7/02/2004

Rich get richer - financial literacy

I've recently been reading a series of bookd written by Robert Kiyosaki, his Rich Dad, Poor Dad, books, where he talks about 2 "fathers" he had growing up, and about their different teaching techniques. One of his main points is that schools do not teach financial literacy, so the only way for kids to get it is from parents. If your parents are rich, they likely know what to teach, and if they're poor, they have no idea. So the richer keep getting richer and the poor keep getting poorer. Stop to think for a second that much of our society participates in buying stocks, bonds, futures, and all kinds of things, let alone the routine tasks of managing their own income, assets and liabilities. I can't think of a single class in high school that taught me how to do any of these things. (math taught me how to count i guess). No wonder the poor class of society doesn't know where to go. Check out the book sometime. It's given me a new perspective on financial education.

10 comments:

morty said...

Its surley easier to get rich if you have te know how. But almost every rich person in the world if you trace it back vision had to come in somewhere. The rich were'nt always rich. But ambition changed that all. And you can't teach that. *tear*

Dr. Tufte said...

This is another fantastic post - it's really applicable for students trying to envision how the rest of their life will work out.

I am not familiar with this book specifically, but the general idea has been around for centuries. There is an old phrase "shirt-sleeves to shirt-sleeves in three generations" which means that working-class parents teach good skills to their kids, who then grow up rich, but the grandchildren are raised in luxury, don't understand the sacrifices, and end up back in the working class. Personally, I have this problem in my own family - neither myself or my wife is as good a financial planner as our parents were ... and it shows. The words I would put on it are that a lot of people mistake being financially uncluttered for being financially organized. People whose finances are organized often keep them neatly too, but many people seem to think that keeping them neat will make them organized, and that isn't always the case (an analogy is that lots of people keep clean kitchens but not all of them can cook).

The bigger economic problem here has to do with an issue that comes up in early finance classes called discounting. Discounting is how we value cash flows that we receive in the future. It is rational to discount in a way that looks exponentially declining on a graph (for example, you are indifferent between $81 today, $90 that you get a year from now, or $100 that you get two years from now because you are discounting at 10% per year). In practice, many people appear to discount at a rate that changes through time; in particular, they discount very heavily at the beginning, which means they put far too little value on cash that will be available to them in the future. This means that they will save too little when they can, and end up with less than they should have.

An interesting application of this is that the difference between people who commit crimes and other moral transgressions and the rest of the population is that potential criminals appear to have higher rates of discount. They are less willing to wait for future gratification, and thus more likely to bend or break the rules to get what they want now.

Mitch said...

This contradicts the experience of many immigrant families, including my own. My grandfathers came here as laborers, my Dad only finished high school after the war (at Mom's insistence), I've got 2 masters degrees, and my oldest son will be attending medical school next year. Poor people may not be able to calculate the present value of an annuity, but they can readily impart a respect for learning, hard work, and saving.

Go check out some of the longitudinal studies of families in the high and low ends of the income distribution curve in the US. Both ends gravitate toward the middle over time, and are replaced from the middle, at a faster rate than anywhere else on the planet.

C-Dizzle said...

I agree and disagree with this blog. The idea that a rich parent has the ability to better prepare their posterity for financial success is a general truth in my opinion.

The idea that a poor parent has no clue how to teach about financial success is a relative argument. One person’s “poorness” is another person’s “richness”. Some people are content being rich in other areas of life besides money but still possess the ability to teach about monetary success.

The argument that not a single class in high school teaches about “stocks, bonds, futures” and “managing their own income, assets and liabilities” is true. That’s why people are told to go to college if they want to make the real money. High school was only meant to give you a general education prior to specializing in college.

In my last semester alone, I learned all of the above listed information. This is why college graduates tend to make considerably more money than high school graduates.

Dr. Tufte said...

Hey students: I think "Mitch" who commented above is the first person from outside of class to comment on what you've written.

Dr. Tufte said...

Two thoughts about what Mitch said:

1) I wonder if he is in the middle of the shirt-sleeves to shirt-sleeves in three generations. It's just a saying, but sometimes it is true.
2) What Mitch said in his second paragraph about income distributions is right on the money - on average people do move from where their upbringing was towards the center of the distribution. But that is an average across everyone, and points like Ned's still can be made for a large number of people.

As to C-Dizzle's point, I think it is great that he learned to do this in college, but most people don't, and many never get this information anywhere.

Anonymous said...

FYI Kiyosaki is a questionable authority. I read "Rich dad poor dad" and enjoyed it, but something was not right. A lot of actions that he promoted in the book are illegal or immoral. In addition, there are some other problems (like the identity of his right dad, his net worth, etc). I believe there are places on the web that document this. Kiyosaki now has a lot more rich dad books, but the first one is most entertaining.

Armand
random passer by

Calico Cat said...

"Go check out some of the longitudinal studies of families in the high and low ends of the income distribution curve in the US. Both ends gravitate toward the middle over time."

That's what statisticians call regression towards the mean. And it's the likely result of a meritocratic society like the U.S.

But the U.S. is imperfectly meritocratic. There is still a strong benefit to being born to affluent parents.

metromut said...

Growing up in a small town where everyone was basically lower-middle class, there were signs of financial illeteracy everywhere. I was never taught the ins and outs of the finacial world. Stocks, bonds, and finacial management was never talked about in high school nor at home. Which leads me believe that rich parents do produce rich offspring and poor parents produce poor children, because that is what they were exposed to and that is what they learned.

Pravash said...

really a good advice...





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