CAN GAMES TEACH INVESTING SKILLS?

Years ago I decided to participate in an investing competition sponsored by one of the leading financial firms. The rules were pretty simple. You were given $250,000 in pretend money that you could invest and at the end of 90 days whoever had the most money won. It sounded like a fun idea so I signed up. I soon placed my first trades and was off and running.
 
By the time the 90 days was over I felt like I had made a pretty decent return, until I looked at the leader board.  I was shocked to see the winner of the competition had grown his account to a whopping seven million dollars. As I looked over his trades I realized I had mistakenly thought this was an investing competition when in fact it was a gambling competition. The winner had placed very high risk trades and let them ride. It was the only way to grow that much money so fast.
 
As I contemplated that experience I realized that the contest had little value to a real investor because it taught incorrect principles. Since the money was not real, there was no risk of real loss, so those who wanted to win did so by taking extreme risks. That is not a good habit to form if you want to be a good long term investor. 
 
I have seen similar competitions in the public school system. I don’t want to knock these contests because they get young people excited about investing, but I want to caution that they can teach poor investing habits because the players have no real risk. It is akin to learning about real estate by playing monopoly. Without any real skin in the game, the players can develop bad habits. When you have nothing to lose, there is also very little to be gained.
 
I encourage parents that one of the best ways to teach solid investing principles is by opening a real account for their children, preferably with at least some of the child’s own money. When their account goes up they will learn valuable lessons. When the account goes down they may learn even more. Both experiences teach, in a memorable way, the value of making good decisions, managing for risk, and not being too greedy. Unlike artificial competitions that may encourage too much risk taking, using real money will encourage a more conservative and sustainable approach. And it doesn’t have to be a lot of money to make this work.
 
Investing competitions have value because they can teach kids how to evaluate an investment as well as the logistics of how it all works. But if there is no real chance for loss, then in my opinion there is also little chance for real gain. I worry sometimes that the millennial generation who learn investing by playing games in school may not be prepared for the day when the investing world turns against them. And one day it will.