When we developed the curriculum for our 24 Hour Personal Finance course at Eastside Prep., we decided to use the shortened class periods on Friday (45 minutes vs. 90 minutes during the week) to focus on Investing. So, today was the first Friday and therefore the first lesson on Investing. I decided to try something new by focusing on the psychology of investing before diving into the details of various investment vehicles.

Once students got settled with their Chromebooks, I projected onto the screen the “Think You Can Time the Market?” simulation. Quick explainer:

This game takes 10 years of actual prices for the S&P500 and displays them in a gyrating line graph that takes about a minute to display. Students start with a fictitious $10,000 balance at the start of the game. As the line graph gyrates on their screen, they can make the decision to SELL at any point. Once they have sold, they can at any point decide to BUY back in. That’s it! Very simple game to understand and play and once the game is over, you get a message as to whether or not you beat the market. In effect, were you able to time the market to make yourself better off  just sitting on your hands?

I created a score sheet for them to complete (see below) and provided them with this URL to go to the simulation (will work for you too): http://wp.me/p67Jri-Th

Then they were off and running to play the game five times and mark down their Actual Balances, Their Balance If They Did No Trades and whether they beat the market (the simulation provides this information at the conclusion of each round). There is an addictive quality to this simulation that the students really enjoy!

Here were just some of the comments that I captured as I walked around the room (these would later provide great discussion starters):

• “Are you kidding me? [After a particularly steep drop in the stock price]”
• “I should have just…”
• “Imagine doing this everyday”
• “Is it Ok to match the market”
• “Wow, it’s been down for three years now.”

Once the students had played five rounds, I asked them to do the following:

• Add up each of the columns to see how they did on a cumulative basis over the five periods
• Ask them to check their score sheet to see how many games their Actual Balance was less than $10,000 (which means they lost money)

Then, they completed this Word Cloud on Poll Everywhere to describe their emotions while they played the game, which we then discussed more specifically why they felt this way (I made sure to highlight to them that this was low stakes and asked how they would feel if REAL MONEY was at stake):

Here is where it got interesting…

• I went around the room and in only 5 of the 65 games played did the students actually lose money (finished with Actual Balance under $10,000) and yet the word cloud is full of negative emotions like disappointed and frustrated and angry.
  • This is the most graphic display of “loss aversion” that I have seen. That is, we are hardwired to avoid losses at all costs so that when we experience loss we feel a much stronger emotion than the elation from gains. That explains how students could make money over 90% of the time and still feel this anger. The volatility in stock prices can drive us to madness.
  • Other great teaching point here is stock prices tend to trend up over time so the longer the holding period (in this case 10 years), the higher likelihood that you will not lose money (in fact, history suggests that over rolling ten year periods, that 95% of those periods show a positive gain). Note of course that these are absolute returns and don’t account for inflation.

• When I asked students to add up their score sheets for all five games and compare their Actual Balance to the Balance they would have had with no trades, only ONE of the thirteen students did better than if they hadn’t traded at all.
  • So, in effect students would have been better off not doing anything (no buying or selling decision) rather than trying to time the market
  • Good teaching opportunity to explain the reasons for this underperformance:
    • As much as we know that we should “Buy low” and “Sell high,” it is hard to know what constitutes “high” or “low” when the future is unknowable. There is also the “fear of missing out” which often leads us to buy when the market has already run up because we don’t want to miss out on the next gain. Quite a few students found themselves in this predicament.
    • You may get lucky with a trade once in a while (almost all students had a game where they beat the market) but it is hard to consistently beat the market over the long term (with exceptions like Warren Buffett).
    • Achieving a market return is OK, after all the long-term returns in the stock market are 7-9%.

This simulation and discussion went quite a bit longer than I expected, but I thought the lessons established a solid foundation for the investing unit.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.