I first thought about refinancing through SoFi, a leading peer-to-peer lender that connects recent graduates with high-quality alumni lenders. My business school classmates would regularly post on Facebook how they just refinanced their loans using SoFi. And with over $13,000 in Stafford student loans payable at a 6.8% interest rate, refinancing didn’t seem like a bad idea.
However, it wasn’t until a friend of mine from college, Justin Liu, posted about WeFinance that I seriously looked into refinancing my loans. Founded by Justin’s friend and another Stanford alum, Eric Mayefsky, WeFinance allows recent grads to directly refinance their student loans from within their social network, rather than through predetermined lenders. It’s like the Kickstarter of student loan refinancing – unlike getting money from one single institution like a bank, people like me can borrow money from a smattering of friends via channels like Facebook, and through WeFinance’s network of everyday investors.
I like the WeFinance idea on several levels — it helps students with lower repayment risk access appropriately lower cost loans and it reduces transaction costs, and thereby potentially helps use societal resources more efficiently, by eliminating the need for institutional due diligence. But on the other hand, the idea of refinancing my loan still left me a little unsettled. Couldn’t my refinancing actually make some people worse off? And why do I feel uncomfortable about pitching a refinancing opportunity to my friends when I think it’s in their best interests and mine?
As an amateur ethicist, I subscribe to the Platonic view that attempting to live an ethical life is a necessary and wonderful part of living a good life and studying and resolving complex ethical problems helps improve our individual lives and society as a whole. And I believe seemingly simple decisions we make every day as market participants, from who we purchase products and services, where we choose to work, and what careers we pursue, are actually very complex ethical decisions that require careful consideration and weighing of lots of different factors. It may seem unusual that I’m picking a mundane topic like refinancing to share my ethical observations and reflections. However, contemplating the finer points of refinancing allows a deeper discussion of topics that I’ve wanted to explore for a long time, such as the ethics of entrepreneurship and disruption; the role of intuition, meditation, and reflection in making ethical decisions; and the practice and potential of impact investing.
The Duality of Entrepreneurship: Value Creation and Value Transfer
Imagine a world with three people: one person who owns everything in the world (the “Owner”), another person who builds widgets for the Owner (the “Builder”), and an Entrepreneur. If the Entrepreneur offers to provide new widgets to the Owner and the Owner chooses to continue buy widgets from Builder along with the new widgets from Entrepreneur, the Entrepreneur and Owner benefit and the Builder is no worse off. This kind of entrepreneurship, where an entrepreneur is creating value without making anyone else worse off, is what I’ve come to learn as “value creation.”
Now imagine a world with those same three people. If the Entrepreneur, instead of offering to build new widgets, offers to build the same widgets that Builder is making for less and Owner chooses to purchase widgets from Entrepreneur instead of Builder, the Entrepreneur benefits and the Builder is worse off. The Owner still gets the same widgets; the only difference is that he keeps a little bit more since he has to pay a little bit less. This kind of entrepreneurship, where an entrepreneur is simply transferring some of the value — taking the wages that would have gone to someone else and diverting them to himself instead — is what I have come to learn as “value transfer.”
The point of these examples is to illustrate how entrepreneurship, despite our often positive associations with the term, can result in very different and sometimes negative outcomes depending on the circumstances. Most people I think would agree that given the choice, we would rather be the entrepreneur in the first world rather than the entrepreneur in the second. This is consistent with our ethical intuition that entrepreneurship that creates value is better than entrepreneurship that merely transfers value; making everyone better off without making anyone worse off is certainly from an ethical standpoint better than making someone better off only at the direct expense of another.
It is this intuition that drives many people’s discomfort with societal trends like outsourcing and the rise of Walmart. Indeed, if we tweak our earlier example to reflect some of the realities of outsourcing, imagine that the Entrepreneur is someone who is extremely wealthy and Builder is extremely poor, and that Entrepreneur’s entry into the widget market makes Builder worse off, i.e. Builder is now unemployed and unable to feed his family while Entrepreneur’s already significant wealth continues to grow. Should it be any surprise that inequality has increased in America and outsourcing has its discontents?
But the true reality of outsourcing and virtually every form of entrepreneurship is that no start-up is purely about value creation or value transfer. Despite the widespread coverage of simplistic partisan views often espoused in the media that outsourcing is either “good” or “bad,” the nuanced reality is that outsourcing and all entrepreneurship exists on a theoretical spectrum between the more desirable world of value creation and the less desirable realm of value transfer. In the case of outsourcing, outsourcing certainly does transfer value from the people who lose their jobs and make some people worse off, but outsourcing can also simultaneously create significant value. For example, outsourcing can make operations more efficient, like when a giant call center in India replaces individual customer service representatives in the United States, freeing up people in the US to work on other matters. And outsourcing can reduce the cost of production, enabling innovations that weren’t possible before.
Entrepreneurship and the inevitable Schumpeterian creative destruction of jobs and wages it leaves in its wake, taken as a whole, probably does more good than harm — and in any case is an inevitable and unstoppable consequence of human nature. But just because entrepreneurship is something that does have positive benefits and something we must accept doesn't mean we don’t have a choice on how we support and pursue entrepreneurship. Like the Entrepreneur in the earlier two worlds, we have choices on what kind of businesses we start and which businesses we choose to work at and shop from, each of which has its own set of ethical implications. The difficulty is how we differentiate our choices along ethical dimensions that are difficult to assess and distinguish.
Using Intuition to Move Forward in the Face of Complex Ethical Uncertainty
If we consider ethics in our business decisions, how should we act? Should we purchase fair trade? Choose a career in the nonprofit sector? Invest our money in an ethically-screened index fund? Try to start the next billion-dollar social media company and become philanthropists?
If you buy into the traditional philosophy that businesses should maximize profit, you might think that such decisions are fairly easy. Simply buy the product that gives you the most bang for your buck, pursue the career that will make you the most money, and invest your money and your time into the most profitable businesses. After all, under this view, money is a proxy for value, so the more money you generate, the more you contribute to society, and considering anything else besides money is merely a distraction.
Many well-respected economic philosophers from Adam Smith to Nobel laureate Milton Friedman have defended profit maximization as not just an inevitability of fierce competition, but as a bona fide theory of morality. And I admit, I can imagine a world where this kind of simplistic and elegant philosophy would work. But it’s obvious that we don’t live in this theoretical world and it should be obvious by now that the single-minded pursuit of profit in the real world leads to terrible and unfair outcomes. Can we really justify the intentional deception by tobacco companies and the coverup of cancer-causing environmental contaminants like hexavalent chromium by PG&E as ethical and desirable as long as such decisions were expected to be profitable? Perhaps a surprising number of us may want to defend such decisions as somehow necessary or good as we desperately hold on to this idea that we live in a just world, but the prevailing idea that companies ought to lie to us, deceive us, and have an obligation to pursue profit no matter the consequences run counter to many of our notions of individual morality and leave us deeply unsettled.
The challenge with abandoning profit maximization as an ethical philosophy is that there isn’t a theory that we can all easily articulate and agree upon. Instead of profit, we might rely on emotions and heuristics of what feels right and what seems good to guide us. We can try to live what is portrayed as the ethical lifestyle — for some, that might mean subscribing to Mother Jones magazine, driving a Prius, and buying Fair Trade coffee. For others, that might mean buying US products, supporting companies like In-N-Out and Chick-Fil-A that promote Christianity, and buying products that donate a percentage of revenues to military veterans organizations. But independent of where you lie on the ideological spectrum, using brands, imagery, and advertising as a proxy for how to live ethically is necessarily imprecise for whatever ethical values you might have. If you believe in buying fair trade, how do you decide among various fair trade products and among other competing ethical labels? What if instead of buying a Prius you purchased a cheaper and less fuel-efficient car but used your savings to offset more CO2 emissions by buying carbon credits directly off the climate exchange?
Without a simple theory to follow or reliable emotions or heuristics to guide us, many of us may simply resign ourselves to the idea that living an ethical life is too complicated or that ethics simply doesn’t exist and live our lives accordingly. But like many areas of life that don’t have clear and precise rules such as writing and art, the successful practice of ethics requires us to rely on intuition continuously honed by thoughtful meditation and reflection. Like the grandmasters of chess who are unable to calculate all the possibilities of a given move or the investor who at the end of the day must rely on a gut feeling of whether to invest, making good ethical decisions in everyday life require us to make judgments on issues that are difficult to fully analyze and have no clear right answer. Even the simple issue of whether to buy fair trade might take into account a whole host of factors, like whether the charitable premium for fair trade products could be better spent elsewhere, whether building visibility for the fair trade movement is an important goal in and of itself, the ethical implications of the best alternative option, and the personal circumstances of the buyer.
The challenge with relying on intuition is that often our intuition is fallible and imperfect, subject to various cognitive biases. But in order to make the snap judgments we must make in everyday decisions, what Malcolm Gladwell calls thin-slicing and what Nobel laureate Daniel Kahneman calls thinking fast, we need to hone our brain’s ability to recognize all the relevant ethical issues and weigh a multitude of factors in a matter of moments, rather than oversimplifying the problem or just relying on a select few rules of thumb, a process of developing and honing one’s intuition, as Josh Waitzkin vividly describes in his book The Art of Learning. Mistakes will inevitably be made, but the more we can meditate and reflect on our ethical decisions, the more confidence we can have in trusting our ethical intuitions, and the better we should be able to tell whether or not the decisions we made are consistent with our deeply held notions of fairness.
Deciding to Use WeFinance and Turning an Investment into an Impact Investment
As I mentioned before, when I first learned about WeFinance, it immediately appealed to me for several reasons: it was started by a friend of a friend, people giving and receiving loans among friends sounds like an efficient way of doing things, and I could save a little money on my student loans. However, simultaneously, I wondered what the true potential impact of WeFinance might have on society and why soliciting loans from friends on Facebook made me feel uneasy. If WeFinance really took off, inevitably a few loan officers at traditional lending institutions might take a hit as collateral damage in the Schumpeterian wave. It’s also possible that a bunch of friends making small loans to one person is a poor substitute for an expert making a large loan who has much greater incentive to properly conduct due diligence. At the end of the day though, while I certainly don’t have any definitive proof, my gut tells me that the WeFinance model in many ways is similar to microfinance and can reduce transaction costs, increase the likelihood of repayment, and more appropriately provide lower-cost capital by relying on perceptions of trust in peer networks in lieu of formal due diligence and greater pressure to repay due to peer accountability.
Perhaps surprisingly, my deepest qualms weren’t about refinancing my student loans with WeFinance, but the decision to solicit loans from my friends on Facebook. The way WeFinance works, I could raise all the money I need to refinance my loans from the lenders on the WeFinance platform; tapping into my own social network to lend me money was a separate decision. And for me, there’s something inherently uncomfortable about making my interactions on Facebook transactional. I think one of the reasons why social endorsements of products and services on Facebook aren’t as common place as they could be is because we don’t like to profit from our friends or introduce any kind of ulterior motives in our authentic relationships.
As I reflected on this issue more, I could more clearly see the risks of soliciting loans on Facebook. I could make my friends uneasy by posting something that directly benefits me, perhaps making me seem a bit selfish and self-centered. I could hurt my reputation for integrity if anything goes wrong with the loan repayments. I might also reduce the effectiveness of my endorsements if someone has a bad experience with WeFinance.
But while there are certainly risks to advertising self-interested transactions on Facebook, following a hard and fast rule to never engage in such behavior eliminates those opportunities when doing so might be desirable. In this case, when I started imagining how I could turn this simple loan request into a broader discussion of entrepreneurship and ethics, the question became no longer one of whether I should solicit on Facebook, but what is the best way of doing so. And as I wrestled with the issue of having an ulterior motive in profiting directly from my friends despite giving them what I consider a good deal, I realized that I could commit to donating the savings on my loan to charity not only to eliminate my financial self-interest, but to also make a point about impact investing.
Just as we have a choice in supporting the types of businesses that we shop from and invest in, the choice of where you put your capital can make a difference, especially in less efficient markets. If you take two identical companies, one owned by a person who does what you think is bad for the world and another owned by a person who does what you think is good for the world, doesn’t it make sense that supporting the latter is more desirable? If you know that making a 4% return on a loan to a friend is a pretty good financial opportunity, especially for the risk, and on top of that the friend is willing to donate his savings to charity, doesn’t that seem to have more impact than your everyday investment?
In many ways, I see the field of impact investing as encouraging more businesses to commit to actual impact in society in a way that consumers and investors can meaningfully distinguish more ethically and less ethically desirable companies from each other. Unlike traditional investing where everyone comes to the table with the same goal of maximizing profit, impact investing is an incredibly messy field, where everyone doesn’t prioritize the same things and individuals are confronted with difficult trade-offs between competing values like the environment, employee compensation, and the welfare of the local community. But despite its complicatedness, and its tendency to lead to decision paralysis, I see impact investing as an idea with incredible intuitive appeal — my decision of where to put my money, and more broadly the choices I make as a consumer and in terms of my career, necessarily has some sort of ethical impact on the world around me. And once I recognize that, I feel empowered and excited to discover how I can make a difference in the world through my everyday decisions.
Deciding to refinance my loan through WeFinance and invite my friends to participate gives me incredible joy and satisfaction, because it allows me to encourage entrepreneurship among my friends and friends of friends, support a business that I think will have an overall positive impact on the world, and share with my friends my views on business ethics and introduce them to impact investing. And I hope that the more we all recognize the ethical dimensions of our everyday transactions, the more we will seek to consistently act with our ethical values, and the happier we will all be knowing that we are that much closer in working towards a more just and fair society.
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If you’re interested in lending to me as part of my WeFinance campaign and helping me donate to either Ashoka or GiveWell, please visit:
