Batten Institute

Markets In Human Hope


Innovation: Investing in Human Potential

Scholar: Amy Halliday

Why can we make an investment in a hot start-up but not in the lives of the talented people leading it or in the society that educated them? Why are there stock exchanges for investing in the development of private enterprise but not in the development of human potential through, say, the alleviation of hunger, illiteracy, or injustice? Because, Darden professor Saras Sarasvathy argues, we are stuck with a set of labels that have sustained the false dichotomy between the business world and the social sector: for-profit versus nonprofit, investment versus charity, private versus public, entrepreneur versus social activist.

In her research, teaching, and other activities, Sarasvathy  who is known for her work on the decision-making processes and behaviors of experienced entrepreneurs  has been deconstructing these labels and exploring the possibility of creating markets through which people can "invest" in the upside potential of social phenomena. These markets have come to be known as "markets in human hope."

To get an idea of what such a market would look like, consider the fledgling market for investing in an individual's higher education through human capital contracts (which have been developed by, among others, Batten Fellow Miguel Palacios). In this arrangement, an investor provides financial support to a group of students in exchange for a percentage of their income for a specified period after graduation. Consider also Sarasvathy's recent efforts, with Swiss businessman Marc Freudweiler, to develop a financial instrument for funding schools in Pakistan. In partnership with the nonprofit CARE Foundation, which currently runs 183 schools in the country, Sarasvathy and Freudweiler hope to offer a fixed-investment instrument to provide operating funds for those institutions.

Here's how it would work: An investor would buy a CARE note underwritten by a major bank. The note, like any such instrument, would be invested in global capital markets. If the schools meet certain performance criteria  determined in advance by an independent body trusted by both investors and the schools  the coupon payment that comes in at the end of the year would go to the schools. If the schools do not live up to those standards, the payment would revert to the investor. If the schools maintain good performance, they not only are guaranteed funding but also can make good estimates of how much they will receive each year, which is not possible for institutions that rely on charitable contributions. The investor would earn no financial return on this investment but would be able to trade it through the issuing bank's website. As more such instruments are offered, however, a full-fledged bond market could emerge in which investors buy and sell on a daily basis, perhaps even for a profit as some social causes become more urgent, and therefore valuable, than others.

The design of such investments is simple, but implementing them is anything but. In large part, Sarasvathy explains, this is because the idea of blending for-profit and nonprofit activities is considered radical. For her, however, it is not radical at all. In her 2008 book Effectuation, Sarasvathy writes that there is no economic reason for the separation of for-profit and nonprofit activities. Indeed, the divide is unnecessary and artificial: "Both involve raising as well as deploying funds. Both make investments in creating value. Both need to worry about the details of how those investments will be put to use. And both can and should lead to increased economic as well as social value. And both should have access to capital and equity markets." All markets, she claims, can rightly be called markets in human hope because all economic value is generated by human beings.

Why is Sarasvathy making these arguments in a book about entrepreneurial thinking? Because entrepreneurs, as she describes them, are agents of social change. Successful entrepreneurs, she found in her research, don't just look for opportunities; they make them as well. They work with the means at their disposal  their own skills and resources as well as those of various stakeholders  to create something new. In this way, entrepreneurship is a transformative activity, which need not be restricted to for-profit ventures. In a paper for the 2008 World Entrepreneurship Forum, Sarasvathy and Darden professor S. Venkataraman write of entrepreneurship as an activity that transcends profit. It is, they write, a method of problem solving that helps us "rethink and reformulate the categories that matter to human and societal progress."

In addition to working on the school-funding project, Sarasvathy has introduced Darden students to the concept of markets in human hope. In the spring of 2006, she and Darden professors Frank Warnock and Veronica Warnock taught a course, designed for doctoral students, that explored the feasibility of constructing financial markets for firms in the social sector as well as in countries currently without capital markets. They offered the course again in 2008, this time including MBA students. As one participant wrote, "The best part of the class was seeing the potential that can spring from the minds of concerned people." Through such classroom experiences, Sarasvathy hopes to inspire students to consider what role they can play as entrepreneurs in the social sector.

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