Financial Literacy

In a recent interview with Tim Ferriss, VC Bill Gurley admits:

If there was a scale of financial sophistication between one and 10, and you would say a really smart person in New York is an 8.5, the average Silicon Valley person on financial literacy is a two.

And it’s funny because they make fun of Wall Street, but it’s just out of ignorance, they don’t know anything.

Bill said it, not me (the transcript is worth reading for the full context but I’m not twisting him… those words are the spirit). I don’t know enough to have an opinion on this but I do find it surprising. Financial literacy starts at home and VCs don’t strike me as a cohort that rose from the gutter so either I’m wrong about the source of financial literacy or maybe poor kids play lacrosse after all.

Either way, the workings of money are abstractions like code. It touches almost every decision since it prices time (interest rates function as an exchange rate between time and money). It’s a basic life skill in an increasingly abstract, financialized world. Teaching our kids about it is basic hygiene.

Last night, we had our regular family dinner with my wife’s sister’s fam (4 adults, 4 kids — grades 1, 4, 5 and 7 plus another 4th grader who was spending the night). We usually go around the table asking each person about something they were grateful for that week or what’s something they tried at and failed (I know, I know it’s a bit cliche. These prompts do lead to provocative discussions and serve to put kids and adults on the same level).

But this time we did something different.

Yinh wanted to use the Silicon Valley Bank run as a learning moment. She started by explaining how banks invest deposits in longer-dated loans to earn a yield. To nudge the kids towards understanding the risk, she said the bank invests in loans that only pay back once a year. While not mechanically true, the point was to have them recognize the liquidity mismatch between the long-dated loan and the deposits that can be withdrawn anytime.

I taught them how rising interest rates cause the value of the loans to fall. But I also dispensed with mechanical accuracy in favor of intuition. I told Zak he plays the role of the bank. He loans me $100 and I promise to repay him $110 in one year. But then, immediately, mom asks to borrow that $100 from me but she’ll pay me back $120 in a year.

How should Zak feel? Well, sad. He’s going to get $110 in one year but since his mom is willing to pay $20 for a loan he could have lent her only $90 and still known he’s going to get back $110 in a year. Of course, this isn’t accurate interest rate math, but save that for a 7th grader. For a 4th grader, this delivers the point intuitively. [And for adults who think buying individual bonds instead of a bond fund somehow is less risky because they know how much nominal money they’ll get back, think through Zak’s position here — he is still getting $110 back but he’s definitely sad even though the counterfactual universe where he invests in a bond fund that gets marked down to $90 is optically worse.]

I was fortunate that my mother taught me about money. I can still remember my brain hurting when she explained a mortgage to me. It took a while to get my head around it. Remembering that keeps me patient — I’m grateful she persisted until it got through my dense skull. She didn’t push, she just repeated herself calmly every time I was frustrated “how does this work again?”. It sinks in eventually. If anything, the exposure will prime them to learn faster when they do encounter it down the line when the stakes are higher in school or real life.

[If you think my difficulty in understanding a mortgage was stupid, I got a better one for you. When I was about 12 or 13 an older kid told me a prostitute is “someone that gets paid to have sex with you”.

Sit down for this.

My mental model for “someone gets paid to X with or at you” was…a hitman.

I now believed that there was a person whose career was to have someone pay them to have sex with a 3rd party. Until then I had the impression that sex was a desirable activity but then hearing it connoted as something that is delivered as revenge or assault made me wonder if sex might actually be a gross punishment.

Dazed and confused is a fitting description of my existence so I’ve got that going for me and this blog.]

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