While most are in agreement that our public school system is in need of massive reform, few areas are in as dire-straights as the subject of financial literacy. Here are some gruesome statistics. Fewer than 50% of public high schools require students to take an economics course. Only 13% require a personal finance class, according to the Council for Economic Education. The need to address this issue is glaring, but its urgency is falling on deaf ears. Students are crying out for this information. According to a survey by H&R Block’s Dollars and Sense group, 97% of teens asked are planning on going to college, and 70% worry about paying the bill. 57% make purchases with their own money, but only 7% have a budget. Only 3% have filled out a tax return while 58% believe Congress members pay no taxes! The level of ignorance is both startling and alarming at the same time. Not only do schools neglect to teach these financial basics, but they actually make the problem worse by reinforcing behavioral biases that will be enormously damaging to these future investors. Below are three of the most common cognitive biases found in the average classroom:
Overconfidence– This overestimation of one’s knowledge can be fatal to an investor. It can also lead to something called meta-cognition, which creates the deadly combination of lack of skill and knowledge with a gross overestimation of ability. This was one of the main causes of the housing crisis, internet bubble, and various other financial bubbles that have been quite common throughout history. This thought process is very prevalent in our classrooms. I taught middle school for many years and saw it with my own eyes. My big joke with the students dealt with the “honor roll”. The list just kept getting bigger and bigger every year. I told them, “It would be better to put a list up of the kids who were not on the honor roll. It would certainly be a lot shorter and less work to compile.” They laughed, but down deep they knew I had a point. At some point a B became a bad grade. I used to have to tell them about a bell curve. “If a test was constructed properly no more than 5% of the students should get an A. How is it that in many of your classes 50% or more kids are receiving this grade?” Try explaining that to their parents. Good luck! Everybody’s a winner and gets a trophy. Grade inflation is a huge problem in both high school and college. This creates a false sense of security which can be crippling to a student’s future investment experiences, and more importantly to their life in general.
The Sunken Cost Fallacy– This belief is the mistaken idea that a person who invests much time and energy in something, should never walk away because the loss would be too great. It ignores the fact there might be better opportunities available and the basic economic premise of opportunity cost. This behavior can be destructive to an investor who sticks with a losing position just because he paid a lot for it. It assumes the investment will eventually return to its former glory just because of the blood and treasure devoted to it. Enormous opportunities and potential riches have been ignored by many due to this mistaken belief. This is rampant in our school systems and is reinforced by many parents and educators. The thought goes like this, “I paid a lot of money for your science camp, and biology, physics tutors, etc., so you are going to be a doctor whether you like it or not.” By completely ignoring the fact that this investment might be wrong and the money could be devoted to a subject/career opportunity that the student actually likes, valuable resources are wasted and family life is now a living hell!. The same goes for sports trainers and travel teams. Expensive weekends spent at out-of-state tournaments may destroy any semblance of balance in a family but must continue because of the prepaid costs. School administrators are also at fault. Often, enormous amounts of money are paid to “educational consultants” to implement new academic programs. Even though it is obvious to everyone except the most clueless that things are not working out, the programs will go forward because the investments (in time and dollars) trump the long-term damage to the students’ and teachers’ morale and motivation. The lesson learned: If a lot of time and money are devoted to something, moving on to more promising alternatives would be a big mistake. Learning to cut bait and go forward is an invaluable investing and life skill. Unfortunately, the exact opposite is being stressed in our educational system with damaging long-term consequences.
Confirmation Bias– When someone seeks out information that agrees with their own opinion, and ignores countering viewpoints, they suffer from confirmation bias. This group-think can be especially damaging to investors. Recently, many market participants believed that gold was going to infinity. Nothing could stop it. They ignored all logic and data that disputed this insular idea. They sought out only opinions that confirmed this mistaken viewpoint. The end result was these so called “Gold Bugs” lost a ton of money the past few years. The funny thing is most are still guilty of this same behavior. The power of this belief can be so overpowering that a huge financial loss can actually cement this idea further! Schools are breeding grounds for this group-think. The best grades on essays are usually given to the students who parrot back the information the teacher lectured about. Think of your own experiences. Saying the teacher was wrong was “frowned upon” to put it mildly. In most classrooms failure is viewed negatively, while in creative pursuits it is a positive way to learn. Kids are not dumb and they realize how this group-think works: Confirm the beliefs the teacher has espoused and rewards will come in the form of high grades. While not all teachers are guilty of this, too many are. This ego boost hinders the process of critical thinking. The idea that agreement is the path to success may provide transitory benefits in the form of good grades, but incalculable long-term damage. Warren Buffet once said, “Be fearful when others are greedy and be greedy when others are fearful.” The exact opposite is being stressed in many classrooms. Risk-taking is frowned upon, while conformity is encouraged. It is not a surprise to see fewer young people starting their own businesses and becoming entrepreneurs. According to The Wall Street Journal, the proportion of young adults owning a business has fallen to its lowest level in 24 years! School culture is often an impediment toward the development of this skill set. Schools were originally designed to be prep academies for the monotonous work needed for early twentieth century factories. Sadly, this factory model has undergone very little structural change in the last century.
Dynamic, job-creating companies, like Google, are resorting to giving job applicants tests created in- house. Google believes the skills that potential employees need for the company’s risk-taking culture are not being addressed in the present system of higher education. Compounded with grade inflation, the test scores of undergraduates may have considerably less influence in the hiring decisions that will be made in the future. Google might be on to something. The proper teaching of financial literacy may solve many of our current educational and economic issues of the day. The best investors are well read, fluent in such diverse topics as History, Psychology, Science, statistics, and mathematics. They are usually tech-savvy and have a burning desire to constantly learn and grow. They are often excellent at explaining complex topics in understandable language. They are independent thinkers who refuse to follow the herd. Most importantly, they are very resilient. This factor has been cited by many as the greatest ingredient for future success. Our present educational system could do a lot worse than structuring a system with these components as building blocks for the attainment of degrees. Who knows? Maybe kids will find their learning experience more relatable to the “real world”. Students would be more motivated to learn for the sake of learning instead of pleasing their teacher or parents. Failure and experimentation would be encouraged instead of punished. Conventional wisdom would need to be proven with data. Questioning authority would not get you in “trouble.” The alternative is to stick to memorizing SAT words, finding the area of a rhombus, and judging an individual’s potential by standardized test scores. The choice is clear about what we need to do.