Lesson 11: Behavioral Finance

Lesson 11: Behavioral Finance

Learning Objective:

Students will be able to experience and reflect on different behavioral biases related to money. 

Pre-work:

Follow-up from Last Session (3 min)

Slide: Follow-up from last session
Say: What’s one thing you’ve learned so far about Bitcoin?

Call on 2-3 students.

Say: Bitcoin can take some time to understand, so pace yourself. If you’re thinking of investing in it, be sure to do some more research first so you make an informed decision—and don’t forget to diversify!

Hook (2 min)

Slide: Turn and talk
Say: With the person sitting next to you, discuss the following question: Have you ever made a purchase purely based on emotion or faulty logic? 

Think. Pair. Share. If students are working remotely, you can put them in breakout rooms or simply ask everyone to type a brief answer in the video chat.

Activity #1: The Dollar Auction Game (15 min)

Slide: Activity #1: The dollar auction game
Say: Today you’re going to participate in a hypothetical auction for a one dollar bill. You can make bids in an attempt to win the auction and choose to stop bidding at any time. But there’s one catch—only one person will win the dollar, but both the highest bidder and the second highest bidder have to pay their highest bid to the auctioneer. 

Any questions? Let’s begin the bidding at 5 cents. Any takers? 

Record who bids—and for what amount—on the board or screen. Continue increasing the bidding by 5 cents each time, until there’s only one bidder who’s willing to pay. Let this person know they would win the hypothetical auction and dollar bill.  

Say: Now let’s add up the amount the highest and second highest bidders would have to pay in order for the highest bidder to get the dollar. How much did it cost in total?

Slide: Activity #1: The dollar auction game video
Watch video: The (Ir)rationality of the Dollar Auction. 

Slide: Activity #1: Reflect
Ask: 

  • What were the winning and second highest bids in our class—and what did they add up to?
  • Was there a point when you realized the dollar bill might sell for more than a dollar? If so, what did you do at that point?
  • Now that you’ve seen the dollar auction play out, how might you handle it differently if you were to play again?
  • Have you ever been faced with a decision where your best option was to quit, but you kept going anyway?

Call on 1-2 students for each question.

Say: This activity shows how people can be irrational—and once in the “game,” you might have trouble being logical because of different cognitive biases. 

Ask: When did you decide to sell? Why? 

Have students share out

Say: This activity was to show you that people have many cognitive biases, or systematic—but flawed—ways of thinking. One common type of cognitive bias is loss aversion. Loss aversion, in this case, is when you see the value of your stock going down and that hits you harder than when the value of the stock goes up. Some of you experienced loss aversion between days 9-11 and sold your stock in order to try to avoid losing money.

Activity #2: WidgetShop (10 min)

Slide: Activity #2: WidgetShop 

Say: Let’s do another activity. In this activity, everyone will start with 1 share of WidgetShop. Let’s say you bought this on day one for $65. Each day, you have to decide whether to hold or sell. The goal is to maximize your profit by selling your stock at the highest price you can. You can only sell your stock once. You cannot buy back into the market. 

Pass out or distribute the activity sheet to students.

Slide: Activity #2: Buy, sell, hold?
Say: It’s day one owning your share of WidgetShop. The stock closing price is $68. Would anyone like to sell? You’d make $3 on it! 

Now it’s day 2…and the price is $71. Does anyone want to sell? Your profit would be $6.

Now it’s day 3…And the price is $88. Does anyone want to sell?.

Continue until day 14 using the amounts in the chart below. Only reveal the price one day at a time, and give students time to decide if they want to hold or sell.

Activity #3: Envelopes (5 min)

Slide: Activity #3: Envelopes
Say: I need a volunteer. Please come to the front of the room. (If teaching remotely, ask the volunteer to raise their hand onscreen.)

Show the volunteer the two envelopes.

Say: One envelope has $10 in it, and one envelope is empty. You can choose an envelope, or you can take $5 cash.

Let the volunteer think for a moment.

Say: Actually, would you take $4 cash? 

Show the volunteer the five $1 bills to tempt them, and then take one of the dollars away.

Allow the student to choose an envelope, take the $4, or ask for (and get) the original $5 instead of $4. After the volunteer decides, ask students for a show of hands on which decision they would have made.

  • Decision 1: Pick an envelope
  • Decision 2: Take the $4 
  • Decision 3: Ask for $5, the original counteroffer to the envelopes

Say: This activity is all about risk. You had a 50-50 chance of getting $10, so the average of the possible outcomes was $5. 

  • If you were willing to accept $5 cash, you’re probably risk neutral.
  • If you would have accepted $4 to avoid walking away with nothing, you’re probably risk averse. 
  • If you would have chosen one of the envelopes, you probably take risks—because there’s a chance you would have walked away with nothing.

Activity #4: Flip a Coin (5 min)

Slide: Activity #4: Flip a coin
Say: For our final activity, I need a volunteer who has $5 cash in their bag/pocket. Anyone? If not, we can pretend. 

If a student volunteers that they have $5, ask them to stand up or participate in the activity with you remotely.

Here we have a coin. Let’s say we flip the coin. If it’s heads, I’ll give you $10. If it’s tails, then you have to give me $5. 

Ask the volunteer if they would go for it.

Say: Class, raise your hand if you would go for it. 

Say: Mathematically you should go for it—here’s why. You could gain $10 or lose $5, so your potential gain is greater than your potential loss. But many people wouldn’t do it, because they’d want to avoid losing. This means they have loss aversion, meaning their feelings are more extreme when they lose than when they win—even if the win would be double what the loss would be.

Behavioral Finance Debrief Video  (15 min)

Slide: Cognitive biases to look out for
Say: For all these activities, there were some cognitive biases that we ran into. Here are a few common cognitive biases and aversions that can occur, especially around money and investing. So be aware of these. 

Go through the list. 

Slide: Cognitive biases
Say: Let’s watch this video that does a good job of summing up some of the activities we did today and shares more information on how these cognitive biases affect our behavior around money. 

Watch video: Behavioral Economics: Crash Course Economics #27

Slide: …and one last time…
Say: Ok—one last time, let’s spin the 101 Wheel—and think about how your cognitive biases might help or harm you when it comes to saving for unexpected expenses.

Slide: What does behavioral finance tell us?
Say: Investopedia does a really good job explaining behavioral finance. Can someone read the first paragraph? Can someone read the second paragraph? 

Have students read aloud. 

Display Takeaway slide.