. At the reception, evaluation methods. The students also heard overview of the firm’s debt capital markets students had dinner with FEI Board from recruiters about career opportunities business. This discussion included Morgan Members and alumni in the field of finance. within J.P. Morgan. Stanley’s recent role in the government’s The dinner was followed by a presentation On Tuesday evening, the students regulatory changes. The students also entitled, Liquidity Provision and Informed attended a CMC Alumni Association enjoyed an analyst panel, where they could Trading in the Credit Derivatives Market reception hosted by Kristen Edgreen ask questions about the transition from featuring Professor Fan Yu. Kaufmann ’98 at The Yale Club. The college to the first years on Wall Street. On Tuesday morning, the students reception drew many members of the CMC This year there was a new addition to enjoyed breakfast with Ivan Zinn ’96 at his community including current students, the program, a dinner with young alumni hedge fund, Atalaya Capital. Mr. Zinn alumni, parents, and CMC faculty. The from the Claremont Colleges. Attending the discussed his role as Founder and President, evening gave students an excellent dinner were Asaf Bernstein HMC ’08, a including how the firm was founded and the opportunity to interact with alumni, establish quantitative trading analyst at Citi, Valay changing strategy throughout the years. At contacts, and openly ask questions outside a Shah ’08, an investment banking analyst at Atalaya, students also met Ashley Fochtman, formal business setting. Moelis & Co, and Tejas Gala ’09, a market Head of Investor Relations, who explained On Wednesday, the group headed risk management analyst at Deutsche Bank. her role and her path to the firm. Mr. Zinn downtown to meet Robert Wetenhall ’94, The three alums provided helpful advice on finished the visit with a quiz for students Vice President, High Yield Research Analyst the interview process, anecdotes about work about current events, complete with Atalaya – U.S. Debt Markets, to get an overview of after CMC, and three unique perspectives. gear as prizes. Sales and Trading at the Royal Bank of On Thursday, the final day of activities Next, students visited Deutsche Bank’s Canada. Mr. Wettenhall gave the students a in New York City, students began their day Credit Risk Management Department and tour of the firm’s trading floor, where scenes by visiting Deloitte Consulting. Celia Ramos, had lunch with Alan Delsman ’68, Managing for the upcoming film Wall Street: Money a Senior Manager, and Greg Pavlik, a Director, and Rich Ferguson ’80, Managing Never Sleeps were shot. Principal, hosted the students at Deloitte. Director, Treasurer - Americas. The students The group had lunch at The Capital Following a presentation which provided an discussed how to evaluate risk, especially in Group where they were hosted by Brad overview of the consulting industry, students the current economic environment. Barrett ’00, Partner, and Joe Matt ’99, Vice participated in an analyst panel, featuring In the afternoon, the students visited J.P. President. The two hosts explained their Rishi Reddy ’07, which enabled students to Morgan and met with Amanda Wilson ’98, firm’s strategy, their paths to the firm, and ask candid questions. The visit to Deloitte Portfolio Manager in J.P. Morgan Investment what they thought made the company unique. Management. She started off the visit with an That afternoon the students visited See NYC Networking Trip on page 4 4 THE FINANCIAL ECONOMICS INSTITUTE

The Problem of Alpha and Performance Measurement By Wayne E. Ferson Summarized by Kyle Casella ’10, FEI Student Research Analyst and 2009-2010 BGI/Larson Asset Management Fellow

ON THURSDAY, APRIL 22, 2010 THE the first being to use the client’s preferences Financial Economics Institute welcomed to define alpha. In doing so, he avoids having Wayne Ferson, the Ivadelle and Theodore to make the faulty and difficult assumptions Johnson Chair of Banking and Finance at of previous papers. Professor Ferson USC’s Marshall School of Business, to the concluded that the right alpha is investor Marian Miner Cook Athenaeum. Professor specific and that “agreement in alpha is a Ferson presented his paper on “The Problem modeling fiction.” He said that the current of Alpha and Performance Measurement.” absence of costs and taxes in alpha models First, Ferson questioned the traditional was like “comparing apples to oranges,” familiarity with alpha (the measure of the leaving the future open for research in expected abnormal return of an investment) investor clientele specific performance within models such as CAPM and the Fama- measures, accounting for costs and taxes. French 3 factors. He then presented the two Professor Ferson received his Ph.D. in fundamental questions related to alpha in Finance from the Graduate School of investment management: “When faced with Business at Stanford University where he a fund that has a positive (negative) alpha, wrote his dissertation on “Expected Real should the investor want to buy (sell) that Interest Rates and Consumption in Efficient fund?” The second question is: “If a manager Financial Markets: Theory and Tests.” He has superior information, will he or she received his M.A. in Economics from generate a positive alpha?” Stanford and his M.B.A. from Southern The literature is undecided on the two Methodist University in Dallas, Texas. fundamental questions. Although in most Ferson has taught at Boston College, cases, investors will want to include positive University of Washington, Stanford alpha portfolios in their investment University, Arizona State University, the strategies, there are also cases where an University of Miami, University of South investor might want to short those portfolios. Carolina, and the University of Chicago. He Furthermore, researchers found that has taught undergraduate through Ph.D. managers can have negative alpha, even if level courses on investments, investment they have superior information. management, financial economics, and Professor Ferson then continued to econometrics. Ferson is a past editor of the discuss his continuation of the prior research Journal of Empirical Finance and the Review of into the mystery of alpha. He proposed a Financial Studies . He has been the associate WAYNE FERSON number of extensions for the use of alpha, editor for various journals. L

This year some firms, such as Deutsche Financial Economics Institute not only NYC Networking Trip from page 3 Bank, took the initiative to interview students reflects the strength of the CMC community provided a great opportunity for the students while they were in New York. Several and the advantages of a CMC education, but to learn about the differences between students have already secured summer is ultimately responsible for the success of consulting and banking. internships based on interviews and endeavors such as the New York City The final visit was to Goldman Sachs connections made in New York. Two students Networking Trip. where the students met with David Alvillar will be joining Robert Wetenhall ’94 this The seventh annual New York City ’01, a Vice President in Capital Structure summer and one student will be at DB with Networking Trip was a great success. It was a Finance Trading, and Andrew Kaiser P’13, Alan Delsman ’68 and Rich Ferguson ’80 . record year in the number of firms visited. COO of the Goldman Sachs Bank. Kaiser The students will undoubtedly benefit The breadth of firms allowed students to gain discussed some of the bank’s broader from these visits as well as the opportunity to a greater insight into the many different strategies in addition to Goldman’s role in the meet extensively with CMC alums who have opportunities within the field of finance. The recent governmental and regulatory changes established themselves in successful careers in students learned about consulting, investment facing the finance world. Mr. Alvillar New York. These relationships and this banking, sales and trading, asset management, introduced students to the organization and experience will be invaluable for the students private equity, and hedge funds. L culture of Goldman Sachs as well as an array as they continue at CMC and after of opportunities within the bank. graduation. Ongoing alumni support for the CLAREMONT MCKENNA COLLEGE 5

Financial Economics Institute Spring 2010 Student Research Analysts During the spring 2010 semester, eighteen student Research Analysts were assisting faculty members with research projects. The following is a list of the students, the topics they were researching, and their faculty advisors:

KYLE CASELLA ’10, Market Sentiment in HANNAH GREGG ’12, Impact of Board NICHOLAS SPARKS ’10, Analysis of Beta Europe: Examining the Case of Publicly of Director Independence on Mutual Adjustment and Prediction Techniques with Traded European Football Clubs with Fund Performance with Professor Professor Eric Hughson and Professor Professor Richard Burdekin Henrik Cronqvist Lisa Meulbroek

HARSHVARDHAN CHOWDHARY ’10, Effect RAJAT GUPTA ’11, Rhetoric and the Market: JENNIFER VOLK ’11, Corporate Governance of Liquidity on the Alpha Generated by Applying Behavioral Finance in Allocating Effects with Professor Henrik Cronqvist American Depository Receipts with Professor Funds in a Hedge Fund with Professor Paul Eric Hughson Zak at CGU YANG (AMANDA) YANG ’10, Portability of Star Winemakers’ Performance with RAGHAV DHAWAN ’10, Is CSR Spending WUNNA HLAING ’10, Effect of Liquidity on Professor George Batta Like Any Other Investment? Evidence from the Alpha Generated by American Depository the Financial Crisis of 2007-200 9 with Receipts with Professor Eric Hughson NANAKO YANO (POM) ’11, Capital Flows Professor Amir Barnea and Global Financial Stability with Professor MARIA LÖHNER ’10, The Value of Tort Suit Sven Arndt NATHAN DOCTOR ’11, The Value of Tort Preemption in the Pharmaceutical Industry Suit Preemption in the Pharmaceutical with Professor Eric Helland ERIC ZACHARIAS ’11, Portability of Star Industry with Professor Eric Helland Winemakers’ Performance with Professor NIKOLAS MILLER ’10, Capital Flows and George Batta JUSTIN ESKIND ’11, Experiments on Global Financial Stability with Professor Valuation of Risky, Intangible and Experienced Sven Arndt YUCHEN ZHANG ’10, The Impact of Assets with Professor Ananda Ganguly Operational Risk Incidents on U.S. Banks and ALEXANDER REICHERT ’11, Experiments on Insurance Firms’ Bond Prices with Professor NOAH FRANZ ’10, College and University Valuation of Risky, Intangible and Experienced Fan Yu Endowments in the Current Recession with Assets with Professor Ananda Ganguly Professor Lisa Meulbroek and Dean Janet Smith

Back row, from left: Kyle Casella ’10, Hannah Gregg ’12, Maria Löhner ’10, Nikolas Miller ’10, Nanako Yano ’11 (POM). Front row, from left: Nathan Doctor ’11, Noah Franz ’10, Nicholas Sparks ’10, Eric Zacharias ’11. 6 THE FINANCIAL ECONOMICS INSTITUTE

Where Will FEI Students Be Working?

CONGRATUATIONS TO THE FOLLOWING SENIORS AND JUNIORS COMPLETING THE FINANCIAL ECONOMICS Sequence who have notified the FEI that they have secured a full-time job, placement in graduate school, or a summer internship. This list identifies the students’ major(s) and their place of employment.

ALEKSANDER LYNG ’10 , Economics, CHRISTOPHE BINDERT ’11, Mathematics/ Graduating Financial Economics Barclays Capital, Sales & Trading Economics, Relational Investors (San Sequence Seniors: Division (New York, NY) Diego, CA)

STEPHEN ANDRON ’10, Economics- JAMIE MATUSIAK ’10, Economics- ANTHONY BOUVIER ’11, Economics/ Accounting, Ernst & Young (San Accounting/Mathematics, Beach Mathematics, Mercer Human Capital (Los Francisco, CA) Fleischman (Tucson, AZ) Angeles, CA) LEWIS CORSON ’11, Economics, Houlihan KYLE CASELLA ’10, Economics, Wells KEREN MICHELSON ’10, Economics, Lokey Financial Restructuring Group Fargo Securities Mergers & Acquisitions Google (Mountain View, CA) (Los Angeles, CA) (Los Angeles, CA) NIKOLAS MILLER ’10, Economics/ KAITLYN DESAI ’11, Economics- NANCY CHAN ’10, Economics-Accounting, Mathematics, Prudential Capital (San Accounting, Deutsche Bank (New Wells Fargo Commercial Underwriting Francisco, CA) York, NY) (San Francisco, CA) JOHN PEREZ ’10, Economics, University of NATHAN DOCTOR ’11, Economics, Cascade HARSHVARDHAN CHOWDHARY ’10, Washington Law School (Seattle, WA) Investment (Kirkland, WA) Economics-Accounting, Ernst & Young RAJAT GUPTA ’11, Economics/Mathematics, (Los Angeles, CA) SCOTT SANFORD ’10, Economics- Moelis and Company (Los Angeles, CA) Accounting, Marsh, an arm of the Marsh RAGHAV DHAWAN ’10, Economics/ and McLennan Companies (Los REED HOGAN ’11 , Economics, Financial Mathematics, Aon – Retirement Angeles, CA) Economics Institute (Claremont, CA) Consulting (Irvine, CA) NICHOLAS SPARKS ’10, Economics, Lazard CHRISTOPHER JONES ’11, Economics- BENJAMIN DRAA ’10, Economics, JP Investment Banking (Los Angeles, CA) Accounting, Deloitte Consulting – Human Morgan, Private Banking (San Capital (San Francisco, CA) Francisco, CA) MICHAEL WIDMANN ’10, Economics, SHAUN KHUBCHANDANI ’11, Economics, Credit Suisse Technology, Investment Citigroup (New York, NY) TRAVIS HULL ’10, Economics, RDS Banking Group (San Francisco, CA) Master’s in Finance Program BENJAMIN KRAUS ’11, Mathematics/ (Claremont, CA) YANG (AMANDA) YANG ’10, Economics, Economics, Goldman Sachs Securities Macroeconomic Advisers Division (New York, NY) ANDREW JARMON ’10, Economics, Mercer (Washington, D.C.) Human Capital (Los Angeles, CA) ALEXANDER REICHERT ’11, Economics, YUCHEN ZHANG ’10, Economics, Houlihan RBC Capital Markets (New York, NY) TYLER LAY ’10, Economics-Accounting, 4+1 Lokey Howard & Zukin (Los Angeles, CA) Program at Claremont Graduate ELIZABETH ROSE ’11 , Economics/ University (Claremont, CA) Psychology, Northwestern Mutual Funds (Minneapolis, MN) Financial Economics Sequence MICHAEL LIM ’10, Economics, Shattuck BRETT SPENCER ’11, Economics, Morgan Hammond Partners Investment Banking Juniors – Summer Positions: Stanley (Ontario, CA) (San Francisco, CA) JULIET ARCHER ’11 , Environment, Economics, and Politics, Merrill Lynch SCOTT YINGLING ’11, Economics- YU-YU LIN ’10, Economics-Accounting, Private Banking (Century City, CA) Accounting, PricewaterhouseCoopers Applying to graduate schools (Chicago, IL) SAMANTHA BASTIEN ’11, Economics- MARIA LÖHNER ’10, Economics, Citigroup Accounting, RBC Capital Markets (New ERIC ZACHARIAS ’11 , Economics, Mergers & Acquisitions (Los Angeles, CA) York, NY) Relational Investors LLC (San Diego, CA) CLAREMONT MCKENNA COLLEGE 7

Human Perception and Attitudes Towards Uncertainty By Peter Bossaerts Summarized by Maria Löhner CMC ’10, FEI Student Research Analyst

the human brain is well adapted to recognize appears to think that risk is just squared and react to such “social” risks—perhaps it is error, not anything more complicated (such even better at this task than at assessing pure as skewness or kurtosis). This is the first financial risks which arise from non-strategic evidence from neurofinance that the simple uncertainty such as, for example, uncertainty finance treatment of economic agents with about the weather. Professor Bossaerts and mean-variance preferences is justified. his team examine questions related to Professor Bossaerts’ talk ended with strategic uncertainty using neurofinance some general “take-home messages” for the experiments. audience. He says that bringing decision One of his particular areas of interest is theory, and machine learning how people make the risk-reward tradeoff. into the study of the human brain reveals that This led to his investigation of the the brain is highly efficient at mathematical Dopaminergic system, which is located deep computations. Additionally, these

PETER BOSSAERTS in the rear brain stem. Dopamine creates a computations surprisingly occur in regions feeling of arousal in the brain, the same that have longed defied formal analysis. This created by cocaine and alcohol. Surprisingly, indicates that, contrary to popular belief, ON FRIDAY, MARCH 5, 2010 , it is a “cool” mathematical signal in a deeply emotions and formal thinking are not Professor Peter Bossaerts gave a talk at the emotional part of the brain. It helps us learn orthogonal. For economists, what emerges is Marian Miner Cook Athenaeum entitled what rewards are predicted to be because a brain that generates choice as the outcome “Human Perception and Attitudes Towards neurons calculate the expectation of reward. of a process including a constant re- Uncertainty.” Bossaerts, a prominent scholar This finding demonstrates that emotion and evaluation of risks and rewards, online at Caltech, is one of the world’s leading mathematical thinking are not as far apart as tracking of opponents’ actions, etc., instead experts in neurofinance. In particular, he many people originally thought. of a device that optimizes given utilities. investigates how the brain processes financial Furthermore, rationality does not imply a Peter Bossaerts is the William D. information and how people make financial lack of emotion. It appears rationality and Hacker Professor of Economics and decisions in an uncertain environment. He emotion cannot easily be disentangled, and Management and Professor of Finance at the explained that, in the brain, there are two that both are necessary to make good California Institute of Technology. Bossaerts types of uncertainty which appear to be decisions. “Brain regions that encode the received a licentiate and doctorandus degree processed separately: non-intentional and mathematical features of a decision problem in applied economics from the University of strategic uncertainty. The former is the type are often also involved in the corresponding in . He received his Ph.D. of uncertainty that comes from slot emotional reactions, suggesting that in Management (Finance) at the University machines, natural disasters, and financial emotions may largely be subsumed in the of California, Los Angeles, under Richard markets. The latter comes from strategic mathematical decision models.” Based on Roll. His first appointment as assistant interactions with other financial market this finding, Professor Bossaerts explains professor was at Carnegie Mellon participants, some of whom might have that choice can be viewed as “the result of a University’s Graduate School of Industrial superior information to one’s own. delicate balancing of the emotional features Administration. In 1990, Professor Bossaerts Professor Bossaerts and his team are of a decision problem, such as moved to the California Institute of paying “particular attention” to risk that disappointment, elation, regret, relief, envy, Technology (Caltech), where he was results from this second kind of and gloating.” promoted to Professor of Finance. He was uncertainty—strategic uncertainty. They call Professor Bossaerts also discussed the also Executive Officer for the Social Sciences this risk intentional risk, which is defined as brain’s interpretation of financial risk. The and Chair of the Division of Humanities and uncertainty created by a “goal-directed brain appears to interpret financial risk as Social Sciences. Until June 2009, Bossaerts opponent or even social structure,” such as a reward variance—not something more was at the Swiss Federal Institute of financial market. One example of intentional complicated that could come out of an Technology (EPFL) as Swiss Finance risk is the risk of trading in a financial economist’s expected utility model. The Institute Professor. He continues to run market with an insider. Bossaerts asserts that brain seems to calculate risk prediction error their Laboratory for Decision Making under people are good at detecting insiders because as outcome minus anticipation. The brain Uncertainty, on a temporary basis. L 8 THE FINANCIAL ECONOMICS INSTITUTE AT CLAREMONT MCKENNA COLLEGE

Congratulations Class of 2010!

THE FINANCIAL ECONOMICS INSTITUTE WOULD LIKE TO CONGRATULATE THE GRADUATING SENIORS OF 2010. The following is a list of seniors who completed the Financial Economics Sequence and the titles of their theses. We would also like to announce that Nicholas Sparks wrote the Best Finance Thesis for 2009-2010! Congratulations!!

STEPHEN ANDRON, The Effects of Warrants THOMAS KEIFFER, Market Liberalization NIKOLAS MILLER, Sector Leverage on Stock Returns: An Analysis of the Gold and Comovement: The United States and and Volatility Ores Industry Emerging Markets RACHEL NISHBALL, Debt Relief for the MAX BOSWORTH, Determining Profitability TYLER LAY, Empirical Analysis of the Co- Heavily Indebted Poor Countries: An of a Moving Average Technical Trading Rule Movement of the Credit Default Swap Market Empirical Analysis of the HIPC Initiative and Stock Market KYLE CASELLA, Oil Shocks and the Term JOHN PEREZ, An Empirical Analysis of the Structure of Interest Rates MICHAEL LIM, Analyst Forecast Bias, Competitive and Contagion Effects upon Rival Uncertainty, and Jensen’s Inequality Firms Due to the Bankruptcy Filing of NANCY CHAN, The Friday Effect on Competitors Earnings Announcements: Evidence YU-YU LIN, The Elimination of US GAAP from 2008 Reconciliation Requirement for Foreign NATACHA PETERSEN, Does Inflation Private Issuers Targeting Affect Stock Market Volatility in HARSHVARDHAN CHOWDHARY, How Does Emerging Markets? Liquidity Affect Expected Returns on ADRs? MARIA LÖHNER, Do Lawsuits Matter in the Pharmaceutical Industry? SCOTT SANFORD, A Lesson from the North: RAGHAV DHAWAN, Credit Ratings and Bond A Comparison of US and Canadian Banks Yields in China’s Corporate Bond Market ALEKSANDER LYNG, The Effect of Direct Bidding on Treasury Auctions NICHOLAS SPARKS, An Analysis of the BENJAMIN DRAA, Investor Sentiment, Primary Beta Adjustment Techniques: Method ROBERT MARTIN, Effects of the Government Fundamentals, and the Dot-Com Bubble Reconciliations and Extension to Industries Sponsored Enterprises on Mortgage Lending NOAH FRANZ, The Role of Asset Allocation in Standards MICHAEL WIDMANN, Who Signs the Smaller College and University Endowment Checks? Does Ownership Structure Affect JAMIE MATUSIAK, The Effects of Pension Performance MLB Franchise Performance? Costs and Expected Rates of Return for Plan TRAVIS HULL, Profitability and Co-Financing Asset on CEO Cash Compensation in the New YANG (AMANDA) YANG, Stock Performance in the Movie Industry: The Effect of Star Millenium of Chinese State-Owned Commercial Banks Actors and the Overall Chinese Stock Markets KEREN MICHELSON, Stock Market Reactions ANDREW JARMON, The Impact of Corporate to the Announcement of CEO Turnovers YUCHEN ZHANG, Announcement Effect: Social Responsibility on Executive Involving a Gender Switch Investigating the Credit Default Swap Market Compensation Reaction to Operational Risk Events

Upcoming Events

New York City Networking Trip

JANUARY 10-13, 2011 Fifteen CMC students will visit prestigious firms in NYC to gain FinancialEconomics exposure to various job opportunities in the financial markets and to INSTITUTE establish relationships with CMC alumni working at these companies. Applications for the trip will be available in Bauer Center 321 in October, 2010. Bauer Center, Room 321 500 East Ninth Street Claremont, CA 91711-6400 VISIT OUR WEBSITE AT: http://www.claremontmckenna.edu/fei/ Phone: (909) 607-0042 The Exchange newsletter is published by the Financial Economics Institute at Fax: (909) 607-0088 Claremont McKenna College. If you would like copies of previous issues, or if you wish to have your name added or removed from our mailing list, e-mail [email protected] or E-mail: [email protected] write to the Financial Economics Institute, Claremont McKenna College, 500 E. Ninth Website: Street, Claremont, CA 91711 with your request. http://www.claremontmckenna.edu/fei/