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On a recent flight from Armenia back to Washington, D.C., your correspondent took advantage of the in-flight entertainment to watch Brad Pitt in his 2011 movie, Moneyball. No doubt the story of the success of a small regional (and low-budget) baseball team will appeal to the heart of all true baseball fans. But for the Safe and Fair Finance Blog, some lessons also emerge.
The story’s author, Michael Lewis, is famous for Liar’s Poker, published in 1990 describing Wall Street and the famous investment bank, Salomon Brothers. Anyone who worked in investment banking in the 1980s will find his stories arrestingly accurate.
The basic premise of Moneyball is that players have traditionally been bought and sold based on the wrong criteria. A manager’s decisions about which player to trade for another is based on perception, i.e. the manager’s biases and gut-feel, all of which are based on years of experience but selective recall of that experience. Unfortunately such perceptions are often inaccurate and lead to faulty decision-making. The young assistant to manager of the Oakland A’s baseball team suggests that instead focus be placed on just one data point—the number of times each player reaches a base, called “time on base”. The argument is that the more times a player reaches a base, the higher the probability that the player will move from first base, then to second to third and then home for a run. The more times a player is on base, the more runs will be chalked up and the more likely the team will win the game.
In selecting ball players, managers are often influenced by consensus thinking rather than hard data. Some players look funny when they throw the ball. Some play it safe too often. A once star athlete may have lost much of his power and so is considered ineffective when he still has a lot to give. For one reason or another, some talented players have undervalued qualities. Their market price is based on biases and gut feel. But their value to the team is reflected in the data.
Here Michael Lewis tapped into his experience on Wall Street. Finding tradable assets where the market value differs from the true value—and buying and selling based on the discrepancies—lies at the essence of successful financial investing. Better to buy and sell players using concrete data rather than gut-feel, suggests the young manager’s assistant. For the Oakland A’s in Moneyball, it was a highly successful strategy that changed the way that baseball teams were selected throughout America. It changed the way managers thought about how to win the World Series without busting the budget.
So how can Moneyball help figure out how best to design programs of financial education? Most government officials design economic policies based on a combination of their gut and their interpretation of recent historical experience. However neither is a reliable guide. Instinct is helpful when sudden decisions must be made but economic policy is almost never made in a matter of moments and such gut-feel can lead to poor choices. Better to focus on using concrete data to achieve policy goals. Unfortunately such evidence-based policy-making remains very rare, particularly when related to warm and fuzzy issues such as financial education.
Safe and Fair Finance Blog suggests that financial education programs focus on just two concrete data-points. First, one needs to define a target for success of financial education programs. This might be to achieve a certain level of measured financial literacy among the adult population--or perhaps having your country’s population rank at the top of a survey of financial literacy worldwide.
Second, one needs to identify the critical measure that ensures success in reaching the goal—something equivalent to “time on base”. Is this number of hours of classroom training in personal finance? Currently time in classroom is the most commonly used indicator. Unfortunately it is the least useful of all possible choices. A more helpful target might be the percentage of adult population that maintains bank account (reflecting sufficient public confidence in using keeping extra cash in a bank rather than under the mattress or in a sock). Whatever indicator is selected, detailed and comprehensive statistics need to be collected, published and analyzed.
Only financial education programs are designed based on data of what works will financial literacy measurably improve. Otherwise the best alternative might be to cancel the classes on personal finance and let students enjoy playing baseball.