Market Blind Spots Among College Students

Here I am in silence
It’s a game I have to play
You and I in silence
With nothing else to say
--Information Society

Although history-making events such as today’s further nationalization of Citigroup (C) are occurring regularly in financial markets, most college students continue to maintain relatively low levels of market awareness.  Over time, of course, Minyanville hopes to reverse that deficit via the University of Minyanville and similar programs.

When I chat with students about financial markets, a few points arise that commonly take students by surprise.  They include the following:

Seeing both sides of the trade. Veteran Minyans understand this as a ‘core value’ of the ‘Ville. For every buyer, there is a seller. Regardless of which side you're on, it pays to understand what the other side is thinking. Seeing both sides of the trade is the financial market equivalent of critical thinking, the development of which is a primary objective of higher education.

Our markets are not free. Most students I speak with view the US as a ‘free market’ economy. They exhibit surprise when presented with the notion that domestic markets are subject to significant intervention. Students commonly consider the Federal Reserve, for example, as a facilitator of free market functioning rather than as an inhibitor of it. The notion of central banks as counter productive central planners has not dawned on many students.

Currency by fiat. More than three quarters of all students I talk with believe that the US dollar is backed by gold. Nearly all believe that somewhere in the world the gold standard still exists. Few understand the fiat mechanism underpinning worldwide monetary systems.

Leverage works both ways. The banking crisis has offered ample opportunity to portray lessons in leverage gone awry. In class, I’ve shared real and hypothetical bank balance sheets and demonstrated what happens as asset prices decline when you’re leveraged 10 or 30 to one. After viewing the outcomes, students often wonder aloud about why managers would take such risk. I then suggest that they take a look at their own balance sheets…

Moral hazard. Two or three years back, a student stopped by my office asking my opinion on his idea to flip a few houses in the then red hot local real estate market. He wanted to finance his projects with adjustable rate debt. I raised the specter that at some point over the next few years housing prices might fall considerably, or that interest rates could scream higher. He countered by offering that the government would never let that happen. Students are not immune to the forces of moral hazard.

From where I sit, overcoming such ‘blind spots’ better equips college students for making informed financial market decisions.