TIME Education

How Sports Can Help Your Kids Outsmart Everyone Else

Houston Astros v New York Mets
Children yell to players after a game between the New York Mets and Houston Astros at Citi Field on September 28, 2014 in the Flushing neighborhood of the Queens borough of New York City. Alex Goodlett—Getty Images

Jon Wertheim is the executive editor at Sports Illustrated. Tobias Moskowitz is Fama Family Professor of Finance at the University of Chicago.

The playing field provides the ideal context for learning fractions, probability, equations, risk assessment, principles of finance, behavioral economics and even multi-variable calculus

Correction appended October 16, 2014

In her excellent book, Building A Better Teacher, the journalist Elizabeth Green tells a story of a new hamburger that the A&W Restaurant chain introduced to the masses. Weighing 1/3 of a pound, it was meant to compete with McDonald’s quarter-pounder and was priced comparably. But the “Third Pounder” failed miserably. Consultants were mystified until they realized many A&W customers believed that they were paying the same for less meat than they got at McDonald’s. Why? Because four is bigger than three, so wouldn’t ¼ be more than 1/3?

Green uses this example as one more piece of evidence that Americans suffer from a collective case of innumeracy, the math equivalent of not being able to read. But the A&W anecdote could also be used to underscore another national crisis: financial illiteracy. Even after a catastrophic recession—prompted, in part, by millions of us not grasping the terms of adjustable mortgages or the perils of an economic bubble—the subject of finance might as well have an “R” rating affixed. Come and see what all the fuss is about once you turn 18. It is the rare high school—much less middle school—curriculum that offers economics, and the rare K-12 curriculum that imparts simple lessons, such as the promise of compound interest or the peril of spending more income than you earn.

Put a dozen educational consultants in a room, ask them how to teach financial literacy, and you’ll get at least a dozen responses. There was once consensus that relevance and context are key. Show a sixth grader a supply and demand curve, it’s unlikely to be effective; instead, ask that same 11-year-old, “If the ice cream store has a line around the block, what would happen if they raised their prices?” But even that is up for debate. “The work often overwhelms the interest of the context,” says Dan Meyer, a former math teacher now studying math education at Stanford. “Calculating—putting numbers into a formula and then working out the arithmetic—is boring. Important, but boring. The interesting work is coming up with the formula.”

However, we would contend that there’s one context, popular among kids (increasingly of both genders), that is tailor-made for introducing basic concepts of economics and math, and a lot less boring: sports.

Just as a game is packed with fractions, probability, equations and even multi-variable calculus if you’re so inclined, so too is it a laboratory for risk assessment, principles of finance and behavioral economics—an emerging field that looks at the effects of psychology and emotion on economic decision-making.

In the aisles of Walmart or the listings for real estate, round numbers are powerful motivators, either to hit or to avoid. We’ll buy a 99¢ Coke, but are less inclined when it’s $1. We take pains to list homes for $99,999, not $100,000, when the difference is laughably negligible. And we do the same in sports. We hand a fat contract to a .300 hitter, but are less likely to do so to a batter that hits .299, never mind that the difference could be as little as two hits (or official scorer decisions) over the course of a season.

Sports also provide a context for probability. Broadcasters may ask questions hypothetically, but real answers exist. Jones is only a 40% free-throw shooter but he makes both. What are the odds of that?

If only one day a response would come: Well, I’ll tell you, Bob. Forty percent is 4/10. Multiply that twice for the two shots. 4/10 x 4/10 = 16/100 or 16%. Not good odds, but not extraordinarily rare, either.

And there are other examples. What is cutting a player from a roster if not taking a short position? A balanced line-up is a classic diversification strategy. Drafting a player at the same position as your star can be seen as a hedge against asset depreciation. That the baseball season started in Australia is a vivid example of international expansion and an attempt to alter consumer habits. Basic probability will explain why no one came close to winning the Billion Dollar Bracket Challenge that Warren Buffett sponsored during last March’s NCAA Tournament.

As Meyer notes, coming up with a formula might be more important than mere calculating. But, here again, sports can help. Sabermetrics in baseball and advanced stats in other sports are based on the premise of improving predictive models and deriving formulas. Half the fun of winning your fantasy league is the implication that you outsmarted (came up with a better formula than) everyone else.

If nothing else, any kid who’s been to both a hockey game and a basketball game knows the difference between thirds and quarters, and, in turn, would have picked the right burger.

Correction: The original version of this post misstated the title of Elizabeth Green’s book. It has been corrected.

Jon Wertheim is the executive editor at Sports Illustrated. Tobias Moskowitz is Fama Family Professor of Finance at the University of Chicago. Their 2011 book Scorecasting was a New York Times bestseller. Their new book, The Rookie Bookie, attempts to combine sports, statistics and financial literacy for kids.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

MONEY retirement planning

3 Ways To Prevent Overconfidence from Derailing Your Retirement Plans

Proud Rooster
George Clerk—Getty Images

You need confidence to plan for the future, but unless you have a realistic view of your skills, you're likely to sabotage your own efforts.

Confidence can be a powerful force. RAND Corporation researchers have found that people who felt confident were more likely to plan for retirement than those who were more tentative. But confidence can cut both ways.

The rub is that confidence can too easily slip over the line to overconfidence. For example, EBRI’s 2014 Retirement Confidence Survey notes that Americans’ confidence in their ability to afford a comfortable retirement has been recovering from the lows of the financial crisis. Which is good, except the report then goes on to say that this rebound in confidence isn’t backed up by better planning for retirement: “Worker savings remain low, and only a minority appear to be taking basic steps to prepare for retirement.”

Psychologists and economists have long been fascinated by The Overconfidence Effect: the tendency for people to overestimate their judgment and abilities. Frenchmen think they’re better lovers than they are; university professors overrate themselves as teachers; investment analysts have an exaggerated view of their ability to forecast stock prices. Berkeley finance professor Terrance Odean has published numerous papers showing that overconfident individual investors sabotage their investment performance by trading too much.

So, how can you reap the advantages confidence can bestow without falling prey to overconfidence? Here are three tips:

1. Challenge yourself. The next time you’re about to make an investing or retirement-planning move—say, diversify into a new asset class or convert a big portion of a traditional IRA to a Roth IRA—ask yourself for a detailed rationale of why you believe this move is necessary, what evidence supports that view and what, exactly, you expect this move to achieve for you. Then come up with reasons this strategy might fall short of expectations and assess what the downside might be. And do it in writing, as this will force you to be more rigorous in your arguments. You might also go to one of the calculators in RDR’s Retirement Toolbox and plug in new investments or other strategies to see whether they enhance your retirement prospects.

If you go through this exercise and come away still convinced you’re doing the right thing, fine. Proceed with your plan. But if you raise issues that highlight potential weaknesses you hadn’t really thought through, you may want to hold off until you do more research, or just scale back your original plan (invest less than you’d originally intended in that ETF or convert a smaller amount to a Roth).

2. Keep a record. I don’t know about you, but I tend to remember clearly the times I was right about something and forget or gloss over the times I was wrong. That’s only natural. But to protect against this instinct—and give yourself valuable perspective on how often future events prove that your analysis (or gut instinct) was right or wrong—jot down your various predictions and date them. Believe that small-cap stocks are about to surge or inflation is poised to spike or the value of the dollar will fall? Write it down. That way you’ll be able to check back and see how good a financial seer you really are.

Here’s an exercise you can do right now. Think back to when the market was still on a roll before hitting the wall in 2008. Were you predicting stock prices were about to plummet? Did you act on that prediction? How about back in 2010 when everyone was absolutely convinced the bond market was in a bubble and prices were about to burst? Were you part of the bubble crowd? Bond prices did eventually drop and hand investors an annual loss. But that didn’t happen until three years later in 2013, and the loss was hardly devastating: about 2%. Meanwhile, people who fled bonds to hunker down in cash lost out on a gain of nearly 20% from 2010 through 2012, a three-year span during which money market funds and the like returned a total of less than 0.5%.

3. Put yourself on a short leash. It would be nice to think we act only after rationally thinking things through. But humans always have and always will also act impulsively and irrationally. So rather than trying (probably unsuccessfully) to completely stifle that impulse, you may be better off indulging it, but within strict limits. One way to do that: set aside a small amount of money in an “experimental” reserve account that you can invest or use however you please. The only stipulation is that this money remain separate from your regular savings and investments so you can easily see how well, or badly, your reasoned analyses, hunches, gut instincts, fliers (whatever you want to call them) turned out.

Who knows, if this account grows in value over the years, you may want to incorporate some of your “experiments” into your investing strategy. But if this account lags the growth of your regular portfolio or seems to be slowly seeping away, it may provide just the incentive you need to leaven your confidence with a little humility before you make your next financial decision.

Walter Updegrave is the editor of RealDealRetirement.com. He previously wrote the Ask the Expert column for MONEY and CNNMoney. You can reach him at walter@realdealretirement.com.

MORE FROM REALDEALRETIREMENT.COM

Do You Know Your Retirement IQ? Take This Quiz

More Sex—And 3 Other Tips For A Happier Retirement

Want A More Secure Retirement? Act Like A Woman

MONEY behavioral finance

Save Money. That’s an Order

Meir Statman, a finance professor at Santa Clara University, is one of the most influential experts in behavioral finance — the study of how your emotions and beliefs affect your decisions surrounding money.

Research in this field has led to a growing number of practices, such as automatic enrollment in 401(k) plans, intended to gently steer you toward smarter choices.

In presentations to financial advisers, and in his 2011 book What Investors Really Want, Statman explores how people try to balance the conflicting goals they have for their investments — for example, earning top returns while reducing risk.

Statman, 65, has now started to question some of the behavioral finance dogma that has been the focus of his work. In a new paper, he argues that improving Americans’ retirement security may require something stronger than a polite nudge.

His conversation with MONEY senior writer Kim Clark has been edited.

You’ve studied behavioral finance for more than 30 years, and you’ve seen many efforts to nudge people in the right directions. Do they work?

Nudging is very useful. Lots of people were nudged into saving for retirement by making it automatic and adding automatic escalation of savings.

Fifteen years ago, I might have said that would do the job. I doubt it now, because I see almost two populations: one that can be nudged into retirement savings, and another that is resistant. For them, we need to go beyond nudge into shove, and make retirement savings mandatory. I’m reluctant to shove people. But I think half of us, maybe more, are in a crisis.

So what’s your plan?

It’s similar to a 401(k) except that it is mandatory instead of voluntary. Employers would administer it. For self-employed people, there would be something like the insurance exchanges in the new health care law.

How much would people be required to save?

We should set a relatively low minimum, say 8% of one’s income, satisfying pressing retirement needs. Ideally the level would be closer to 15%. That’s the range in other countries that have created mandatory savings plans, such as Israel and Australia.

This is on top of Social Security?

Precisely. You might ask, “Why not just expand Social Security?” but that is not likely to fly politically, and enacting my proposal would require a new federal law.

Social Security is an insurance plan more than a retirement savings plan. It is fair for us to insure one another against dire poverty and disability. It is unfair, however, to ask us to assure others of a comfortable retirement.

Your plan seems very paternalistic.

People would resent it today, but be grateful later on. God knows, we all can tell stories about stuff our mothers forced us to do that we resented then, but for which we are grateful now.

When my dad was young and had young children, he wanted to take money from his pension fund to build another room to our house so there would be more room for the kids. He was turned down. In retirement, he was very grateful that he had been turned down, because it meant that he had more income and could live more comfortably.

We all face dilemmas between consumption now and later. A mandatory savings program prevents you from succumbing to temptation, even to one that is quite reasonable.

If I’m a person who saves already, why should I support your plan? Why should you be permitted to meddle in my life?

Savers should be indifferent to a requirement to save, because they do it anyway.

A resistance to mandates, of course, is part of American culture. I just hope that it can be overcome.

Think about spendthrift parents who arrive at retirement with nothing. And think about their adult kids who are savers. Those children might resent supporting their parents, but they are not likely to abandon them.

If you don’t make the nonsavers save, one way or another they are going to fall on the shoulders of the savers.

Let’s move on to other financial behavior. What are some big errors people make when investing?

One is applying wrong analogies from other parts of their lives. People think that experience will make them more competent investors, just as surgeons become more competent by performing more surgeries. Well, the analogy does not necessarily apply to investing, because the human body is not trying to fool the surgeon by moving the heart from one place to another.

In investing, the person on the other side of the trade will try to fool you. It might be an insider. It might be someone with special knowledge. People have to be disabused of the notion that investing is like surgery and realize that it’s more like a tennis game where your opponent may look weak but, in truth, is much better than you.

What else?

Hindsight. If you kept a diary in 2007, it would likely say something like, “I think that the market is high. I’ll wait a bit, and then decide.” It would be wishy-washy. But we all look back at 2007 and we say, “Wasn’t it clear that the market was going to go down?”

That kind of hindsight gives you the confidence that you can tell the future as well as you can the past.

Later on you might be tempted to sell your stocks because you are sure that their prices will fall — only to find, three years later, that stock prices doubled while your cash was in a money-market fund.

So whenever I feel like saying, “I just knew it,” I tap myself on the forehead and remind myself that I didn’t. We are intelligent beings. We can identify cognitive errors and set a defense against them.

You point out that people often overlook the emotional reasons behind their investing. Can you give me an example of that?

I hope that people who trade heavily can admit to themselves that they do it not just to make more money, but because it is fun. Trading, of course, loses people money on average, but it can be fun the same way that playing videogames is fun.

I say, “Well, you know, everything in moderation.” Just don’t overdo it.

What’s another way that emotions can affect investing?

When people are feeling poor, they are willing to take more risks.

You can have two people each earning $100,000 a year. One of them says, “This is plenty.” The other feels behind. That one is more willing to risk losses in the hopes of reaching his or her aspirations.

Are there ways in which our emotions and biases actually improve our investment returns?

Whenever you trade stocks, you expose yourself to the possibility of regret. You might find out later on that you would have been better off doing something else.

I think that the anticipation of regret prevents many people from doing something stupid, such as selling all their stocks in March of 2009.

So to the extent that our aversion to regret causes us to buy and hold rather than time the market — because any action opens a door to regret — that is a cognitive error that helps us.

Have you seen any evidence over time that people are getting smarter about investing?

You know, I thought that I would be blue in the face before people were going to believe the logic and empirical evidence that index funds do better, on average, than actively managed funds. But it seems that people are learning and getting smarter.

There has been an increase in the proportion of investors’ money that is going into index funds and exchange-traded funds. And I’m not blue in the face!

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser