Huff Post: How Financially Literate Is the Investing Public?

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hoppy08520
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Huff Post: How Financially Literate Is the Investing Public?

Post by hoppy08520 » Thu Jul 31, 2014 7:24 am

How Financially Literate Is the Investing Public?
article wrote:A June 2014 study by researchers at the National Bureau of Economic Research evaluated the overall financial literacy of U.S. investors. The 17 questions were grouped into five categories (compound interest, inflation, diversification, tax-deferred investments and employer contributions).

The average score by all participants was 67 percent, or about 11 out of 17 correct responses.
You can take the quiz here. Not to brag but I got 17/17 8-)

What struck me about the article was this statement, which would seem to confirm that the investing public are very illiterate:
article wrote:The 2014 DALBAR report, for instance, concluded that over the past 20 years, individual stock fund investors achieved only a 5.02 percent average annual return, which is considerably less than the 9.22 percent they could have achieved simply by investing in a S&P500 index fund. Results for other asset classes are similar.
This is an incredible investing failure, to lag the index by 4 (!) points. What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Beliavsky » Thu Jul 31, 2014 7:31 am

Even for VFINX, the Vanguard S&P 500 fund, Morningstar reports 15-year investor returns of only 1.83% annualized, compared to 4.25% for the fund itself. I assume that VFINX attracts fewer traders than the SPY ETF.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by angelescrest » Thu Jul 31, 2014 7:45 am

The good news is that I'm financially literate according to George Mason U. :D

The bad news to confess is that I missed #10 and #12. :oops:

And to end on good news again, I would have failed not that long ago before I started studying up and reading on this forum.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by madbrain » Thu Jul 31, 2014 7:54 am

hoppy08520 wrote: You can take the quiz here. Not to brag but I got 17/17 8-)
Then you were wrong on the answer to number 12 . The b answer to that question is incorrect. Not all traditional 401k or IRA contributions are pre-tax.

Edit: and 14 c is wrong too, it ignores 72t SEPP withdrawals.
Edit2: and hardship withdrawals still are subject to IRS penalty, they don't avoid it.
So the given answer is doubly wrong.
Last edited by madbrain on Thu Jul 31, 2014 8:14 am, edited 1 time in total.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by nisiprius » Thu Jul 31, 2014 8:04 am

if the mutual funds investors are losing 4 points, who is getting that 4 points?
This is a question that has long puzzled me and I am still trying to figure out an answer. This is a set of working hypotheses. I don't know how to test any of them.

a) The public DOES systematically underperform the market, by quite a lot. The various pieces of evidence on "investor returns" are just too overwhelming.

b) You can NOT market time successfully by monitoring what the "public" does and doing the opposite. Some "second law of financial dynamics" prevents this from working.

c) It is pretty clear that the more "speculative" the asset is--the greater the potential for a big win--the worse the underperformance is.

d) Outright Ponzi schemes and pyramids are illegal, but everyone knows that legitimate business and investments can and do have an element of Ponzi in them. Everything is always better when a business is growing and attracting new investment capital, and during that growth, every dollar you take out of the business is a mixture of business earnings and new investors' money coming in.

e) A Ponzi scheme, pyramid club, or chain letter transfers wealth from people who get in late and get caught in the collapse to people who get in early and get out before the collapse.

f) In the world of legitimate investments, there is a regular pattern of things that are not big enough to be called bubbles, but, perhaps, are more like fads and fashions. They have the same kind of social dynamics or market psychology as fads or fashions or "hits." They last six months to a couple of years. While they are going on, excitement builds, and the news of people making money in the investment spreads via press and word of mouth, until "everyone" is talking about the new opportunity.

g) Just as in the Ponzi scheme, each of these fads transfers money from those who get in late to those who get in early, and that is the answer to your question.

h) Having said that, how can one get in early? Well, I don't think that's a good idea, either. By the time somebody is telling you to "get in on the ground floor" it is nowhere near the ground floor.

i) "The best way to predict the future is to invent it"--Alan Kay. The best way to get in early is to be one of the financiers who actually creates and offers the new investment opportunity. The next best way is to actually have inside information. This could be illegal inside information--and you get away with it. Or, it could just as well be perfectly legal but unfair asymmetrical information. Or some other form of unfairly privileged position, as in IPOs.

j) The way to literally get conned is to believe that you, who was an outsider a year ago, has just been offered membership in the elite inner circle by your influential new friend. That doesn't happen with garden-variety mutual funds and ETFs, though.

k) The fantasy is that even though you were not present at the creation of the innovative new kind of mutual fund or ETF, you have the keen insight that enables you to spot the winners before the general public does. That is, you can get in early, honestly, and without any kind of unfair advantage. I don't think this is actually impossible--I am prepared to believe that Michael Burry may have actually done this with subprime mortgages, for example (in his case spotting the LACK of value and betting on collapses). But it is very unlikely. One problem is that for this to work, you must be prepared to invest in something at a time when almost nobody else has heard of it AND the people who have heard of it mostly think it is a bad idea. This might be possible, but I don't do it myself and I don't recommend it. Just as I think it is possible to win playing poker, but I am not the kind of person who can do it.

l) In general, money is transferred from those who get in late to those who get in early. However---
:!: :!: :!: this is a big deal :!: :!: :!:
SOME money is transferred from those who get in late to those who get in at the middle.

And that is what Bogleheads do. By staying the course, on the average, we can and do succeed in "getting in at the middle."
Last edited by nisiprius on Thu Jul 31, 2014 12:48 pm, edited 3 times in total.
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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by laughlinlvr » Thu Jul 31, 2014 8:06 am

I missed #12 too. The question was badly framed. Option #1: In any type of IRA or 401(k) account, all of the money in your account grows tax free is a semantic difference. It actually grows tax-deferred. However, there is no "tax-deferred return" indicated on your quarterly 401k statements. The numbers in the statement reflect a tax-free return.
Also, this is a quiz aimed at the general public. When employees go to their 401k orientation meeting the presenter typically says that your investments will grow tax-free until you take distributions. And then you only pay taxes on the distribution.
So I think answer (b) is wrong and I feel entitled to a perfect score.
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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by madbrain » Thu Jul 31, 2014 8:10 am

laughlinlvr wrote: So I think answer (b) is wrong and I feel entitled to a perfect score.
12 b is just wrong, because you can make non-deductible contributions to a traditional IRA. And some non-Roth 401k plans allow after-tax contributions, as well.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by ResearchMed » Thu Jul 31, 2014 8:19 am

laughlinlvr wrote:I missed #12 too. The question was badly framed. Option #1: In any type of IRA or 401(k) account, all of the money in your account grows tax free is a semantic difference. It actually grows tax-deferred. However, there is no "tax-deferred return" indicated on your quarterly 401k statements. The numbers in the statement reflect a tax-free return.
Also, this is a quiz aimed at the general public. When employees go to their 401k orientation meeting the presenter typically says that your investments will grow tax-free until you take distributions. And then you only pay taxes on the distribution.
So I think answer (b) is wrong and I feel entitled to a perfect score.
Me, too, and for the exact same reason.

I've re-read the question, and the money in either *grows* tax-free.
That's the entire point, right?
NOT paying taxes on the returns while the money remains within the tax-deferred account; letting the compounding continue without the tax bite each year.

The tax comes later.

It was difficult to imagine many people getting some of those questions wrong, but I guess they do, and that's part of the problem in terms of why there isn't more retirement savings.
But I think the main reason is that most people (middle and lower incomes) are just too stretched with housing, food, clothing, and a few extras. Not all of them are blowing it on jewels, etc.
When I think about how I would raise a family in a major urban area (especially high cost of living area) on a median salary (and half are *below* that)... I don't know.
I did it for several early years, of course, but those weren't the years I was saving...

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by prudent » Thu Jul 31, 2014 8:28 am

hoppy08520 wrote: What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
They are losing it because IMHO they sell low and buy high. They don't stay the course, they act on emotion. Market drops 20%? Sell before I lose more money! Then they stay out until the market has already gone way up again, and they get back in just in time to catch the next drop.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by John3754 » Thu Jul 31, 2014 8:34 am

How can we expect the general public to be financially literate when nobody teaches young people in this country about finances? It is a failure of our system in my opinion. I'm a highly educated professional and in all my years of education I was taught literally nothing about finances, the only reason I know what I do today is because I took the initiative to seek it out myself. Every day of my life I am surrounded by other highly educated professionals who unfortunately have not taken that same initiative. Despite the fact that these are some of the most intelligent people I've come across, they have zero financial literacy and are being completely taken advantage of by the leeches in the finance industry. So this being the case I don't know why we'd be surprised that the average investor trails the index when the fact is they're feeling around in the dark and being led by sharks posing as people who want to help them.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by ResearchMed » Thu Jul 31, 2014 8:34 am

prudent wrote:
hoppy08520 wrote: What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
They are losing it because IMHO they sell low and buy high. They don't stay the course, they act on emotion. Market drops 20%? Sell before I lose more money! Then they stay out until the market has already gone way up again, and they get back in just in time to catch the next drop.
But isn't someone else selling when the loser-investor is buying, and buying when they are selling?
It won't be the identical other person, but "on average", no?

So is it the "shrewd" investors who buy individual stocks, and not mutual funds? Are THEY "winning" on average :?:

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by prudent » Thu Jul 31, 2014 8:42 am

I don't think it's a "one person loses so another person wins" situation.

If I jump out of the market prior to a large run-up, my average yearly gain is lower than yours because you stayed in. But you didn't gain at my expense. I wasn't even in the game.

Also, think of how many 5% load funds with high ERs are factored into the "average" mutual fund investor's returns.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by John3754 » Thu Jul 31, 2014 8:54 am

ResearchMed wrote:
prudent wrote:
hoppy08520 wrote: What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
They are losing it because IMHO they sell low and buy high. They don't stay the course, they act on emotion. Market drops 20%? Sell before I lose more money! Then they stay out until the market has already gone way up again, and they get back in just in time to catch the next drop.
But isn't someone else selling when the loser-investor is buying, and buying when they are selling?
It won't be the identical other person, but "on average", no?

So is it the "shrewd" investors who buy individual stocks, and not mutual funds? Are THEY "winning" on average :?:

RM
A lot of people that I know are trailing the index simply because they're using a financial advisor that charges 1% AUM on top of putting them in 20 different funds with ERs of 1.5% and "management fees" (whatever that means) of 0.5%. If you're paying 3% in fees then obviously you're going to trail the index and the only person who wins is the person collecting the fees.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by ResearchMed » Thu Jul 31, 2014 8:58 am

John3754 wrote:
ResearchMed wrote:
prudent wrote:
hoppy08520 wrote: What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
They are losing it because IMHO they sell low and buy high. They don't stay the course, they act on emotion. Market drops 20%? Sell before I lose more money! Then they stay out until the market has already gone way up again, and they get back in just in time to catch the next drop.
But isn't someone else selling when the loser-investor is buying, and buying when they are selling?
It won't be the identical other person, but "on average", no?

So is it the "shrewd" investors who buy individual stocks, and not mutual funds? Are THEY "winning" on average :?:

RM
A lot of people that I know are trailing the index simply because they're using a financial advisor that charges 1% AUM on top of putting them in 20 different funds with ERs of 1.5% and "management fees" (whatever that means) of 0.5%. If you're paying 3% in fees then obviously you're going to trail the index and the only person who wins is the person collecting the fees.
Yes, all of "those fees" definitely account for drag.

I was referring to the argument that the lower returns are due to behaviors of buying high and selling low.

RM

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Bracket » Thu Jul 31, 2014 9:15 am

Question 12 also seems to ignore the fact that not all traditional IRA contributions are pre-tax. Ironic that a quiz claiming to assess financial literacy has such an error.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Fallible » Thu Jul 31, 2014 9:50 am

Thanks for the article. Financial literacy also was taken up in a WSJ column last year by Jason Zweig and most surprising to me, though it probably should not have been, was this:

"Before we invest in the luxury of making people financially literate, shouldn’t we first take care of the vastly more urgent problem that millions of them can’t read, write or do basic math? According to the National Center for Education Statistics, an estimated 30 million Americans were unable to read basic English prose and roughly 47 million were functionally innumerate as of 2003, the latest available survey.

"As a society, shouldn’t we be ashamed that we are awash in studies of people’s financial literacy, while we can’t even be bothered to survey basic literacy and numeracy more than once a decade?"

Link to the article: http://blogs.wsj.com/moneybeat/2013/05/ ... s-so-over/
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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by scone » Thu Jul 31, 2014 10:13 am

Weren't the leading Bogleheads going to start some sort of financial literacy project? IIRC I heard about it at a previous conference.
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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by madbrain » Thu Jul 31, 2014 10:44 am

Bracket wrote:Question 12 also seems to ignore the fact that not all traditional IRA contributions are pre-tax. Ironic that a quiz claiming to assess financial literacy has such an error.
Yes, and I pointed that out already twice in this thread.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by thx1138 » Thu Jul 31, 2014 10:53 am

hoppy08520 wrote:This is an incredible investing failure, to lag the index by 4 (!) points. What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
I didn't take the time to read the report, but if it is done like any other typically the key difference is that what caused most of the drag was the investors being out of the market - and having a good propensity for being out of the market when they should have been staying the course.

So this isn't a "boy those idiots chose the wrong funds" kind of problem when they compare to staying in the S&P500 for the full term. The big drag was simply they didn't stay in the market (harvesting beta) for the full period - so of course you'll have a lower return than the market if you weren't actually in the market to begin with! Worse still since much of beta comes in bursts often after scary times the individual investors are sitting in savings accounts while most of the beta gains are being made. This makes their under performance even worse than just a simple scaling of the amount of time they spend in the market.

P.S. And as others pointed out question 12 is hilarious. It is as if it was designed to be answered "incorrectly" the more you actually knew about IRAs and 401ks. The reality is as written there simply isn't a correct answer to the question - perhaps if we changed "d. I don't know" to "d. You don't know" :happy

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by tadamsmar » Thu Jul 31, 2014 11:11 am

hoppy08520 wrote:What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points?
Another investor. If investor A holds it for half the period and investor B holds it for the other half of the period, they each get 4 points. Whereas, the brilliant Boglehead buys and holds for the whole period and gets 8 points on his stock holdings and 4 points on his 50/50 stock/bond allocation assuming his bonds break even. :evil:

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Fallible » Thu Jul 31, 2014 11:21 am

scone wrote:Weren't the leading Bogleheads going to start some sort of financial literacy project? IIRC I heard about it at a previous conference.
This may be what you're looking for, an excellent Bogleheads Blog, btw.
http://www.bogleheads.org/blog/boglehea ... y-project/
and this:
Bogleheads® financial literacy project [link fixed by admin LadyGeek]
Last edited by Fallible on Thu Jul 31, 2014 11:38 am, edited 1 time in total.
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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by TomatoTomahto » Thu Jul 31, 2014 11:26 am

Fallible wrote:Thanks for the article. Financial literacy also was taken up in a WSJ column last year by Jason Zweig and most surprising to me, though it probably should not have been, was this:

"Before we invest in the luxury of making people financially literate, shouldn’t we first take care of the vastly more urgent problem that millions of them can’t read, write or do basic math? According to the National Center for Education Statistics, an estimated 30 million Americans were unable to read basic English prose and roughly 47 million were functionally innumerate as of 2003, the latest available survey.

"As a society, shouldn’t we be ashamed that we are awash in studies of people’s financial literacy, while we can’t even be bothered to survey basic literacy and numeracy more than once a decade?"
This!

And it's worse for innumeracy than illiteracy. How many people ([(removed) --admin LadyGeek]) have no shame in saying "I'm just no good at math," but would be embarrassed to say that they are illiterate. We're not talking about discrete differential manifolds, we are talking about the ability to understand percentages, compounding, the differences between mean, median, and mode, etc.

My kids' school, while not a math powerhouse, had the kids read A Mathematician Reads the Newspaper by John Allen Paulos. Those kids are better prepared to read a pitch from a financial advisor also.
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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by pkcrafter » Thu Jul 31, 2014 11:46 am

Nisiprius wrote:
everyone knows that legitimate business and investments can and do have an element of Ponzi in them. Everything is always better when a business is growing and attracting new investment capital
:shock: I think Nisiprius has discovered another factor--the Ponzi factor (Ponz), not to be confused with MOM, which is very similar. Also should not be confused with Fonz, (the Fonzi factor). 8-) You can add your own definition for the Fonz factor.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by bhsince87 » Thu Jul 31, 2014 12:15 pm

hoppy08520 wrote: This is an incredible investing failure, to lag the index by 4 (!) points. What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
I wouldn't call it a terrible investing failure. Less than optimal, absolutely. But a 5% return might be perfectly acceptable to many folks, and allow them to reach their goals. Especially if inflation is running at 2%.

And the 4% they "lost" didn't go anywhere, because it never existed. That's like me saying, "Real estate in San Francisco is up 9% this year. But where I live, it's only up 5%. Who is getting the 4 points that I lost?"
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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Aptenodytes » Thu Jul 31, 2014 12:31 pm

scone wrote:Weren't the leading Bogleheads going to start some sort of financial literacy project? IIRC I heard about it at a previous conference.
Bogleheads.org

Surely one of the most successful sustained public education efforts around.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by Epsilon Delta » Thu Jul 31, 2014 12:47 pm

Samuel Clemens wrote:I was gratified to be able to answer promptly, and I did. I said I didn't know.
Do the ignorant but self aware get them all right if they choose the last answer to each question?

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by lairdb » Thu Jul 31, 2014 1:10 pm

So, I'm with all of you on 12 being imprecise for various reasons, but I also make the same argument about 16. (I don't care about the others, because I got them right.)

I read "employer provides a 50% match up to $2,000" as "employer provides a 50% match up to $2,000 of contributions", not "employer provides a 50% match up to $2,000 of matching funds". Evidently that's not a common interpretation, since no-one else has mentioned 16 -- is the former language so common in plan documents as to be presumptive?

(It's been a while since I've been at a matching employer.)

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by bcjb » Thu Jul 31, 2014 1:47 pm

John3754 wrote:How can we expect the general public to be financially literate when nobody teaches young people in this country about finances? It is a failure of our system in my opinion. I'm a highly educated professional and in all my years of education I was taught literally nothing about finances, the only reason I know what I do today is because I took the initiative to seek it out myself. Every day of my life I am surrounded by other highly educated professionals who unfortunately have not taken that same initiative. Despite the fact that these are some of the most intelligent people I've come across, they have zero financial literacy and are being completely taken advantage of by the leeches in the finance industry. So this being the case I don't know why we'd be surprised that the average investor trails the index when the fact is they're feeling around in the dark and being led by sharks posing as people who want to help them.
+1

It's very unfortunate that schools don't teach basic financial literacy. Those who are born in a certain type of family might receive this information at home, but many others have no such luck. Immigrants aren't given any information about this either. When we moved to the US, we received advice that wasn't particularly necessary (e.g. 'how to open a bank account', which really isn't different elsewhere in the developed world) and we were told nothing about the retirement system (which is absolutely idiosyncratic). I don't know how people can be taught to 'live below their means' (beyond just mentioning it over and over again), but we were great savers (in CDs, savings account) and wasted opportunities to invest. Fortunately, one of our jobs had an initial, automatic contribution rate to the 401(k). (I.e., it was 'opt out', not 'opt in'.) That made us reevaluate things, and ultimately led to Bogleheads.org. It also helped that our first 401(k) was at Vanguard!

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by AviN » Thu Jul 31, 2014 10:19 pm

I got 16 wrong (according to the answer key) for the same reason.
lairdb wrote:So, I'm with all of you on 12 being imprecise for various reasons, but I also make the same argument about 16. (I don't care about the others, because I got them right.)

I read "employer provides a 50% match up to $2,000" as "employer provides a 50% match up to $2,000 of contributions", not "employer provides a 50% match up to $2,000 of matching funds". Evidently that's not a common interpretation, since no-one else has mentioned 16 -- is the former language so common in plan documents as to be presumptive?

(It's been a while since I've been at a matching employer.)

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by FedGuy » Thu Jul 31, 2014 10:53 pm

AviN wrote:I got 16 wrong (according to the answer key) for the same reason.
As did I.

I also paused on #4 to debate with myself whether the hypothetical CD paid interest at a rate of 5% per year, or if it paid simple interest at the rate of 5% of the original principal at maturity.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by oragne lovre » Fri Aug 01, 2014 12:42 am

It's an interesting quiz and I want to throw in my two-cents.

1. As several persons already point out the imperfect wording and thus incorrect answer to question 12, I won't go back to it. I also feel that question 5 is not perfectly worded either. The reason is that question 5 leaves out the important effect of tax rate on both future income and goods-purchase. For example, if income tax rate increases by 0.1% while goods-purchase tax increases by 0.1% or even stays the same, the purchasing power would be less. Of course, we cannot predict how tax rates change. I, however, think that question 5 would be less misleading if it had such phrase as "assuming there will be no change in tax rates for both income and goods-purchase."
2. I've eventually found an excellent quiz, which I'll use as a finance-teaching tool for my growing kids.

Please feel free to comment on my observation on question 5. You'll definitely help me teach my kids financial lessons well.
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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by angelescrest » Fri Aug 01, 2014 5:41 am

So I probably should have gotten #10, but when are 401(k) contributions taxed (a)?

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by sometimesinvestor » Fri Aug 01, 2014 6:53 am

I have other problems with question 5 as we know what happened to the cost of goods but many of us spend money on services. The fact that many here have problems with several of the questions makesme wonder how careful the quiz writers were.o

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by madbrain » Fri Aug 01, 2014 7:26 am

boroc7 wrote:So I probably should have gotten #10, but when are 401(k) contributions taxed (a)?
Some (non-Roth) 401k plans allow after-tax contributions.
Pre-tax contributions are only taxed when withdrawn.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Scandium » Fri Aug 01, 2014 7:30 am

madbrain wrote:
laughlinlvr wrote: So I think answer (b) is wrong and I feel entitled to a perfect score.
12 b is just wrong, because you can make non-deductible contributions to a traditional IRA. And some non-Roth 401k plans allow after-tax contributions, as well.
And on 12 option d can be correct too; "I don't know". Well, if you actually don't know then that statement is true, which is what they're asking. :?

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by madbrain » Fri Aug 01, 2014 7:42 am

Scandium wrote: And on 12 option d can be correct too; "I don't know". Well, if you actually don't know then that statement is true, which is what they're asking. :?
Sure, but since it wasn't a test of financial non-literacy, I don't think you would be expected to get credit for that answer ;)

IMO, there should be at least one correct answer, or a "none of the above" option. I think in the case of question 12 and 14, the answers selected as correct just show that the study authors may not be as financially literate as they think. Non-deductible IRA contributions are not so rare, and I don't know why they would miss that.
72t SEPP withdrawals may be less common.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by Johno » Fri Aug 01, 2014 10:40 am

bhsince87 wrote:
hoppy08520 wrote: This is an incredible investing failure, to lag the index by 4 (!) points. What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
I wouldn't call it a terrible investing failure. Less than optimal, absolutely. But a 5% return might be perfectly acceptable to many folks, and allow them to reach their goals. Especially if inflation is running at 2%.

And the 4% they "lost" didn't go anywhere, because it never existed. That's like me saying, "Real estate in San Francisco is up 9% this year. But where I live, it's only up 5%. Who is getting the 4 points that I lost?"
On the last point I don't think that analogy holds necessarily. If somebody made 5% in the San Francisco market, somebody else did have to make more than 9% in SF real estate for the total to come out at 9%. And in the case of this paper the whole US stock market is 'San Francisco'. Retail investors are not operating in a different market like NY real estate v SF real estate, they can buy the S&P fund ('SF') with a flew mouse clicks. It's possible that one methodology issue with the study is comparing 5% return in stocks including non-S&P (mid/small cap US, foreign) to 9% in S&P. However non-S&P stocks didn't do greatly differently over the last 20yrs than S&P, perhaps better.

So somebody else is getting the 4% lag of the individual, though a good deal of it is the higher expenses the actively managed or advised individual portfolio pays, rather than pure profits for other stock traders/investors.

I partly agree with your first paragraph though. One reason someone might have gotten 5 rather 9 (and allowed someone else to get more 9) in stocks is that they were simply uncomfortable in stocks in certain periods of higher risk. In this respect there might be an element of confusion between strategy and results. Scaling back stock holdings when things look bad has lost money in the modern history of the US stock market (with perhaps, or perhaps not, the exception of 1929>30's depending on assumptions). But the future could be different from the past. Anyway, the paper talks about (relatively recent) history, and those who followed a strategy of cutting back US stock holdings when risk increased (say when the VIX exceeded a certain level, though probably 90% of the people in the study never heard of the VIX and do it by gut) sacrificed return. But that's not a gteed result in the future, whereas the superiority of continuously holding an index fund to continuously holding the average actively managed fund is close to an airtight mathematical axiom*.

*the potential theoretical hole is a situation where actively managed mutual funds consistently beat index funds and the mathematically necessary class of investors who lag index funds is a combination of retail holders of individual stocks plus all other institutions besides mutual funds. But that's highly unlikely: retail holders of individual stocks are a relatively small slice of the market, and it would be quite strange if institutions other than mutual funds (pension funds, hedge funds, equity trading desks) performed systematically worse than actively managed mutual funds.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by Epsilon Delta » Fri Aug 01, 2014 2:45 pm

Johno wrote:
bhsince87 wrote: And the 4% they "lost" didn't go anywhere, because it never existed. That's like me saying, "Real estate in San Francisco is up 9% this year. But where I live, it's only up 5%. Who is getting the 4 points that I lost?"
On the last point I don't think that analogy holds necessarily. If somebody made 5% in the San Francisco market, somebody else did have to make more than 9% in SF real estate for the total to come out at 9%. And in the case of this paper the whole US stock market is 'San Francisco'. Retail investors are not operating in a different market like NY real estate v SF real estate, they can buy the S&P fund ('SF') with a flew mouse clicks.
Ah, but did the poorly performing mutual fund investor get out of the stock market? If they want to cash or bonds that's like moving to NY and only getting 5%. You don't have a closed universe of just stock mutual funds, you need to include all the other alternatives, and the average return will be much less than 9%. Nobody gets the "missing" 4%.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by Johno » Fri Aug 01, 2014 7:33 pm

Epsilon Delta wrote:
Johno wrote:
bhsince87 wrote: And the 4% they "lost" didn't go anywhere, because it never existed. That's like me saying, "Real estate in San Francisco is up 9% this year. But where I live, it's only up 5%. Who is getting the 4 points that I lost?"
On the last point I don't think that analogy holds necessarily. If somebody made 5% in the San Francisco market, somebody else did have to make more than 9% in SF real estate for the total to come out at 9%. And in the case of this paper the whole US stock market is 'San Francisco'. Retail investors are not operating in a different market like NY real estate v SF real estate, they can buy the S&P fund ('SF') with a flew mouse clicks.
Ah, but did the poorly performing mutual fund investor get out of the stock market? If they want to cash or bonds that's like moving to NY and only getting 5%. You don't have a closed universe of just stock mutual funds, you need to include all the other alternatives, and the average return will be much less than 9%. Nobody gets the "missing" 4%.
The fact that the investor was only in the stock market part of the time does not negate the zero sum aspect if the study, as it rationally should, tried to measure how much different investors made *in stocks*. If you and I switched ownership of a house in SF over the period, I earned 5% while I was holding it and the total return was 9% over the period, you must have earned more than 9% while you were holding it. The fact that you and I didn't both own the house for the whole period doesn't negate that zero sum relationship if we count the right thing: what we each made *while we owned it*. So if the study isn't complete garbage, it should have attempted to measure and compare investor returns *in the stock market*. It would be ridiculous to just compare total portfolio returns for the period without considering asset allocation and compare them to a buy and hold 100% allocation to an S&P index fund. I am assuming the study isn't that basically flawed, though I don't know for sure.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by grabiner » Fri Aug 01, 2014 8:31 pm

lairdb wrote:So, I'm with all of you on 12 being imprecise for various reasons, but I also make the same argument about 16. (I don't care about the others, because I got them right.)

I read "employer provides a 50% match up to $2,000" as "employer provides a 50% match up to $2,000 of contributions", not "employer provides a 50% match up to $2,000 of matching funds". Evidently that's not a common interpretation, since no-one else has mentioned 16 -- is the former language so common in plan documents as to be presumptive?
If this weren't on a quiz, I would have gotten it wrong, because of the way matches are stated. For example, many employers state something like, "a 50% match on up to 10% of your salary"; the word "on" makes it clear that you can get the full match by contributing up to 10%. If an employer stated, "a 50% match of up to $2000" (note the worth "of"), then it would be clear that you could contribute $4000 to get the $2000 match.
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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by Regal 56 » Fri Aug 01, 2014 10:32 pm

hoppy08520 wrote:What struck me about the article was this statement, which would seem to confirm that the investing public are very illiterate:
article wrote:The 2014 DALBAR report, for instance, concluded that over the past 20 years, individual stock fund investors achieved only a 5.02 percent average annual return, which is considerably less than the 9.22 percent they could have achieved simply by investing in a S&P500 index fund. Results for other asset classes are similar.
This is an incredible investing failure, to lag the index by 4 (!) points. What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
Frankly, I see nothing surprising that investors are underperforming the S&P 500. First, of course, are the active traders deluding themselves that they’re better at reading tea leaves than market insiders. Then there are performance chasers who always pile into a stock, fund, or the market in general after most of the upside is long past. These alone begin to skew things against investors en masse.

But there are also good and prudent reasons why some investors accept underperforming the S&P 500. For example, those who already have enough to comfortably retire have no incentive to take on risk with their investments. They’ve already won the game, and have only to keep up with inflation. So they wisely invest conservatively rather than dump everything into an S&P 500 index fund.

Further, how many of those still saving for retirement invest only in the S&P 500? Many of us diversify with a variety of funds, or hold a fund of funds, which amounts to the same thing. So when the S&P 500 skyrockets, as it did in 2013, many of us underperform it. Those who underperformed the S&P 500 in 2013 weren’t all financially illiterate. Rather, they were prudently diversified, and paid a price for it during that particular year.

What I’m saying is that there are perfectly good reasons why an investor might underperform the S&P 500. It’s too blunt a tool that equates underperformance with financial illiteracy.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by plymster » Fri Aug 01, 2014 11:38 pm

I think this study does not quiz financial literacy at all, since most of the questions are about 401k plans (and other retirement plans). Nowhere does it ask things I would expect like: what's the difference between a stock and a mutual fund? What is the difference between a corporate bond, a CD, and a treasury bill? What are some advantages of a tax-deferred retirement plan over a taxable portfolio?

I also sort of cringed at this quote:
As a colleague of ours with a Ph.D. and 35 years' experience in the financial field confided to us recently, "I barely feel qualified to manage my own investments."
Gee, maybe I should just run down to my local Edward Jones financial adviser and have him "take care of me".

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by steve_14 » Fri Aug 01, 2014 11:47 pm

hoppy08520 wrote:What struck me about the article was this statement, which would seem to confirm that the investing public are very illiterate:
article wrote:The 2014 DALBAR report, for instance, concluded that over the past 20 years, individual stock fund investors achieved only a 5.02 percent average annual return, which is considerably less than the 9.22 percent they could have achieved simply by investing in a S&P500 index fund. Results for other asset classes are similar.
This is an incredible investing failure, to lag the index by 4 (!) points. What I'd like to know is, if the mutual funds investors are losing 4 points, who is getting that 4 points? People holding individual stocks? Institutional investors? Or does some of it go up in smoke to trade costs or tax drag (paying CG tax when swapping funds, for example)?
In my experience, DALBAR is funded by the investment industry and is little more than a marketing tool. Their business model is to torture some dataset until it proves independent investors are idiots who should immediately turn their nest eggs over to their local Merrill Lynch broker. Then it sells these reports to advisors, who show clients. Less biased studies have shown their results to exaggerated, see for example: http://thefinancebuff.com/dalbar-study- ... iming.html

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by dgdevil » Sat Aug 02, 2014 2:03 am

plymster wrote:I think this study does not quiz financial literacy at all, since most of the questions are about 401k plans (and other retirement plans). Nowhere does it ask things I would expect like: what's the difference between a stock and a mutual fund? What is the difference between a corporate bond, a CD, and a treasury bill? What are some advantages of a tax-deferred retirement plan over a taxable portfolio?
Agreed. This was more of a math quiz, and the questions were poorly phrased in some instances. I feel that many people are proud to be financially illiterate because it allows them to play the victim card. It is a badge of honor in our gimme culture that we do not know the difference between a stock and a bond, proudly eschew the company retirement plan, and consider the financial sector to be a den of thieves.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by VictoriaF » Mon Aug 18, 2014 1:28 pm

TomatoTomahto wrote:
Fallible wrote:Thanks for the article. Financial literacy also was taken up in a WSJ column last year by Jason Zweig and most surprising to me, though it probably should not have been, was this:

"Before we invest in the luxury of making people financially literate, shouldn’t we first take care of the vastly more urgent problem that millions of them can’t read, write or do basic math? According to the National Center for Education Statistics, an estimated 30 million Americans were unable to read basic English prose and roughly 47 million were functionally innumerate as of 2003, the latest available survey.

"As a society, shouldn’t we be ashamed that we are awash in studies of people’s financial literacy, while we can’t even be bothered to survey basic literacy and numeracy more than once a decade?"
This!

And it's worse for innumeracy than illiteracy. How many people have no shame in saying "I'm just no good at math," but would be embarrassed to say that they are illiterate. We're not talking about discrete differential manifolds, we are talking about the ability to understand percentages, compounding, the differences between mean, median, and mode, etc.

My kids' school, while not a math powerhouse, had the kids read A Mathematician Reads the Newspaper by John Allen Paulos. Those kids are better prepared to read a pitch from a financial advisor also.
I agree. From a recent article:
Why Do Americans Stink at Math? wrote:One of the most vivid arithmetic failings displayed by Americans occurred in the early 1980s, when the A&W restaurant chain released a new hamburger to rival the McDonald’s Quarter Pounder. With a third-pound of beef, the A&W burger had more meat than the Quarter Pounder; in taste tests, customers preferred A&W’s burger. And it was less expensive. A lavish A&W television and radio marketing campaign cited these benefits. Yet instead of leaping at the great value, customers snubbed it.

Only when the company held customer focus groups did it become clear why. The Third Pounder presented the American public with a test in fractions. And we failed. Misunderstanding the value of one-third, customers believed they were being overcharged. Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter-pound of meat at McDonald’s. The “4” in “¼,” larger than the “3” in “⅓,” led them astray.
If people don't understand that ⅓ is greater than ¼, how do you expect them to understand that a stock that appreciated the most is not the winner or that higher fees do not represent higher value?

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by MathWizard » Mon Aug 18, 2014 2:06 pm

TomatoTomahto wrote:
Fallible wrote:Thanks for the article. Financial literacy also was taken up in a WSJ column last year by Jason Zweig and most surprising to me, though it probably should not have been, was this:

"Before we invest in the luxury of making people financially literate, shouldn’t we first take care of the vastly more urgent problem that millions of them can’t read, write or do basic math? According to the National Center for Education Statistics, an estimated 30 million Americans were unable to read basic English prose and roughly 47 million were functionally innumerate as of 2003, the latest available survey.

"As a society, shouldn’t we be ashamed that we are awash in studies of people’s financial literacy, while we can’t even be bothered to survey basic literacy and numeracy more than once a decade?"
This!

And it's worse for innumeracy than illiteracy. How many people ([(removed) --admin LadyGeek]) have no shame in saying "I'm just no good at math," but would be embarrassed to say that they are illiterate. We're not talking about discrete differential manifolds, we are talking about the ability to understand percentages, compounding, the differences between mean, median, and mode, etc.

My kids' school, while not a math powerhouse, had the kids read A Mathematician Reads the Newspaper by John Allen Paulos. Those kids are better prepared to read a pitch from a financial advisor also.
Yes, I am equally dismayed by this. I've had very intelligent people tell me that they are terrible at math as if it were a badge of
honor.
I am not very good at art, but I am not proud of it, and I appreciate people who are good artists.

Maybe this is somehow related to (at least a US) view that someone who is good in math is socially backwards, perhaps
due to how they have portrayed in movies.

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Fallible » Mon Aug 18, 2014 2:22 pm

VictoriaF wrote:
TomatoTomahto wrote:
Fallible wrote:Thanks for the article. Financial literacy also was taken up in a WSJ column last year by Jason Zweig and most surprising to me, though it probably should not have been, was this:

"Before we invest in the luxury of making people financially literate, shouldn’t we first take care of the vastly more urgent problem that millions of them can’t read, write or do basic math? According to the National Center for Education Statistics, an estimated 30 million Americans were unable to read basic English prose and roughly 47 million were functionally innumerate as of 2003, the latest available survey.

"As a society, shouldn’t we be ashamed that we are awash in studies of people’s financial literacy, while we can’t even be bothered to survey basic literacy and numeracy more than once a decade?"
This!

And it's worse for innumeracy than illiteracy. How many people have no shame in saying "I'm just no good at math," but would be embarrassed to say that they are illiterate. We're not talking about discrete differential manifolds, we are talking about the ability to understand percentages, compounding, the differences between mean, median, and mode, etc.

My kids' school, while not a math powerhouse, had the kids read A Mathematician Reads the Newspaper by John Allen Paulos. Those kids are better prepared to read a pitch from a financial advisor also.
I agree. From a recent article:
Why Do Americans Stink at Math? wrote:One of the most vivid arithmetic failings displayed by Americans occurred in the early 1980s, when the A&W restaurant chain released a new hamburger to rival the McDonald’s Quarter Pounder. With a third-pound of beef, the A&W burger had more meat than the Quarter Pounder; in taste tests, customers preferred A&W’s burger. And it was less expensive. A lavish A&W television and radio marketing campaign cited these benefits. Yet instead of leaping at the great value, customers snubbed it.

Only when the company held customer focus groups did it become clear why. The Third Pounder presented the American public with a test in fractions. And we failed. Misunderstanding the value of one-third, customers believed they were being overcharged. Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter-pound of meat at McDonald’s. The “4” in “¼,” larger than the “3” in “⅓,” led them astray.
If people don't understand that ⅓ is greater than ¼, how do you expect them to understand that a stock that appreciated the most is not the winner or that higher fees do not represent higher value?

Victoria


Illiteracy is the first problem to tackle. If one doesn’t know what “fees” mean, let alone “compounding,” or if one doesn’t know what “math” means, let alone “reading,” if one can’t read math instructions...and on and on.

I had read the excellent NYT article and this is what spoke most deeply to me (I boldfaced the most meaningful):

“Instead of having students memorize and then practice endless lists of equations...Matsuyama taught his college students to encourage passionate discussions among children so they would come to uncover math’s procedures, properties and proofs for themselves.

“To cure our innumeracy, we will have to accept that the traditional approach we take to teaching math — the one that can be mind-numbing, but also comfortingly familiar — does not work. We will have to come to see math not as a list of rules to be memorized but as a way of looking at the world that really makes sense.”
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by VictoriaF » Mon Aug 18, 2014 2:38 pm

Fallible wrote:

Illiteracy is the first problem to tackle. If one doesn’t know what “fees” mean, let alone “compounding,” or if one doesn’t know what “math” means, let alone “reading,” if one can’t read math instructions...and on and on.

I had read the excellent NYT article and this is what spoke most deeply to me (I boldfaced the most meaningful):

“Instead of having students memorize and then practice endless lists of equations...Matsuyama taught his college students to encourage passionate discussions among children so they would come to uncover math’s procedures, properties and proofs for themselves.

“To cure our innumeracy, we will have to accept that the traditional approach we take to teaching math — the one that can be mind-numbing, but also comfortingly familiar — does not work. We will have to come to see math not as a list of rules to be memorized but as a way of looking at the world that really makes sense.”
It's hard to say what should be first and what should follow. If both illiteracy and innumeracy are equally damaging, flipping a coin is better than being paralyzed by indecision. As for the article, I was struck by the notion that the Americans are really good in inventing new teaching methods but are not implementing them. This reminded me of the story of statistical quality control. SQC was also invented in the U.S. but first implemented in Japan. Only when Japanese cars started taking over the American market, the U.S. enterprises started paying attention to the statistics of their defects. Unfortunately, in education the "defects" are not immediately tied to business and no one is taking action under the threat of losing market share.

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Re: Huff Post: How Financially Literate Is the Investing Pub

Post by Crow Hunter » Mon Aug 18, 2014 3:05 pm

Fallible wrote:


Illiteracy is the first problem to tackle. If one doesn’t know what “fees” mean, let alone “compounding,” or if one doesn’t know what “math” means, let alone “reading,” if one can’t read math instructions...and on and on.

I had read the excellent NYT article and this is what spoke most deeply to me (I boldfaced the most meaningful):

“Instead of having students memorize and then practice endless lists of equations...Matsuyama taught his college students to encourage passionate discussions among children so they would come to uncover math’s procedures, properties and proofs for themselves.”

“To cure our innumeracy, we will have to accept that the traditional approach we take to teaching math — the one that can be mind-numbing, but also comfortingly familiar — does not work. We will have to come to see math not as a list of rules to be memorized but as a way of looking at the world that really makes sense.”
I 100% agree.

I vividly remember when I first truly understoon what Pi represented rather than just 3.14.

It had always been presented to me as a constant but never explained what it was or why that particular constant was used. This happened WAY later than it should have.

I understand where people are coming from. I am not good in math even though I am an engineer. :oops:

Math was always my worst subject but I luckily had an EXTREMELY good math teacher in my early college that could actually explain what different concepts meant in Calc 1-3 and Diff Eq. Once I understood the concept of what what they were trying to model with the math, I could figure the problems out.

I think this needs to be done in schools right now for financial literacy. Explain to students what the math actually means. I try to do that now when explaining calculations here at work. I am even worse at teaching than I am math so it doesn't always work out so well. :mrgreen:

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Re: HUFF POST: How Financially Literate Is the Investing Pub

Post by Fallible » Mon Aug 18, 2014 4:05 pm

VictoriaF wrote:
Fallible wrote:

Illiteracy is the first problem to tackle. If one doesn’t know what “fees” mean, let alone “compounding,” or if one doesn’t know what “math” means, let alone “reading,” if one can’t read math instructions...and on and on.
...
It's hard to say what should be first and what should follow. If both illiteracy and innumeracy are equally damaging, flipping a coin is better than being paralyzed by indecision. ...
Agree they are equally damaging. But if they can't read the instructions in the first place...?
John Bogle on his often bumpy road to low-cost indexing: "When a door closes, if you look long enough and hard enough, if you're strong enough, you'll find a window that opens."

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