Financial Education and the 2008 Crisis January 2014
Does anyone remember the call for financial education in the wake of the 2008 Crisis? Most notably Dr. Shriller, Nobel Laureate Economist, was perhaps the most vocal in his call for the need for the investing public to become better educated. The basic premise being that a well educated investing public would be more aware and able to evaluate the risks inherent in the market place as well as the risks that present themselves from those in our society that prey upon the unaware.
I whole heartily agree that there is a void when it comes to financial education in this country and I am disheartened by the tepid advances towards that goal after the Crisis. More importantly I think the focus is misdirected. The solution lies within the education of our young as to the basics of finance and economics starting with the simplest examples of personal finance and reaching towards an understanding of how investments and the decision making process in this area have great impact on their lives. I am talking a core economic understanding of how the financial world functions works and interacts with human nature and the need to survive financially which drives our society. An understanding of money and how given each of us is different in our own way to make sense of what to do with it to enhance our lives as opposed to detract from it.
But let me take a step back. When I read Dr. Schiller's book I could not help recall the famous line uttered by W.C Fields, “You can’t cheat and honest man”. Don’t misunderstand I know the limitations on the implied advice in the quote. In reality however if one understands three primary tenants , which by the way are the very foundation of success in trading as well I believe in life, temperament , risk versus reward and discipline many of the concerns raised by those who call for financial education can be addressed. In fact I assert that the need for the breadth and depth of the education, which is the challenge, becomes greatly diminished.
The problem in part is age. By the time one reaches a certain age it is harder and harder to develop something like financial self discipline that was not ingrained into ones psyche at an early age. A simple sports analogy is muscle memory. Have you ever had the misfortune of dragging that friend who used to be a good high school or college golfer out to the course after many years? As you stand behind him at the practice range wafting for him to fail that smug smile leaves your face as you watch him swing. You don’t even have to follow the ball. You know with very little effort his game will come back because he has the swing that you and $20,000 in private lessons long for.
So what does have to do with the 2008 Crisis or trading or financial education in general? Human nature in many ways drives markets. Ask any risk manager, broker or financial advisor that has sat down with individuals or couples and asked potential clients them to articulate their goals, temperament, and risk profile. People will always tell you yes when asked if they are willing to accept risk but are they really? The answer is yes but only if their investments go up and they make money. It is incredibly hard for a middle aged fairly successful man to grow in the area of financial intelligence (I don’t mean reading a lot and learning about markets). I am talking here about what really matters to success, the three tenants. This is why many people sell when they should buy and buy when they should sell, fear and greed.
The solution I believe lies in one of the fundamental shortcomings of our education system. We are not preparing our young people for the practical financial realities that they will face in today’s society. How many high school students in supposed great schools, can’t explain how interest on a loan or mortgage works? How many can’t explain what a corporation is? Do they know how to balance a check book? Schools today do try and teach about self discipline and risk reward. Testing is a simple example. You don’t study for a test in all likely hood you fail. Sports, if you don’t come to practice and work out you will not make the team. All good fundamental lessons. But what about in the financial area because behold a miracle of nature the lessons don’t necessarily transpose? That is why we are very affluent sports agents.
I do not purport to have all the answers but I can share that when one looks at investing or trading and indeed life itself there is a clear message. Practice and master the three tenants and you have substantial advantage and probability of success. Personally I learned this reality in floor trading where reality presents itself every morning in the form of a simple accounting statement that tells you whether you are kidding yourself or not. Although impractical I think placing every high school student in a trading pit for a month would be remarkable educational experience for them and be the first step towards understanding the financial world and how it is interwoven not to mention the more important lesson of personal self awareness (temperament). This life lesson although maybe painful would be exhilarating and self awareness experiences par none. Couple this experience along with keeping the wisdom of W. C Fields words in the back of their heads might just be the start to avoiding the type of financial and emotional pain that the 2008 Crisis inflicted on the average person.
Temperament- why do guards want to be centers and second basemen want to be center fielders and bat 4th. Know yourself and be happy with it, as the saying goes everyone else is taken.
Risk/Reward- what happens if I am right or wrong with this decision? If I am right will it really change my life viruses if I am wrong will it have a great negative impact on my life.
Discipline- easy to talk about it hard to do. Your sheets don’t lie; you can’t lie to your scale and no just because your bank gave you checks doesn’t mean there is money in the account. Do I have the discipline to even put a plan in place? Once in place can I follow it? When I make a mistake can I admit it? Remember there is no shame in falling only shame in not getting up.