Should We Really Teach Our Kids To Gamble?

Many personal finance teachers do their students a disservice by signing their classes up to play “the stock market game“.

Usually sponsored by financial institutions, stock market games allow students to create investment portfolios of stocks, and then track them over a short period of time.  At the end of the period (whether it’s a week, month or a quarter) a “winner” is declared based on whose portfolio increased the most over the study period.

Some teachers, to their credit, try using the exercise as a teaching tool. 

But those teachers are making a mistake. 

Counting short term successes and losses in a virtual stock market contest stirs an emotional urge that overshadows any educational benefit the students might be receiving.

It’s like teaching children how a casino works by encouraging them to play the games and declaring a winner at the end of the day. 

Do you really teach kids how the casino works? 

Or do you end up tempting them with the “success” they see around them: the odd jackpot earned, while whirling lights and sirens go off for somebody at the slot machine next to theirs?

The stock market game does similar damage. 

Even the students who lose money will “learn” that easy money can be made in the markets over a short period of time.  Why wouldn’t they think that, when seeing that some of their friends made money?

And that’s the seed that financial sponsors truly want to plant in kids.

Some teachers may argue that they’re coupling the stock market game with genuine business analysis.  They might be encouraging their students to research businesses with strong earnings prospects, great brand names, low debt levels or high returns on total capital.  If that’s the case, I commend them for their business sense.

But such businesses, as an aggregate, will perform just as randomly, short term, as businesses that are nearing bankruptcy, with weak earnings prospects, high debt levels and low returns on capital.  The stock market is the friend of the great business and the enemy of the weak one—but only over the long term.  Strong short term business results aren’t going to materialize in short term price differences during the duration of a stock market game.

Over the short term, stock prices are moved by surprises; they’re not necessarily going to levitate as a result of great fundamental business growth.  For example, a superb company could report an earnings increase of 20% in a given quarter, but the stock market price could drop after the news is released.

Short term, much depends on the surprise factor.

For example, if institutional analysts predict that this company will increase profits by 25% during this specific quarter, they’ll sell the stock (resulting in a drop in share price) if the company reports a gain of 20% instead.  In other words, if the company surprises them by not performing as well as they expect it to, they’ll sell the stock, and the price will fall.

Likewise, a terrible business might be expected (by institutional analysts) to reduce its earnings per share by 20% in a given quarter, yet its stock price could skyrocket if its earnings dropped by just 15% instead of 20%.  Analysts would be surprised that it didn’t lose as much as expected, and they would likely rush in with large amounts of institutional money, pushing the stock price up.  Such a surprise, in the eyes of the institutional investor, could be a sign that the company is starting to turn itself around. 

Take the company, Krispy Kreme Doughnut as an example.

Two years ago, I asked my readers to give me a list of crummy businesses—those destined to see their share prices drop significantly.  Krispy Kreme was among those selected by my readers. 

And how have the shares of Krispy Kreme performed over the past 2 years? They have gained 100%.

On the other hand, the share price of the 3M company (a suberb business with rock-solid financials) hasn’t made investors any money over the past 2 years.

You can see the comparative chart below:

 
Splits: Mar 20, 2001 [2:1], Jun 15, 2001 [2:1] 

Does this suggest that you should look for businesses that you think have poor future prospects and invest with them?

Of course not.

It does showcase, however, how unpredictable the stock market can be, and that great businesses don’t always outperform poor businesses over the short term.

Educationally, fundamental business analysis cannot be taught, coupled with the stock market game.  Teachers won’t be able to make any kind of consistent connection between great businesses and rising stock prices.

If students had 20 years to play the game under the guidance of a great teacher, the story would be different.

Businesses that make money over the long term (as businesses) tend to have stock prices (often coupled with dividends) that make money for shareholders over the long haul—when purchased at the right price.

But over the short term, you might as well be at Vegas.

 I’d like to present a few suggestions for business/personal finance teachers:

1.  NEVER play the stock market game with your students.  It will do far more damage than good.

2.  Teach students why financial institutions want them playing the stock market game.  Financial institutions make more money when people “trade” stocks.  This is the main reason they try bringing the casino to the classroom with addictive games in the guise of educational tools.

3.  Show students how to really make money in the stock market, by teaching them to own a diversified account of low cost stock and bond indexes and/or a basket of blue chip businesses that they commit to for many years.  They must understand that if stock market investing is exciting, they’re not doing it right.  To maximize profits, investors need to be long term thinkers, not short term reactors.

4.  Instruct students on investment commissions and taxes, while demonstrating that even most professional investors lose to the market indexes after all costs.

Some teachers rationalize the stock market game by suggesting that it demonstrates how tough it is to beat the stock market indexes.

Their premise is right, but their method is wrong.

Over a short period of time, half the class could end up beating the market.

What have you done to that group of kids? 

You’ve inadvertently revealed (in their eyes) that they’re stock market wizards. 

And what do you think they’ll do with their money once they start investing?

They’ll be far more inclined to trade stocks…making (stock market game) sponsors such as Merrill Lynch, Wachovia Securities, A.G. Edwards and Morgan Stanley very happy indeed. 

Most importantly, young people need to understand that rising stock markets aren’t good for them.

They need to recognize that stocks are real businesses.

As long term buyers of real businesses, young people should much prefer sinking stock prices, not rising ones. 

After all, as long term accumulators of stock market assets, they shouldn’t be celebrating when the products they’re collecting for their portfolios are getting more expensive to buy.

Stock market games undermine this premise.

I discuss how young people should think about stock market movements in my book, Millionaire Teacher while showing how to effectively invest in the stock market.

I only wish that more personal finance teachers become cognizant of the role they’re really playing when encouraging stock market games with their kids.

If you have a contact in a school, please forward this article to them.  With luck, they’ll send it their school’s business teachers. 

 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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16 Responses

  1. DIY Investor says:

    I agree 100%. The "stock market game" sends the wrong message all the way around. For some that lose or play the game during a down period it even turns them off to the whole process of investing. It prevents them from seeing that the best time to invest for the long term is when the market has had a down or flat period. These are exactly the people who will jump in after the market has had a couple of good years.

    I would like to see a well designed questionnaire for students after completing the game. What is their perception of investing at that point, what have they learned about what it takes to be a successful investor, do they think they can invest successfully on their own etc.

    Sadly the teachers are financially illiterate and don't know the fundamentals of investing. They are fodder for the big brokerage firms you mention.

    Getting "Millionaire Teacher" in the right hands is a step in the right direction.

  2. Mark says:

    As a former teacher's aide specializing in Gifted and Talented programmes, I thought long and hard about whether or not to play the stock market game with kids. In the end, I decided not to for many of the reasons you mention. Over the course of a full term, perhaps, it might be worth pursuing but NEVER as a one day exercise. It gives completely the wrong message to children.

    On the other hand, I did regularly teach groups about gambling in a casino using roulette as my teaching tool. Before we played, I made sure the kids calculated the odds on each type of bet (introducing the various options one at a time) so that they knew that red/black was a .50 probability bet, an individual number was 1/36 etc etc. Things became really interesting when I introduced a "0" to the equation. Boy, were they upset with that as they knew exactly what the implications were: I'd stacked the game in my favour as "the house".

    Ultimately, each session ended with pretty much all of the children going bankrupt with all of them understanding that casinos are gambling and that the odds are stacked heavily against them.

    Except there was that one kid, 15 years ago, who on his last bet of the day placed everything he had left on #21 and had his long shot pay off. I cringe when I think of it and wonder if he isn't now in Vegas trying to make his fortune the hard way.

  3. I actually think these stock market games are a great exercise for students. It allows them to see how markets function on a daily basis – for better or for worse. I can see your point about encouraging short term trading, but watching the weekly market gyrations might also help these future investors figure out how risk tolerant they might be and thereby choose the best strategy for their investing personality.

    Perhaps showing them how markets work and combining that information with a longer term context is a happy medium. It's sort of like the approach many teachers have taken to media literacy. It seems to me that anything that promotes market literacy is a good idea.

  4. Larry Cuozzo says:

    When I started teaching business courses 20 years ago in Toronto, the University of Waterloo sponsored a stock market simulation that I played with my senior accounting students (I wasn't much older than my students back then). They loved the game; now I understand why. We were gambling, with pretend money, but it was still gambling. The students got the same high from picking a winner and being able to brag about it that you get from a winning black jack hand. These students looked up to me and I encouraged them to gamble in the stock market. I only hope they figured out long before I did how difficult it is to speculate in the stock market. My lessons are much different today, focused on avoiding investing mistakes. The Toronto Star even let me write a few articles for them this past summer about index investing, long term investing, and living below your means. I hope this makes up for my past mistake. I'm glad I found your blog Andrew; I've enjoyed reading your posts.

  5. Hey Robert,

    You're exactly right. Financial illiteracy among the teachers is certainly the main reason the game gets played.

    Hey Kim,

    I think that you're right about kids requiring exposure to the stock markets at a young age. As far as risk goes, students also need to be instructed on what risk truly is, before understanding their risk levels. I think about flying as an example. It scares some people, yet it's probably the safest form of travel. Without educating people on its safety, many could jump to the conclusion that air travel is unsafe, without the education. Young people need to learn that a falling stock market is better than a rising one (for them). The risk comes from buying assets that are appreciating rapidly, and putting money in the markets for the short term. I think we have to teach them what risk is, and not allow them to go with their guts to determine their emotional risk levels.

    Hey Mark,

    I love what you did with your students, with respect to teaching them about odds in a casino. Nice work! As for that kid who won, hopefully he lost big the first time he wandered into a real casino. That ought to do the trick!

    Hey Larry,

    It sounds like you and I have similar philosophies re. educating kids about money. But don't be too tough on yourself. I laugh when thinking back at some of the things I used to teach kids at the beginning of my career! We can only chuckle and do our best.

  6. Glen says:

    While I'm reading this great post, my son texts me from his Grade 11 CALM class and says, "Dad, we're playing stock market. Which stocks should I buy?" I texted him back and said, "See if your teacher will let you buy an index fund and we'll talk tonight when you get home." He texted me back, "My teacher doesn't know what that is…"

    I guess I know where the 2nd copy of the book I ordered is going 🙂

    Thanks for all your hard work!

    • Hey Glen,

      It's very unfortunate that a teacher trying to instruct his students on the stock market wouldn't know what an index fund is.

      Are you really going to send the teacher a copy of my book? That would be fabulous. And I think he would receive it happily, as a very genuine gift, considering that it was written by someone in his profession, and gifted by a parent of one of his students. Very cool!

      • Glen says:

        You betcha I am. I just have to wait for the ship to get to Canada that has my books on them and then the dogsled ride to Alberta:)

  7. That sounds great Glen!

    The books have actually arrived in Canada. If you ordered through Amazon, you should have the book at the beginning of next week (or the end of this week). Thanks again! It's a quick, easy read that I think you'll enjoy!

    Cheers,

    Andrew

  8. Great post and question!

    I'm aligned with Kim here (Balance Junkie). I think stock market games are excellent exercises. I wish I knew about them, did them, got some understanding of them, 20 years ago as a teenager vs. experimenting with the market in my early and late-20s (only to lose some money). I could have prevented some, not all mistakes, earlier, which is a key to learning.

    Watching market gyrations are like watching individual waves in the ocean. They don't mean a thing day to day. Long-term, you care about the ocean, not the waves in it. I would have loved to have a teacher earlier in my life teach me about this. Alas, sometimes experience is the best teacher but like anything in life, you get better with practice and continuous learning.

    Nice stuff Andrew!

    • The educational question becomes this:

      What does the class learn?

      At this impressionable age, some learn that they're market wizards, no matter what you otherwise tell them.

      Others learn that they have simply lost a game, like a video game.

      I think these are the most dangerous games sponsored by teachers. And I will be telling parents this on "parent night" when I start my class.

    • Hey Mark,

      Let me tell you what I plan to do with my personal finance class instead of playing the stock market game.

      We're going to use real money, raised by clubs, and we're going to responsibly invest the money, year over year. Each year's new class will be the stewards of the building portfolio. We're going to learn how to manage money to give the best long term probabilities of success–no more than you would expect from your RSP (or an American IRA). This is a life skill: to build a responsible portfolio, not a speculator's portfolio. And we will compare it with professionally managed money over the years. This will be a heck of a lesson for kids, I believe.

      We'll also donate the money to selected charities from time to time.

      But the bottom line is this: unlike a gambling game, these kids will learn how to manage a portfolio, much like they would in real life.

      Teach them to gamble, and I believe many will gamble.

      Teach them to invest, and I believe that most of them will learn to invest.

      What do you think of this idea, compared to the stock market game?

  9. I recall playing the stock market game in class during 5th grade and 7th grade for about one month each time. Not enough time to learn anything about investing or the stock market.

    Personally I would replace the stock market game with a block of instruction/set of practical exercises on how to manage a personal budget. Most young kids haven't yet learned the value of money to the extent that they will be able to quickly grasp the nuances of investing. If, on the other hand, they get a small allowance and start to see how it gets divided up between movies, a new bike, etc… they''ll be able to relate to the subject matter in a more tangible way.

    Something else to think about: we wouldn't recommend investing into individual stocks to an adult who did not understand what he was doing, especially if he had too much debt, no savings account, or other financial ills. Why are we teaching kids to invest in stocks before teaching them how to avoid these pitfalls? Shouldn't they follow the same progression in their education track in order to maximize the value of anything learned about investing?

    • Hey Dividends For The Long Run:

      What you have to say here is so brilliant, that I'm just going to quote the whole thing:

      "Personally I would replace the stock market game with a block of instruction/set of practical exercises on how to manage a personal budget. Most young kids haven’t yet learned the value of money to the extent that they will be able to quickly grasp the nuances of investing. If, on the other hand, they get a small allowance and start to see how it gets divided up between movies, a new bike, etc… they”ll be able to relate to the subject matter in a more tangible way.

      Something else to think about: we wouldn’t recommend investing into individual stocks to an adult who did not understand what he was doing, especially if he had too much debt, no savings account, or other financial ills. Why are we teaching kids to invest in stocks before teaching them how to avoid these pitfalls?"

      In my view, your suggestions represent common sense that doesn't appear to be particularly common with teachers who waste time with the stock market game, when they could be financially educating students instead.

  10. SPBrunner says:

    I have met many people of over the years that have bought stock. The ones that thought that buying stocks was like gambling tended to lose over the long term. The ones that thought they were buying companies (i.e. investing) tended to make money over the long term.

    The main thing that I saw about the gambling attitude was they were looking for the big score, and this is probably why they lost money.

    • Susan,

      You are absolutely right. Short term thinkers tend to make disastrous investors. Sadly, it sometimes takes a few years before their knee-jerking speculative strategies really bite them in the rear. But the longer that takes, the more costly the bite, generally.

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