Thank You Sir, May I Have Another?

Over the winter holiday break I emailed Nobel Prize Winner and former Princeton professor Daniel Kahneman. I'm passing through New Jersey, I said, want to meet up to discuss the intersection of cognitive psychology and financial education for children? He couldn't resist an offer like that!

Unfortunately, DK was in CA so no dice. Before wishing me happy holidays he added, "I don’t think I have much wisdom to offer on your problem which sounds difficult."

When the man who won a Nobel Prize based on work regarding optimism bias tells you he thinks what you are doing is difficult I reckon he's not exaggerating. Either that or he's too nice to tell a stranger to sod off. 

But as the New York Times Magazine noted on January 10th (hat tip to Chris Smith at New York magazine) when discussing the marshmallow experiment, there are often too many factors to take into consideration regarding such matters and that results of studies will have their caveats.

So should social scientists, teachers, and I put down our pens and stop trying altogether? By no means. More than any other time we are learning  -daily, it seems - what makes the brain tick. Till the dust settles, the best I can do is move forward with the best information available.

This spring that means teaching a financial education class to parents and children. Out goes the marshmallow experiment. Out also are more hard and fast financial education lessons. Between studying the issue and experiencing it in class, I have come to believe that people fundamentally understand how markets work and capitalism in general. Rather, it is our biases and our lazy minds that make for poor financial decisions. 

In response, the classes will address cognitive psyche, particularly anchoring, the availability bias, framing, loss aversion, optimism bias, the peak-end rule, the planning fallacy, and, if the parents are good, the cumulative prospect theory. 

Of course, the mere mention of any of these by name would overwhelm or confuse most folks. Understandably so. Instead, I'll pack the psyche talk into kids books that the parents and kids can read and illustrate together. Each class will address a different bias or heuristic, how it messes with our daily financial decision-making, and how we can break out of the bias through the adventures of Pablo Plata, Riley Roo, Basilio the Boxer, and a host of other animals. 

Was it over when the Germans bombed Pearl Harbor? Not by a long shot. And so it's back to the classroom. 

Digging in

They say baseball is the most difficult sport and hitting a major league pitcher the most difficult task in sports. With less than a second to react to a pitch, a hitter often must guess in advance what's coming based on a series of recent and past experiences and then execute. Even when hitters know what's coming they can't always get a hit, never mind make contact.

In teaching or writing about financial education I constantly feel like I'm swinging at curveballs that the catcher has already told me are coming, but to no avail. I know what approach doesn't work (the approach most authors have taken of presenting the material in textbook-like fashion with bold print words and no kids or animals). The search for what does work, on the other hand, has eluded me.

The authors of Scarcity: Why Having Too Little Means So Much recommend not teaching someone something till they know the students will have to use it. They find short-term memory to be stronger than long-term.

Malcolm Gladwell in Outliers: The Story of Success finds that someone doesn't attain the proficiency of an expert until they've logged 10,000 hours in a subject or career. Here, repeated experience is king.

The Checklist Manifesto: How To Get Things Right by Atul Gawande proclaims that checklists are the answer to complicated problem solving.

We do not all have the time, the interest, nor the opportunities to all become financial advisors for five years. Nor does cramming before April 15th going to help us do better on our taxes every year. Checklists are certainly helpful, but when we don't know exactly what makes up a credit score or what creditors/lenders are looking for, they cannot assure success.

How then do you teach the subject so that it sticks? As I wrote about in my last post, Nobel Prize Winner Daniel Kahneman, in his book Thinking, Fast and Slow, found a light at the end of the tunnel in:

Subjects' unwillingness to deduce the particular from the general was matched only by their willingness to infer the general from the particular.

This is very helpful and easily adopted. And this is why the children's content I will most likely produce in the coming months will neither look, nor smell like financial education. Rather, it will use comedy to display the biases and heuristics we all use unknowingly everyday to our own detriment.

Batter up. Digging in.

Heartened

"For teachers of psychology, the implications of this study are disheartening. When we teach our students about the behavior of people in the helping experiment, we expect them to learn something they had not known before; we wish to change how they think about people's behavior in a particular situation. This goal was not accomplished in the Nisbett-Borgida study, and there is no reason to believe that the results would have been different if they had chosen another surprising psychological experiment."

So wrote the 2002 Nobel Memorial Prize winner in Economic Sciences, Daniel Kahneman, professor emeritus of psychology and public affairs at Princeton's Woodrow Wilson School, in his book, Thinking, Fast and Slow (2011).

In light of my recent work teaching children about personal finance, I too am disheartened. That is, till I read on.

Nisbett and Borgida went back to the drawing board and came back with this conclusion:

Subjects' unwillingness to deduce the particular from the general was matched only by their willingness to infer the general from the particular.

Or, as Kahneman explains, "The test of learning psychology is whether your understanding of situations you encounter has changed, not whether you have learned a new fact. There is a deep gap between our thinking about statistics and our thinking about individual cases...You are more likely to learn something by finding surprises in your own behavior than by hearing surprising facts about people in general." 

This is encouraging for two reasons. First, it supports my belief that the majority of children's books written on personal finance, despite their preponderance of facts and bold print words, are falling on deaf ears. Kids, hell, all of us, need a more personal story that we can identify with. In other words, there is a place for the series of kids' books that I'm working on.

Second, it paves a way for how to teach financial education in the classroom. While the kids have occasionally oohed and aahed at the cost of college or the price of a home, these facts alone will not establish good financial habits and behavior. They simply map out markets for the kids to refer to in the future. While this is important, it is not the focus of the class. The focus is to establish good financial habits and behavior. Personal stories of kids like them have the power to give the message staying power.

This semester I have focused on drawing parallels to school, an environment the kids are familiar with. Next semester I'll focus more on eliciting personal stories from the kids and using those stories to make points about personal finance. That is one of a few key changes I plan on making. 

The Lingo

Within the next ten years the six to nine year olds I work with in the Get Cheddar Club will be formally introduced to Shakespeare, the U.S. Constitution, DNA and Darwinism. Unfortunately, I have done their future teachers a disservice.

In an attempt to introduce the kids to confusing and confounding financial language, I primed them with lines from the not-always-easy-to-understand movers and shakers mentioned above (as well as Thomas Hardy's pithy line, "Some folk want their luck buttered.") in a drive-by intro.

As in previous classes I drew a parallel to their experiences in school.

"Who wants to get good grades in school?"

They all raised their hands high to the question. They all then did their best to read words and ideas severely unfamiliar to them. And they all plead guilty to not understanding what they had read. Bless their hearts.

How much, I asked, would you bet that you'd get an A on what you just read? A little or a lot? I then waited for them to reply: a little.

"A lot!!!" they all answered.

"Yeah?"

"Yeah!"

I had a feeling this was a conditioned answer, one based on confidence and expectations. I then walked them through their options. Eventually they changed their minds to a little.

"Who wants to own their own home?"

Again hands shot up in the air.

"Well then, you'll have to read this." My assistant and I then handed out sample mortgages to all the kids.

"Elena, please read the first paragraph."

Elena did so, battling through the legalese, but as she did the others skimmed the material and quickly decided they had had enough for one day, especially if no one was going to butter their mortgages never mind their luck.

I then rephrased my earlier question.

"If you don't understand this, would you sign it?"

"No!!!" they responded loudly.

"Why?"

Now I had conditioned them to answer no. Their reasons for not signing didn't quite add up. They didn't quite understand the danger of signing something they didn't understand. And this is where the chorus to the day's song came in handy:

If I don't get it,

you don't get it.

In other words, "If I don't understand, you don't get my money." They ate that up. It has attitude especially when sang three times, each time louder than the time before. In fact, it got going so good that one little boy in class outdid my conducting by introducing a little MC Hammer touch with a, "Stop!" His classmates adopted that immediately. 

While they may bristle at reading Othello or their biology textbook in high school, I can only hope when posed with a difficult financial document to sign that they remember that chorus and ask questions or walk away. Leading up to the financial crisis of 2008, too many people signed mortgages that they didn't understand out of fear of looking like a fool or weak in front of a loan officer, their spouse or their neighbor. And too many feared questioning the financial products they sold and didn't understand.

They didn't get it, and we all ended up getting it alright. 

The Rub

Shortly after teaching a class on the marshmallow experiment, I heard back from the American Psychological Association (APA) about my children's book on the subject. Unfortunately, the APA did not accept Cookie-Wise Pablo for publication. Among other reasons for rejection, the APA cited new research on the experiment.

Findings from the new research are interesting. First, they ran the experiment differently. Before the experiment even began the kids had an encounter with an adult. One adult offered to bring the kid art supplies and flaked on the promise. The other adult came through on the promise.

According to the experimenters' abstract, here is what they found:

Children in the reliable condition waited significantly longer than those in the unreliable condition (p < 0.0005), suggesting that children’s wait-times reflected reasoned beliefs about whether waiting would ultimately pay off. Thus, wait-times on sustained delay-of-gratification tasks (e.g., the marshmallow task) may not only reflect differences in self-control abilities, but also beliefs about the stability of the world.

Fascinating stuff that totally makes sense, right?

To a certain extent, yes. But there are holes or, at least, questions remaining.

It makes sense that this may not wholly be a question of nature or nurture. After all, how often does that happen? It makes sense that the answer may be a combination of the two.

It also makes sense that children in the reliable condition waited significantly longer for the second marshmallow. They just had a reliable encounter and may, in general, have more reliable encounters than unreliable ones. But some children in the reliable condition still did not make it to the second marshmallow. Why? Maybe because they, in general, have more unreliable encounters than reliable ones making a reliable one an aberration.

Or, maybe the kids in the reliable condition that did not make it to the second marshmallow do not have the skills or good habits to successfully delay gratification. These kids can benefit from a book where the protagonist builds these skills and habits.

And what about the kids in the unreliable condition? Are they right to eat the first marshmallow immediately? When the person offering the marshmallow is unreliable, yes. But what about when the person is reliable? If the person is reliable and the kids eat the first marshmallow they have just lost out on a second. In this case the kid who had the unreliable experience is performing a knee-jerk reaction and is not weighing the new offer on the substantiated merits of the person making the offer (unless the person who flaked earlier and the person who offered them the marshmallow are one and the same).

As my prior research has shown, the cities in the U.S. with the highest average credit scores are those in the upper-midwest (Wausau, WI, Minneapolis, MN, Madison, WI, Cedar Rapids, IA). Areas with low incarceration rates and knowledge handed down over generations among people with good habits. In other words, these are the kids who have reliable encounters and who believe they will be rewarded for waiting for the second marshmallow.

Cities in the U.S. with the lowest average credit scores are found in south Texas (Harlingen, Corpus Christi), Mississippi (Jackson) and Louisiana (Shreveport, Monroe) and are, in general, minority-majority communities. Cities with higher rates of incarceration that make it difficult to hand down knowledge from one generation to the next. In other words, these are the kids who have unreliable encounters and who do not wait for the second marshmallow because they do not believe it will ever come. I don't blame these kids for eating the first marshmallow, but there's more to the story.

Not trusting one's father or neighbor is one thing. Not trusting (bear with me on this one) the rule of law and its ability to safeguard consumers from merchants is something else. Then again, as a minority why should you trust the rule of law if it only persists in putting you in jail? Or if, as is well-documented, the law is not equitably executed and you are taken advantage of by banks and their egregious lending rates to minorities? And there's the rub.

As I've learned capitalism is based on trust. If there is no trust, there is no trade as consumers doubt the products merchants sell and merchants doubt consumers' ability to pay. Part of establishing trust is a properly functioning rule of law that protects consumers and merchants. Without an equitable execution of that rule of law, trust breaks down among those who find themselves on the short end, in this case, those who have more unreliable encounters than reliable ones.

For as much as I believe in a book's ability to fill knowledge gaps left by broken families and unreliable individuals or communities, it would be disingenuous of me to portray a minority waiting for a second marshmallow when that does not line up with their reality.

Back to the drawing board.

Cookie Monsters

The most recent meeting of the Get Cheddar Club focused on the Marshmallow Experiment. The experiment first started at Stanford University in the 1960s. Over the years, Dr. Walter Mischel, the experiment's founder and Stanford psychology professor, followed those who participated in the experiment and either successfully waited for the second marshmallow or who caved and ate the first.

Mischel found that those who waited for the second marshmallow did better in school and were better stewards of their finances among other positive attributes. Mischel also found that those who could not wait for the second marshmallow and simply ate the one in front of them did worse in school and that they became poorer caretakers of their money over time.

A lot has been written about the experiment over the years for better or for worse. A 2010 WNYC report called it a greater predictor of future behavior and success than any standardized test. Others have shot holes in it claiming the ability to delay gratification is as much about nurture as nature.

In 2012, New York Times investigative reporter Charles Duhigg published The Power of Habit: Why We Do What We Do in Life and Business. While Duhigg goes on to cite studies that liken willpower to a muscle that can tire after repeated use, I latched on to the successful habit of the children who passed the marshmallow test. When faced with temptation, they knew how to distract themselves. The least I can do for my students is to introduce them to this good habit.

It's easy to tell kids and people to wait for the second marshmallow, but it's rarely that easy to see through.

Putting the Get Cheddar Club through the marshmallow experiment was a fascinating chance to observe human nature first hand.

In front of each student I placed a Famous Amos chocolate chip cookie. I then asked if they wanted two cookies. The class resoundingly said yes. Then the bad news: They could not have the second cookie till Ms. Hannah, my assistant, returned. If they ate the cookie before them, no second cookie. They moaned.

How long will Ms Hannah be away? they asked.

I don't know, I said. It could be five minutes, it could be fifteen.

They groaned.

For good measure I put a cookie in front of myself as well. The kids got a kick out of that. Ms. Hannah then left the room.

Some kids quickly pushed the cookie away from them. Others covered the cookie up with pieces of paper on their desk. A few averted their eyes or hid the cookie from view behind fingers.

Fortunately for them, I couldn't afford to spend 15 minutes of class waiting for someone to crack. So I gave in and devoured my cookie. When Hannah returned she gave me the hairy eyeball and asked me why I did it.

I just couldn't take it anymore, I said. That I felt the room getting hotter. That I couldn't take the pressure of such sweet temptation right before me. That I could not think of anything else.

I then took the kids outside where we worked on a new song and dance routine and played on the playground. Halfway through I asked them, are you thinking about the cookie?

No! they shouted as they played on the swings or slid down the slide.

We then discussed ways to avoid temptation such as going for a walk, reading a book, and playing.

Eventually a kid asked me, what does this have to do with money?

I then drew a parallel between sparing your first cookie to earn a second with putting a dollar in a savings account and waiting for it to become two.

I was proud of the kids' ability to distract themselves from cookie temptation, but know if they had been alone for a longer period of time the results may have been different. Hopefully they'll learn from my acting job rather than make the mistake themselves down the road.

Monsters & Externalities

In economics, an externality is a secondary or unintended consequence. Pollution is the classic example. People build a factory that will employ many and up the area's tax base. Pollution from the factory or the traffic it will bring are externalities.

As a teacher of financial education, I ran into my first in-class externality the other day. To give kids a better feel for the weight of debt and how it can limit one's movements, I started giving out golf balls to kids who fell behind in "paying their bills", i.e., bringing in pieces of paper from the previous class. This time a handful of students deserved four golf balls. Those who had paid all their bills deserved zero golf balls.

The externalities immediately followed.

First, kids who received golf balls accepted them as gifts, not punishments. They bounced the balls, they rolled them, they had a grand old time with them.

Second, the kids who did not receive golf balls wondered why they were being punished. They wanted fun and bouncy golf balls to play with. I couldn't blame them.

Long story short, golf balls are out. I have nine days to come up with a more appropriate alternative.

The rest of the class was a hodgepodge of highs and lows. The kids did an excellent job of remembering the first two songs and dances we had come up with weeks before, but then struggled to get through this week's despite enjoying acting like Big Scary Number monsters. The lyric "crazy scary" especially eluded them. In the end they pulled it together for a spirited on-camera performance.

Parents will attend next class. This gives us an opportunity to show off what the kids have learned and to expose the parents to our version of the Marshmallow Test...the Cupcake Test.