While on vacation under the Italian sun, I was asked a lot of questions about financial literacy. Rather than writing a blog post about a single topic, I thought it might be useful to answer some of the questions I’ve been asked in order to hit on a lot of general information about financial literacy. So, here is my list of the top ten questions and things to know about financial literacy:
1) What is financial literacy?
Financial literacy is like reading and writing. It is the knowledge of basic but essential concepts that are needed to be able to operate in today’s society.
2) How do I know whether I am financially literate?
You can take a test here:
http://www.rand.org/labor/centers/financial-literacy/widgets/financial-knowledge-test.html
3) How do I compare with respect to others?
The above test will tell you how the average American responded to five financial literacy questions. If you live in the U.S. and you want to know how financially literate people in your state are, check here:
http://www.usfinancialcapability.org/
4) How does financial literacy in the United States (or Italy) compare with respect to other countries?
We have done a comparison of financial literacy across eight countries (the U.S., Italy, Germany, the Netherlands, Sweden, Russia, Japan, and New Zealand). In a nutshell, the world is flat in terms of financial literacy! You can read about this work here (warning: these are long papers but still fun to read)
http://www.financialliteracyfocus.org/academics/FLatW.html
5) Why should I become financially literate? Can’t I be happily ignorant?
There are costs of being financially illiterate. Studies show that those who have low financial literacy are less likely to take advantage of the opportunities offered by financial markets (for example, refinancing mortgages when interest rates go down or getting higher returns by investing in stocks and bonds), are less likely to invest in mutual funds with low fees, and are more likely to have problems with debt and to pay higher borrowing costs. Overall, ignorance is not bliss.
An overview of these studies is provided in this paper:
http://www.financialliteracyfocus.org/files/FLatDocs/Lusardi_Mitchell_Overview.pdf
6) Where do I go for information if I want to improve my financial literacy?
For readers in the United States, a reliable and independent source of information is www.mymoney.gov. One of the best web sites for financial literacy is New Zealand’s national site. Here is the link (after all, we are going global!):
http://www.sorted.org.nz/
7) What if I want to have fun while I’m learning?
Excellent idea! Doorways to Dreams has designed financial literacy games, so you can become financially literate while having fun. Here is their financial entertainment website:
http://financialentertainment.org/
8) What do I do to promote financial literacy and to become financially literate?
Ask for financial literacy programs in your school, your workplace, and your local library. Become an ambassador for financial literacy.
Three examples of initiatives or tools to use are here:
http://www.math.dartmouth.edu/~mqed/FinancialLiteracyProject/
http://nyse.nyx.com/financial-fitness-kit
http://www.finra.org/Newsroom/NewsReleases/2011/P122886
9) Who is promoting financial literacy? Just academic nerds like you?
Are you kidding me? Here is a list of people (and one puppet) who are promoting financial literacy.
(i) Elmo, puppet and TV celebrity (for you younger readers):
http://video.nytimes.com/video/2011/04/15/business/100000000776361/talking-money-with-elmo.html?hp
(ii) Ben Bernanke, Chairman of the Federal Reserve. You can read one of his recent speeches here:
http://www.federalreserve.gov/newsevents/testimony/bernanke20110420a.htm
(iii) Ray Lewis, football star. You can read about one of his talks here:
http://articles.nydailynews.com/2011-04-29/sports/29510296_1_ray-lewis-uaf-financial-literacy
(iv) Both President Bush and President Obama have been supporters of financial literacy, via, for example, the President’s Advisory Council on Financial Literacy
http://www.treasury.gov/resource-center/financial-education/Pages/Advisory.aspx
10) Are there any big initiatives happening on financial literacy?
Yes, there are many. One important initiative is that of the OECD (Organisation for Economic Cooperation and Development). Starting in 2012, the OECD’s Programme for International Student Assessment (PISA) will measure financial literacy among 15-year-olds in 19 countries. You can read more about this important initiative here:
http://www.pisa.oecd.org/dataoecd/8/43/46962580.pdf
Saturday, August 27, 2011
Monday, August 15, 2011
No Roman Holidays
I am in Italy where, it has been said, even the statues go on vacation in August. While this is the feeling one normally gets in the summer, the Italian government, under pressure from the European Central Bank, has just—in a short period of time—put together a series of decisive reforms. Little was left untouched, from cuts that reached into the pockets of politicians, from whom many privileges have been taken, to the abolition of small provinces to reduce the costs of local governments to tax increases —including a new “solidarity fund” which will require temporary tax increases for those whose income is above 90,000 Euros—to increases in the pension age for women (a gradual move from age 60 to age 65).
This was no Roman holiday (for those of you who have seen the wonderful movie with Audrey Hepburn and Gregory Peck) for the Italian politicians, who have used all of the tools at their disposal to rein in the deficit and tackle a public debt as high as 120% of GDP. And for those who think these are the reforms that Socialist Europe makes, I want to remind readers that Italy, in fact, has a right-wing government. For those who wonder why this was not done before, I would argue that this is a good way to use a severe crisis (no crisis should be wasted) to convince both citizens and politicians that changes are necessary.
The reason I have chosen this topic for this blog posting is that in many countries around the world the crisis has profound consequences, with or without changes in government policies. In the newspapers, the first pages are now dedicated to economic news. Long articles are written about the reactions of the financial markets, about the spreads in the government bonds of different countries, and about the economic measures that countries have taken in reaction to a severe crisis.
This is another reason why we need financial literacy. Every day we read and hear economic news. This news is not only affecting or reflecting the macro economy but has an effect on our lives. The behavior of financial markets is affecting our savings, our cost of traveling abroad, our capacity to retire or to donate to the initiatives we deem important. Similarly, the changes in economic policies are affecting the services that we get from the government, our income, our capacity to find a job or to get a good education. We need to be able to understand what this news means, we need to be able to take advantage of the opportunities offered by the financial markets, we need to be able to understand the causes and consequences of the economic reforms that governments are proposing to us. And it is perhaps in a time of economic crisis that we need financial knowledge the most.
So, while Italy pauses during this national holiday, I am writing a new blog post about financial literacy because it is a regular Monday in other countries, because many stock markets are closing with moderate gains today, and because economic crises may even bring good things, for example new and much-needed economic reforms.
If some of you are wondering what I will do with my non-Roman holiday, I will do three things: bask in the sun, go to the opera, and of course write more blogs.
This was no Roman holiday (for those of you who have seen the wonderful movie with Audrey Hepburn and Gregory Peck) for the Italian politicians, who have used all of the tools at their disposal to rein in the deficit and tackle a public debt as high as 120% of GDP. And for those who think these are the reforms that Socialist Europe makes, I want to remind readers that Italy, in fact, has a right-wing government. For those who wonder why this was not done before, I would argue that this is a good way to use a severe crisis (no crisis should be wasted) to convince both citizens and politicians that changes are necessary.
The reason I have chosen this topic for this blog posting is that in many countries around the world the crisis has profound consequences, with or without changes in government policies. In the newspapers, the first pages are now dedicated to economic news. Long articles are written about the reactions of the financial markets, about the spreads in the government bonds of different countries, and about the economic measures that countries have taken in reaction to a severe crisis.
This is another reason why we need financial literacy. Every day we read and hear economic news. This news is not only affecting or reflecting the macro economy but has an effect on our lives. The behavior of financial markets is affecting our savings, our cost of traveling abroad, our capacity to retire or to donate to the initiatives we deem important. Similarly, the changes in economic policies are affecting the services that we get from the government, our income, our capacity to find a job or to get a good education. We need to be able to understand what this news means, we need to be able to take advantage of the opportunities offered by the financial markets, we need to be able to understand the causes and consequences of the economic reforms that governments are proposing to us. And it is perhaps in a time of economic crisis that we need financial knowledge the most.
So, while Italy pauses during this national holiday, I am writing a new blog post about financial literacy because it is a regular Monday in other countries, because many stock markets are closing with moderate gains today, and because economic crises may even bring good things, for example new and much-needed economic reforms.
If some of you are wondering what I will do with my non-Roman holiday, I will do three things: bask in the sun, go to the opera, and of course write more blogs.
Tuesday, August 9, 2011
Financial literacy for politicians
I have argued in my blog postings that individuals need financial literacy because we are increasingly asked to make financial decisions that have important consequences. But there is a group for whom financial literacy is even more important, since their decisions are going to affect the whole population. These are our politicians.
As a case in point, the consequences of the standoff about the debt ceiling are severe. For the first time in history, the US debt has been downgraded from AAA to AA. This could mean higher interest rates, for example, on mortgages or car loans, and thus higher costs for many consumers. The stock market gyrated last week, dropping sharply, and it dropped more than 600 points on Monday, destroying in less than a week most of the gains that had been made slowly over many months. These are serious problems that affect real people!
When politicians make decisions with such consequential economic implications, they must be financially literate. Consumers learned about the costs of financial illiteracy during the financial crisis; politicians will likely get their lessons soon, if what they want to see is what happens to an economy in which basic economic principles are ignored.
There have been a number of statements by politicians that reveal their financial illiteracy. One example: the argument that it does not matter (or we should not care) if the world is watching or what the world thinks of how the US handles the debt ceiling. This is unfortunately wrong. A large portion of US debt is held by the Chinese, and so it does matter what other countries think of the discussion about the debt ceiling, and politicians should care—in fact, they should care a lot. Another example: the suggestion that we should let the government default to demonstrate how important it is to reign in the deficit. This is strange financial decision-making. It is the equivalent of a household wanting to burn down the house to discipline its members. I would recommend trying that strategy on a desert island but not in a country inhabited by 300 million people.
I doubt financial illiteracy is concentrated in one political party only. We have witnessed poor economic decisions a lot in the past few years. Having public debt on an unsustainable path is not only problematic, but it provides a bad example to citizens as well. Not just the federal government but also state and local governments have done a poor job in keeping their finances in order.
The decisions that politicians make have enormous implications for the economy and for all of us. We are the ones paying the cost of the decisions that are made. We should demand that the politicians we sent to represent us and who are bound to make these important decisions be financially literate and explain their decisions to us in economic terms. A fragile economy that has survived a very severe crisis and is trying to recover from a great recession needs politicians who understand basic economic principles, now more than ever.
As a case in point, the consequences of the standoff about the debt ceiling are severe. For the first time in history, the US debt has been downgraded from AAA to AA. This could mean higher interest rates, for example, on mortgages or car loans, and thus higher costs for many consumers. The stock market gyrated last week, dropping sharply, and it dropped more than 600 points on Monday, destroying in less than a week most of the gains that had been made slowly over many months. These are serious problems that affect real people!
When politicians make decisions with such consequential economic implications, they must be financially literate. Consumers learned about the costs of financial illiteracy during the financial crisis; politicians will likely get their lessons soon, if what they want to see is what happens to an economy in which basic economic principles are ignored.
There have been a number of statements by politicians that reveal their financial illiteracy. One example: the argument that it does not matter (or we should not care) if the world is watching or what the world thinks of how the US handles the debt ceiling. This is unfortunately wrong. A large portion of US debt is held by the Chinese, and so it does matter what other countries think of the discussion about the debt ceiling, and politicians should care—in fact, they should care a lot. Another example: the suggestion that we should let the government default to demonstrate how important it is to reign in the deficit. This is strange financial decision-making. It is the equivalent of a household wanting to burn down the house to discipline its members. I would recommend trying that strategy on a desert island but not in a country inhabited by 300 million people.
I doubt financial illiteracy is concentrated in one political party only. We have witnessed poor economic decisions a lot in the past few years. Having public debt on an unsustainable path is not only problematic, but it provides a bad example to citizens as well. Not just the federal government but also state and local governments have done a poor job in keeping their finances in order.
The decisions that politicians make have enormous implications for the economy and for all of us. We are the ones paying the cost of the decisions that are made. We should demand that the politicians we sent to represent us and who are bound to make these important decisions be financially literate and explain their decisions to us in economic terms. A fragile economy that has survived a very severe crisis and is trying to recover from a great recession needs politicians who understand basic economic principles, now more than ever.
Sunday, July 31, 2011
The NFL is Back
I was very happy to hear that the NFL lockout was over, and I have been avidly reading the sports section of the newspapers. I normally read the business section, but this week I could not bear to read the discussion about the debt ceiling any longer, and it was good to go straight to the sport pages. While attending the National Bureau for Economic Research (NBER) Summer Institute last week, I startled a few economists with my conversations about football; I enjoyed that!
There are four things I like about the agreement that was reached last week:
1) Players’ safety and health. The agreement limits on-field practice time and contact. Importantly, it limits full-contact practice in the preseason and regular season. Who needs concussions? I was appalled at the statistics about injuries among football players when I read them. These are serious issues and I frankly wonder why it took so long to worry about players’ safety. This discussion has already trickled down to college football, and I was very happy to see that the Ivy League colleges have also adopted a limit to football practices to reduce head injuries. Importantly, the new agreement provides enhanced injury-protection benefits and an opportunity for current players to remain in the player medical plan for life. It also set up a fund for medical research, health care programs, and NFL Charities. These are smart features; a big thumbs up.
2) Benefits for retired players. The agreement provides additional funding for retiree benefits and sets up a fund to increase the pensions of pre-1993 retirees. This is also a good and needed program. The career of players is often very short (and cut short by injuries as well) and it is hard to accumulate a good pension during a short career (let alone think about pensions when one is 22!). We have read too many stories of players running out of money after they stop playing, and it is important to find ways to provide for the players’ future. Another thumbs up.
3) Improvements to career transition and degree-completion programs. Because, as already mentioned above, the career of players is short, it is important to provide help in their career transitions. Players have very specific skills that can be used well in sports but also in other fields, but they need help in translating those skills or simply in being connected to other fields. Some players have not completed their college education and, given the returns to higher education, it is beneficial to facilitate and help players finish their degrees. A thumbs up here as well.
4) Sharing among players. To those who believe players are greedy and want absurdly high wages, I would like to point out there are absurdly high amounts of money on the table, and the projections are for high growth in that money in the future as well. In fact, players have agreed not only to a stricter salary cap but a new fund will also be created to redistribute savings from the new rookie pay system to current and retired-player benefits and a veteran-player performance pool. And we have now heard news about Peyton Manning staying with the Colts but passing up being the highest paid player in NFL history. This will allow the Colts more flexibility to sign other players. This is the statement Manning made: “Whether I deserve to be the highest-paid player over the next five years is irrelevant. I would rather them use the money and keep the players they want to keep and get other players.” One thumbs up to Peyton Manning. Another thing I want to remind readers is that players donate generously. Many have their own charities and are very sensitive to social issues related, for example, to poverty, education, and discrimination. Because of that spillover, I would have preferred to see more rather than less money going to the players.
But the best news is that we will be able to go see the games. I am getting ready to not only watch them on TV but to go to the stadium. As for the other lockout (about the debt ceiling), I think politicians could learn a thing or two from the NFL.
There are four things I like about the agreement that was reached last week:
1) Players’ safety and health. The agreement limits on-field practice time and contact. Importantly, it limits full-contact practice in the preseason and regular season. Who needs concussions? I was appalled at the statistics about injuries among football players when I read them. These are serious issues and I frankly wonder why it took so long to worry about players’ safety. This discussion has already trickled down to college football, and I was very happy to see that the Ivy League colleges have also adopted a limit to football practices to reduce head injuries. Importantly, the new agreement provides enhanced injury-protection benefits and an opportunity for current players to remain in the player medical plan for life. It also set up a fund for medical research, health care programs, and NFL Charities. These are smart features; a big thumbs up.
2) Benefits for retired players. The agreement provides additional funding for retiree benefits and sets up a fund to increase the pensions of pre-1993 retirees. This is also a good and needed program. The career of players is often very short (and cut short by injuries as well) and it is hard to accumulate a good pension during a short career (let alone think about pensions when one is 22!). We have read too many stories of players running out of money after they stop playing, and it is important to find ways to provide for the players’ future. Another thumbs up.
3) Improvements to career transition and degree-completion programs. Because, as already mentioned above, the career of players is short, it is important to provide help in their career transitions. Players have very specific skills that can be used well in sports but also in other fields, but they need help in translating those skills or simply in being connected to other fields. Some players have not completed their college education and, given the returns to higher education, it is beneficial to facilitate and help players finish their degrees. A thumbs up here as well.
4) Sharing among players. To those who believe players are greedy and want absurdly high wages, I would like to point out there are absurdly high amounts of money on the table, and the projections are for high growth in that money in the future as well. In fact, players have agreed not only to a stricter salary cap but a new fund will also be created to redistribute savings from the new rookie pay system to current and retired-player benefits and a veteran-player performance pool. And we have now heard news about Peyton Manning staying with the Colts but passing up being the highest paid player in NFL history. This will allow the Colts more flexibility to sign other players. This is the statement Manning made: “Whether I deserve to be the highest-paid player over the next five years is irrelevant. I would rather them use the money and keep the players they want to keep and get other players.” One thumbs up to Peyton Manning. Another thing I want to remind readers is that players donate generously. Many have their own charities and are very sensitive to social issues related, for example, to poverty, education, and discrimination. Because of that spillover, I would have preferred to see more rather than less money going to the players.
But the best news is that we will be able to go see the games. I am getting ready to not only watch them on TV but to go to the stadium. As for the other lockout (about the debt ceiling), I think politicians could learn a thing or two from the NFL.
Monday, July 25, 2011
Hopes for the Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) officially opened its doors on July 21, 2011. Established by the Dodd-Frank Act, we finally have an institution that, as the name says, will be devoted to protecting consumers. This is an important milestone. It is not possible to live in a world of individual responsibility without at the same time having a structure in place to protect consumers. This is not just a political choice, it is an inevitable step to take when we put people in charge of their financial well-being. The shift in responsibility from governments and employers onto individuals has stemmed from changes in the age composition of the population (an increasingly elderly population) and in the increased mobility of the labor markets (which requires that pensions be portable), and I do not see a way of going back to a system dominated by, for example, defined benefit pensions. But consumers face a formidable task, particularly now that financial markets around the world have become very complex and the choice of financial products has dramatically expanded.
I have several hopes for the Consumer Financial Protection Bureau.
• First, I hope they will set the right expectations about what they can accomplish, in particular in the short run. Protecting consumers is a very complex task; it requires a combination of both regulation and financial education, and it will take time to get that combination right. Having the Bureau does not make people smarter overnight, and—given widespread financial illiteracy—the Bureau has a challenging task in front of it. I can already envision front-page news articles the next time we will experience financial troubles (and there is trouble to come; more on this below), which will argue that despite the existence of the CFPB, we have not prevented financial woes. Having the CFPB does not mean that consumers will not make financial mistakes or that the supply of financial products will have no flaws. While the Dodd-Frank Act provides guidelines on what the Bureau should do, it is very important to make clear what it can realistically aim to accomplish in the short run.
• Continuing on the previous point, I hope that the Bureau will devote ample attention to financial education. One of its mandates is to promote financial education but, as we know, education inevitably takes time—and no one has time; no one can wait. But, as Federal Reserve Chairman Ben Bernanke has said, “well-informed consumers, who can serve as their own advocates, are one of the best lines of defense against the proliferation of financial products and services that are unsuitable, unnecessarily costly, or abusive.” We need an institution that has the brains, the courage, and the vision to think beyond the short run. In this respect, the Bureau could set itself apart from other institutions intent on pleasing people, politicians, or voters, with no consideration for the future. Myopic policies are costly and these costs will eventually be paid (young people, be warned). Most of our financial decisions have to do with transferring resources to the future (for example to pay for expenses after retirement or for children’s college education), and we need institutions with a long planning horizon.
• Third, I hope that the Bureau will pay careful attention to what has happened during the recent financial crisis but it will also look ahead and be proactive in addressing potential future problems. There are early indications of serious problems brewing inside the Defined Contribution pension system. There are also problems regarding how people assume and manage debt. These are issues that emerge when looking at data, and is important to use that evidence for prevention.
• Finally, I hope the Bureau will focus its efforts on those who need protection the most. While everyone will benefit from the existence of the Bureau, it is clear that there are vulnerable groups in society that deserves particular attention. These groups include not only the young and the old, which have been shown to display alarmingly low levels of financial knowledge, but also women, those with low educational attainment, and African-Americans and Hispanics. Again, the data speak clearly about who the vulnerable groups are and also provide suggestions on how to protect those vulnerable groups.
The CFPB is an institution that can make a difference in people’s lives. I want to remind you that we are all consumers; we all make financial decisions; we all need fair treatment in the market and financial products that serve our needs well; we all have grandparents, children, and female and minorities friends who are part of those vulnerable groups. Personal finance is, well, “personal.” We should not forget about that, and we should take time to recognize that with the CFPB we have made one important step forward. It’s about time.
I have several hopes for the Consumer Financial Protection Bureau.
• First, I hope they will set the right expectations about what they can accomplish, in particular in the short run. Protecting consumers is a very complex task; it requires a combination of both regulation and financial education, and it will take time to get that combination right. Having the Bureau does not make people smarter overnight, and—given widespread financial illiteracy—the Bureau has a challenging task in front of it. I can already envision front-page news articles the next time we will experience financial troubles (and there is trouble to come; more on this below), which will argue that despite the existence of the CFPB, we have not prevented financial woes. Having the CFPB does not mean that consumers will not make financial mistakes or that the supply of financial products will have no flaws. While the Dodd-Frank Act provides guidelines on what the Bureau should do, it is very important to make clear what it can realistically aim to accomplish in the short run.
• Continuing on the previous point, I hope that the Bureau will devote ample attention to financial education. One of its mandates is to promote financial education but, as we know, education inevitably takes time—and no one has time; no one can wait. But, as Federal Reserve Chairman Ben Bernanke has said, “well-informed consumers, who can serve as their own advocates, are one of the best lines of defense against the proliferation of financial products and services that are unsuitable, unnecessarily costly, or abusive.” We need an institution that has the brains, the courage, and the vision to think beyond the short run. In this respect, the Bureau could set itself apart from other institutions intent on pleasing people, politicians, or voters, with no consideration for the future. Myopic policies are costly and these costs will eventually be paid (young people, be warned). Most of our financial decisions have to do with transferring resources to the future (for example to pay for expenses after retirement or for children’s college education), and we need institutions with a long planning horizon.
• Third, I hope that the Bureau will pay careful attention to what has happened during the recent financial crisis but it will also look ahead and be proactive in addressing potential future problems. There are early indications of serious problems brewing inside the Defined Contribution pension system. There are also problems regarding how people assume and manage debt. These are issues that emerge when looking at data, and is important to use that evidence for prevention.
• Finally, I hope the Bureau will focus its efforts on those who need protection the most. While everyone will benefit from the existence of the Bureau, it is clear that there are vulnerable groups in society that deserves particular attention. These groups include not only the young and the old, which have been shown to display alarmingly low levels of financial knowledge, but also women, those with low educational attainment, and African-Americans and Hispanics. Again, the data speak clearly about who the vulnerable groups are and also provide suggestions on how to protect those vulnerable groups.
The CFPB is an institution that can make a difference in people’s lives. I want to remind you that we are all consumers; we all make financial decisions; we all need fair treatment in the market and financial products that serve our needs well; we all have grandparents, children, and female and minorities friends who are part of those vulnerable groups. Personal finance is, well, “personal.” We should not forget about that, and we should take time to recognize that with the CFPB we have made one important step forward. It’s about time.
Wednesday, July 13, 2011
Teaching the STARs
I recently taught a class on financial literacy in the new STAR EMBA program that the George Washington School of Business (GWSB) just launched. This is a new Executive Master in Business Administration (EMBA) for Special Talent, Access and Responsibility (STAR) students, targeted to athletes, celebrities, and others. For those who do not yet know, I have moved to GWSB, so you can say I went from teaching the little stars (Dartmouth undergraduates) to teaching the bigger stars (athletes and celebrities).
Programs like this one are much needed and fill an important gap. Irrespective of high salaries and lucrative contracts, an athlete’s career is normally very short and often riddled with injuries. Ken Ruettgers, a former NFL player and now the executive director of GamesOver, documented that 78% of NFL players are bankrupt, divorced, or unemployed two years after retiring. This is one of the ugliest statistics I have seen. As Doug Guthrie, the dean of GWSB, stated succinctly: “These individuals need help translating their special talents and access to resources at a very early stage in their lives into the business skills that will help them elevate their personal brands into business dreams that will change the world.” I particularly like the latter part of the statement. These are extraordinarily talented individuals who were recruited for the EMBA program because of their enormous potential to make an impact.
The program is customized to fit these students’ needs, including their playing seasons (several of the football players in class are still active). Thus, it started with two weeks of full immersion in many courses in Washington, DC, and will continue in the heart of the financial capital (New York) and on the West coast, in Los Angeles. Spouses were also accepted and very much welcomed into the program, and out of 23 students, we had four couples in class.
In spite of their special talents, the group, in many ways, behaved very much like regular students. After a few days, they were wearing GW T-shirts or caps, were complaining about homework, and had found the strategic places in the classroom where they thought they could surf the internet, respond to e-mails, or finish their assignments without being noticed (we saw them, of course). There were differences as well. After a few days they stopped eating the catered lunches (too many calories I guess); regular students would never pass up buffet lunches. They went regularly to the gym, many of them looking so super-fit that I could not avoid feeling very wimpy.
But beyond these differences, they were not, by any means, a regular class. Their insights were profound and they startled a few faculty members with their comments. They did not speak a lot in class, but when they did, they were succinct and nailed a point, as if there was no margin for error. Even though they were soft-spoken in class, I could sense their confidence and determination. I admired the female basketball players’ toughness—they had played in several countries, spoke many languages, and one of them, more than 6 feet tall, was wearing very high heels!
We knew we had great potential to work with. We knew we could push these students for more work, give them challenges, and expect the best. These students know endurance, the importance of hard work, the correlation between effort and results. As I looked at this class of football, basketball, and baseball players; Olympic gymnasts; and poker players, I knew I could expect a lot from them. I also knew they expected a lot from me.
My class on financial literacy was divided into three parts. In the first part, I discussed why financial literacy has become important for each of us, what the consequences of financial illiteracy are, and why—in a new world of individual responsibility—financial literacy is an essential tool for making financial decisions. In the second part, I discussed why financial literacy is especially important for athletes: given their short careers, good planning is particularly important, as is an understanding of how to grow and protect wealth to make sure that resources last a lifetime. While most people get rich later in life (apart from those pesky Harvard students who invent Facebook while in college), athletes are rich early in life, so they have to learn in their twenties about trusts, wills, and prenuptial agreements. In the third part of the class, I discussed how these students can make a difference in promoting financial literacy. My discussion here was focused on the divergence of wages between those with and without a college degree and the fact that high school students are asked to make one of the biggest investments of their lives—the investment in education—without having any notion of this basic concept or of the basics of economics and finance. I discussed what athletes can do to make a difference in the lives of the many young people who look up to them.
For those of you who think that we professors just show up in class and teach off-the-cuff, let me tell you that I prepared a lot for this class and was quite nervous at the idea of teaching this group of students. Several weeks ahead, I started reading about the different sports played by the athletes who would be in my class. For example, I read lots about football and football players: rate of injury, lengths of careers, what it means to be drafted. Because I did not know anything about the game, I read “Football for Dummies,” so at least I knew what a linebacker is and could understand the dossiers of the athletes in my class. I read the sport pages of the newspapers and read sports magazines (I understood half of what they were saying, but there were some good stories). At the end of the class, I went to talk to one of the students, who is a football player for the Baltimore Ravens. I had mentioned the Ravens a lot in class and talked about Ray Lewis (of the Ravens) as an example of an athlete who cares a lot about financial literacy, and I wanted to tell him that I think the world of Ray. He jokingly suggested I come teach the Ravens. When I told him I didn’t know whether I could really teach a whole team, his reply hit me like a ball in the head: “Yes, you can. Because you can relate to us.” I always prepare for my classes because I want to know who my students are, what they need, and to make the class relevant to them, but no student ever told me “you can relate to us.” I’ve been teaching for close to 20 years, and it was a linebacker from a football team in Baltimore who best articulated what teaching means for me and what I strive for every day in the classroom. I never felt so good. As I told you, these people are truly special, they are STARS!
Programs like this one are much needed and fill an important gap. Irrespective of high salaries and lucrative contracts, an athlete’s career is normally very short and often riddled with injuries. Ken Ruettgers, a former NFL player and now the executive director of GamesOver, documented that 78% of NFL players are bankrupt, divorced, or unemployed two years after retiring. This is one of the ugliest statistics I have seen. As Doug Guthrie, the dean of GWSB, stated succinctly: “These individuals need help translating their special talents and access to resources at a very early stage in their lives into the business skills that will help them elevate their personal brands into business dreams that will change the world.” I particularly like the latter part of the statement. These are extraordinarily talented individuals who were recruited for the EMBA program because of their enormous potential to make an impact.
The program is customized to fit these students’ needs, including their playing seasons (several of the football players in class are still active). Thus, it started with two weeks of full immersion in many courses in Washington, DC, and will continue in the heart of the financial capital (New York) and on the West coast, in Los Angeles. Spouses were also accepted and very much welcomed into the program, and out of 23 students, we had four couples in class.
In spite of their special talents, the group, in many ways, behaved very much like regular students. After a few days, they were wearing GW T-shirts or caps, were complaining about homework, and had found the strategic places in the classroom where they thought they could surf the internet, respond to e-mails, or finish their assignments without being noticed (we saw them, of course). There were differences as well. After a few days they stopped eating the catered lunches (too many calories I guess); regular students would never pass up buffet lunches. They went regularly to the gym, many of them looking so super-fit that I could not avoid feeling very wimpy.
But beyond these differences, they were not, by any means, a regular class. Their insights were profound and they startled a few faculty members with their comments. They did not speak a lot in class, but when they did, they were succinct and nailed a point, as if there was no margin for error. Even though they were soft-spoken in class, I could sense their confidence and determination. I admired the female basketball players’ toughness—they had played in several countries, spoke many languages, and one of them, more than 6 feet tall, was wearing very high heels!
We knew we had great potential to work with. We knew we could push these students for more work, give them challenges, and expect the best. These students know endurance, the importance of hard work, the correlation between effort and results. As I looked at this class of football, basketball, and baseball players; Olympic gymnasts; and poker players, I knew I could expect a lot from them. I also knew they expected a lot from me.
My class on financial literacy was divided into three parts. In the first part, I discussed why financial literacy has become important for each of us, what the consequences of financial illiteracy are, and why—in a new world of individual responsibility—financial literacy is an essential tool for making financial decisions. In the second part, I discussed why financial literacy is especially important for athletes: given their short careers, good planning is particularly important, as is an understanding of how to grow and protect wealth to make sure that resources last a lifetime. While most people get rich later in life (apart from those pesky Harvard students who invent Facebook while in college), athletes are rich early in life, so they have to learn in their twenties about trusts, wills, and prenuptial agreements. In the third part of the class, I discussed how these students can make a difference in promoting financial literacy. My discussion here was focused on the divergence of wages between those with and without a college degree and the fact that high school students are asked to make one of the biggest investments of their lives—the investment in education—without having any notion of this basic concept or of the basics of economics and finance. I discussed what athletes can do to make a difference in the lives of the many young people who look up to them.
For those of you who think that we professors just show up in class and teach off-the-cuff, let me tell you that I prepared a lot for this class and was quite nervous at the idea of teaching this group of students. Several weeks ahead, I started reading about the different sports played by the athletes who would be in my class. For example, I read lots about football and football players: rate of injury, lengths of careers, what it means to be drafted. Because I did not know anything about the game, I read “Football for Dummies,” so at least I knew what a linebacker is and could understand the dossiers of the athletes in my class. I read the sport pages of the newspapers and read sports magazines (I understood half of what they were saying, but there were some good stories). At the end of the class, I went to talk to one of the students, who is a football player for the Baltimore Ravens. I had mentioned the Ravens a lot in class and talked about Ray Lewis (of the Ravens) as an example of an athlete who cares a lot about financial literacy, and I wanted to tell him that I think the world of Ray. He jokingly suggested I come teach the Ravens. When I told him I didn’t know whether I could really teach a whole team, his reply hit me like a ball in the head: “Yes, you can. Because you can relate to us.” I always prepare for my classes because I want to know who my students are, what they need, and to make the class relevant to them, but no student ever told me “you can relate to us.” I’ve been teaching for close to 20 years, and it was a linebacker from a football team in Baltimore who best articulated what teaching means for me and what I strive for every day in the classroom. I never felt so good. As I told you, these people are truly special, they are STARS!
Thursday, June 30, 2011
The courage of women
I want to cover a topic that is not discussed much in the world of finance: the courage of women. In an arena in which women have been scarce and where financial genius and wizardry are often synonymous with being male (and there are many excellent men out there), it’s interesting to note, by gender, some of the key players in financial events of recent years.
In a world where corporate interests have a big voice, it was a woman who stood up and advocated protecting the consumer, the “little guy.” It was a woman who promoted regulation of the derivatives market, an arcane market that few understood well but in which immense risk could be taken. It was a woman who blew the whistle on Enron and its overinflated evaluations. And the list goes on.
In the same time frame, we witnessed Bernie Madoff carry out an enormous Ponzi scheme that defrauded individuals of their retirement savings and institutions of their endowments. And it was a young derivatives broker who brought down Barings Bank, one of the oldest of the United Kingdom’s investment banks. This dude even had the audacity to write a book titled “How I Brought Down Barings Bank and Shook the Financial World.” Another male trader almost took down France’s second-largest bank. The former head of the International Monetary Fund, which had been dealing with the financial situation in Greece, which is threatening the very existence of the Euro, has been under house arrest. And the list goes on.
At the risk of making gross generalizations about gender and finance, the above outline makes me hope we will begin giving truly serious consideration to furthering the role of women in the financial world and start opening doors more widely to them. One useful role I could see for women is in curbing the excesses that we have witnessed in recent years and that have caused some venerable firms to go knocking at the doors of government for help. The risk-averse attitude of women (considered a fact but hardly documented in the data), often considered a weakness, may turn out to be a strength. As women rise to the top, I hope their voices will be heard.
Some progress has undoubtedly already been made. The top regulator of financial markets and head of the Security and Exchange Commission is Mary Schapiro. At the Department of Labor, Phyllis Borzi is the Assistant Secretary of Labor for the Employee Benefits Security Administration, whose mission is to protect the security of retirement, health, and other employee benefits for America’s workers and to support the growth of the private sector employee benefits system. We are talking about trillions of dollars here! The endowments of some of the wealthiest universities, such as Harvard, are managed by women, and many Ivy League colleges and universities (which are some of the richest institutions in the United States) are headed by women. We have yet to see any woman go down in flames from their seats at those positions of power, but, of course, history will tell. The helm of the International Monetary Fund will be given to a woman. This is another milestone, though I wish women were not brought in only when crises occur and when everyone—man or woman—will face very difficult situations and is more doomed to fail than to succeed.
I believe that one ideal job for women in finance is that of financial advisors. A critical quality in that job is the ability to care for clients and listen to their needs and concerns, and women can excel in that. And, important in wealth management is not only wise investing but also the right amount of protection, against disability, death, and other risks. Coming back to my posts of a few weeks ago, there was much wisdom in the football players’ bringing their mothers to the New York Stock Exchange to discuss financial literacy. That memory still warms my heart.
Women have used cleverness and ingenuity when caring for others, achieving important results. My favorite example is Ethel Percy Andrus. A school principal who retired in the late 1940s to take care of her ailing mother, she was shocked to discover how many retired teachers had no health insurance. As there was no national health care program for people over age 65 (Medicare wasn’t created until 1965), Ethel turned to insurance companies to offer group health insurance to retired educators. She was turned down by more than a dozen companies but she persisted until one company agreed to develop a health plan for retired teachers. The plan became so popular that non-educators also wanted to purchase it. In 1958, Ethel established AARP (then known as the American Association of Retired Persons). The rest is, well, history.
In a world where corporate interests have a big voice, it was a woman who stood up and advocated protecting the consumer, the “little guy.” It was a woman who promoted regulation of the derivatives market, an arcane market that few understood well but in which immense risk could be taken. It was a woman who blew the whistle on Enron and its overinflated evaluations. And the list goes on.
In the same time frame, we witnessed Bernie Madoff carry out an enormous Ponzi scheme that defrauded individuals of their retirement savings and institutions of their endowments. And it was a young derivatives broker who brought down Barings Bank, one of the oldest of the United Kingdom’s investment banks. This dude even had the audacity to write a book titled “How I Brought Down Barings Bank and Shook the Financial World.” Another male trader almost took down France’s second-largest bank. The former head of the International Monetary Fund, which had been dealing with the financial situation in Greece, which is threatening the very existence of the Euro, has been under house arrest. And the list goes on.
At the risk of making gross generalizations about gender and finance, the above outline makes me hope we will begin giving truly serious consideration to furthering the role of women in the financial world and start opening doors more widely to them. One useful role I could see for women is in curbing the excesses that we have witnessed in recent years and that have caused some venerable firms to go knocking at the doors of government for help. The risk-averse attitude of women (considered a fact but hardly documented in the data), often considered a weakness, may turn out to be a strength. As women rise to the top, I hope their voices will be heard.
Some progress has undoubtedly already been made. The top regulator of financial markets and head of the Security and Exchange Commission is Mary Schapiro. At the Department of Labor, Phyllis Borzi is the Assistant Secretary of Labor for the Employee Benefits Security Administration, whose mission is to protect the security of retirement, health, and other employee benefits for America’s workers and to support the growth of the private sector employee benefits system. We are talking about trillions of dollars here! The endowments of some of the wealthiest universities, such as Harvard, are managed by women, and many Ivy League colleges and universities (which are some of the richest institutions in the United States) are headed by women. We have yet to see any woman go down in flames from their seats at those positions of power, but, of course, history will tell. The helm of the International Monetary Fund will be given to a woman. This is another milestone, though I wish women were not brought in only when crises occur and when everyone—man or woman—will face very difficult situations and is more doomed to fail than to succeed.
I believe that one ideal job for women in finance is that of financial advisors. A critical quality in that job is the ability to care for clients and listen to their needs and concerns, and women can excel in that. And, important in wealth management is not only wise investing but also the right amount of protection, against disability, death, and other risks. Coming back to my posts of a few weeks ago, there was much wisdom in the football players’ bringing their mothers to the New York Stock Exchange to discuss financial literacy. That memory still warms my heart.
Women have used cleverness and ingenuity when caring for others, achieving important results. My favorite example is Ethel Percy Andrus. A school principal who retired in the late 1940s to take care of her ailing mother, she was shocked to discover how many retired teachers had no health insurance. As there was no national health care program for people over age 65 (Medicare wasn’t created until 1965), Ethel turned to insurance companies to offer group health insurance to retired educators. She was turned down by more than a dozen companies but she persisted until one company agreed to develop a health plan for retired teachers. The plan became so popular that non-educators also wanted to purchase it. In 1958, Ethel established AARP (then known as the American Association of Retired Persons). The rest is, well, history.
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