Risk Literacy Must Precede Financial Literacy


People need to be more certain about uncertainty. Life is not a math problem. Investing provides ground zero for the cost of this neglect. “I don’t know,” “maybe,” and “it depends,” are words that are clearly lacking in the vocabularies of too many investors and those who are paid to advise them.

This belief is strongly reinforced in our antiquated, factory-model driven system of public education. According to Gerd Gigenzer the author of the book Risk Savvy:

“People aren’t stupid. The problem is that our educational system has an amazing blind spot concerning risk literacy. We teach our children the mathematics of certainty — geometry and trigonometry— but not the mathematics of uncertainty, statistical thinking. And we teach our children biology but not the psychology that shapes their fears and desires. Even experts, shockingly, are not trained how to communicate risks to the public in an understandable way.”

Why would you expect people to respect the enormous uncertainties of financial markets when they are rewarded for the “right” answers, instead of the statistical probability of a correct outcome in school?

Children are taught how people breathe, but not how they think. The last time I checked behavioral management was not included in the core four subjects. More important, young people are not instructed how to recognize the irrationality of their own primal minds. Never mind the coping skills to deal with these thoughts.

We deal with many teachers regarding their retirement plans and spend a great deal of time in schools. This includes teaching their students. Unfortunately, many educators also have a strong misconception of risk.  This filters down to those they are instructing.

For example:  Too many teachers think they don’t need a retirement plan because they have a guaranteed pension. While a pension is terrific, nothing is certain in investing or life for that matter.

They are simply transferring their risk to politicians and state constitutions. The risk has not gone away it has simply been moved to another place. Relying on the government and the whims of politicians is not equivalent to betting on the Harlem Globetrotters to defeat the hapless Washington Generals in a fixed basketball game.

When many teachers decide to invest in their 403(b) plans, their funds often end up in fixed annuities with a guaranteed payout of 3% or so. This is thought to be a “safe” investment.

For a person with a decade-long time horizon, this thought could not be more untrue. Inflation will ravage this account; not to mention the opportunity cost of not investing in the overall market (which, historically, has returned 8-10% over long periods of time).

We cannot expect the current school environment (which is plagued by definite answers; standard textbooks; and an assembly-line like, nine-period schedule) to develop students’ life skills, such as handling money and investing.

This lack of understanding of the true nature of risk and why people behave in the way they do bleeds into other important areas.

This quest for certainty leads many to search to confirm their own beliefs, rather than seeking out the truth through exploring the possibility that they might be wrong.

Politics provides proof of this in size. These beliefs span both parties, but seem to be much more severe on the fringes.

I came across this quote about the latest President Trump fiasco, “These days when people say, ‘Oh, my gosh, this really looks terrible, was I possibly wrong about Trump?’ they quickly go on social media or see the shows and instantaneously find something that reinforces their opinion,”  “And they cling to that.”

This type of thinking is not only damaging to an investment portfolio but can shake the foundation of our nation’s system of governance.

We need better thinkers to confront our current retirement and political crises.

Sadly, the place where this type of thought process should be ingrained in the minds of young people is not up to the challenge.


Source: Stories vs. Statistics by Morgan Housel