My 9-Year-Old Son Trades Stocks on Robinhood. It Isn’t All Risky Bets.
Beyond the meme stocks, the app is a great tool for teaching responsibility and financial concepts.
Investing games can educate people about the market, rather than just encourage speculation. | iStock/JGalione
I have a confession. I am an economist, yet for two years I have encouraged our son, now 9, to choose stocks for us to invest in together on Robinhood, the site now notorious for drawing inexperienced investors into risky trades.
Not only that, I encourage you parents to do the same. And companies like Robinhood and its competitors should encourage learning the markets rather than just speculating in them.
My son and I invest only a few dollars a week. It’s fun, and a great chance to teach your kids not to behave like those who got burned when their investments plummeted.
We talk about his investments and what drives their value. We discuss the importance of spreading his investment choices across different companies to reduce the risk and to invest for the long term. We discuss how low-cost index funds provide a sensible means to do this, and to be wary of funds that charge high fees for exposure to the same sets of assets. We also note that because index funds have become part of the orthodoxy of institutional investment, companies within the benchmark indices can also be overvalued.
As I teach politics and economics at the Stanford Graduate School of Business, we also discuss how the different stocks in his portfolio, and the economy as a whole, could be affected both by dramatic political events like elections, but also less exciting but crucial issues: How trade deals like the U.S.-Mexico-Canada agreement might affect U.S. and Mexican companies and workers. How the filibuster rule affects the chance for President Joe Biden to push through sweeping bills on climate change versus narrower bills through budget reconciliation.
The Benefits of Democratizing Finance
Investments in financial markets can be an important way for individuals to build savings, and diversify their risk away from their personal and local economic conditions. But with the dramatic rise in shares in GameStop, AMC, and other “meme” stocks, driven by social platforms like Reddit, there is a raging debate about whether the “democratization of finance” has gone too far. Committees in both the House and Senate have held hearings on regulation. And indeed, there is an important body of research in finance that shows that individual investors, particularly men, sometimes trade too much and are overconfident.
My research over the past two decades has found that access to financial investments and ideas can not only empower people to make more informed economic decisions in their own lives, but also help build common interests and reduce political polarization and violence.
For example, in 2015, in the first experiment of its kind, Israeli economist Moses Shayo and I gave Israeli citizens endowments of $50 to $100 of assets tracking the real stock values of different companies, and the chance to trade $5 to $10 of that portfolio once a week for up to seven weeks. Participants were also asked each week to say what they thought drove the value of the stock that week and over the past three years, and to predict what would happen next.
We found that this intervention not only strongly increased participants’ understanding of hard-to-teach financial concepts such as the relative riskiness of individual stocks versus funds, but also further raised their participation in the stock market afterward. Participants also began to follow financial news, even after the study.
Both women and men also became more focused on the common good — in this case, Israel’s economy — when evaluating policies where emotions run high, such as the peace process. This modern experiment was motivated by important historic cases: Practical political problem solvers, like Alexander Hamilton and Matsukata Masayoshi in Japan, recognized the potential of shared financial exposure as a means to align the incentives of people across fractious states and castes to help reduce polarization and conflict.
Investing in Nintendo and Gold
Shorn of its cultural baggage, finance is really just about focusing on and sharing the future. For our son, too, our regular game of investing helped focus him on the future.
Our son used to consistently fail the marshmallow problem — the classic psychologist’s question to determine someone’s patience, which is associated with success in later life. Asked whether he wanted one marshmallow right now or two in 15 minutes, he consistently said he wanted one right now and two later, but failing that, he’d settle for biting into that marshmallow while the biting was good. But after a few months of weekly small investments, for his eighth birthday present, and honestly, to our surprise, he asked for a small but long-term bump in his weekly investment allowance over other more immediate gifts.
My son’s portfolio is a bit eclectic. While he does hold low-cost index funds, he also is a Warren Buffett–style investor: investing small amounts in companies like Nintendo whose products he likes. We assure that the dividends from his investments — usually a dollar here and there — are visible to him, so he can begin to understand the importance of the fundamentals of the company, rather than base his decisions on pure speculation that prices will rise.
We allow him some room to fail, through the whimsical choices that older investors sometimes also make. He invested in the renewable energy company Plug Power, because he cares about the environment, but also in large part because he liked the ticker name, PLUG. He invested a little in a gold fund, because, well, he was 8 years old and gold is shiny. It was a useful moment to talk about gold’s inherent value relative to paper dollars and to Bitcoin and other cryptocurrencies, which are valuable only as long as people think they are.
Our son has seen the fall and rise of the markets during the pandemic. The fact that the return on his portfolio was more than double that of the S&P 500 — also handily beating his father — is also a chance to talk about the difference between confidence and hubris, and the shared risks we all face: that on many key issues, be it the pandemic or the environment, we all succeed together or fail together.
Small Risks, Big Lessons
In my teaching, I have found that asking students to discuss election outcomes and other emotional political questions through the lens of their impacts on the financial market and the economy has been useful for breaking out of echo chambers and finding common ground. In fact, our students have often impressed me in the accuracy of their predictions in light of these discussions.
The investing game my son and I play — using small amounts, discussing the logic and applying guardrails — could help other families seeking a fun and educational activity with their children. It can also empower us as adults to make more informed decisions in our own lives and focus on the common good when evaluating policies, rather than on what divides us.
Financial companies have proved incredibly adept at broadening access to investment opportunities. If they were to take the next step, providing a track for those interested in learning — whether on their own or together with their children — and helping them to learn through small investment experiments rather than taking large risks, I believe they could find a ready audience.
Similarly, we can design games to educate people about the market, rather than just to encourage speculation. In follow-on research in progress, for example, we have been finding that even randomly assigning the opportunity to trade “fantasy” portfolios — with zero real stakes — could be effective. Similarly, policymakers could consider supporting increased access to such learning opportunities as a means to empower our children over their entire lifetimes, perhaps in concert with policy initiatives like Democratic New Jersey Senator Cory Booker’s “Baby Bonds.”
In my view, these approaches could truly help democratize finance and strengthen our democracy as well.
This story was originally published in USA Today on July 7, 2021.
Jha’s research has been published in leading journals in economics and political science, including Econometrica, Quarterly Journal of Economics, American Political Science Review and Journal of Development Economics; and he serves on a number of editorial boards. The American Political Science Association recognized his research on ethnic tolerance as the best published article in political economy in 2014, and the Society for Institutional and Organizational Economic recognized his coauthored research on heroes with the Oliver Williamson Award in 2020.
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