Dr. Pansy L. Yang (Bio)
Executive Director of the Fink Center for Finance & Investments
As financial instruments have increased in availability and complexity, the danger has grown in some consumers' inability to understand the vast array of choices. Financial literacy is defined, usually, as the ability of people to understand finance and make informed decisions for lifelong financial security.
Various bills and acts supporting financial literacy have been passed by Congress from 2000 on, and a number of organizations have been created to support financial education. One of the oldest of these organizations is the Jump$tart Coalition for Personal Financial Literacy, which first started measuring financial literacy nearly 15 years ago when the term "financial literacy" was virtually unknown. Its mission is to "improve the financial literacy of pre- kindergarten through college-age youth by providing advocacy, research, standards and educational resources"; this is representative of the movement within the U.S. to financially educate individuals starting from an early age.
We are very fortunate to have a contribution about financial literacy in this bulletin from Lewis Mandell, professor emeritus of finance at SUNY Buffalo, a leading pioneer in the field. Lewis constructed the Jump$tart Survey, and administered the survey first in 1997, and then subsequently every two years from 2000 to 2008. His decade of work has led to sobering conclusions. He finds current classroom teaching methods to be rather ineffective; i.e. students who take a high school course in personal finance do not have a greater understanding of finance than those who never take a course. In this article, he summarizes the results of the 2008 National Jump$start Coalition Survey of high school and college students.
Bruce Carlin, associate professor in finance at UCLA Anderson and co-director of the Fink Center, shares his findings from a particular research study in which he analyzes the financial literacy of approximately 2,350 students between the ages of 13 and 19 in Los Angeles during the 2008-09 academic year. He reveals details of the study and results from this controlled empirical experiment, in which half the students received a lengthy training course prior to making financial decisions and half did not. He finds that education works in some settings. However, when extrapolation is needed, prior education may become unreliable or even detrimental, unless it is augmented with timely decision support.
Associate Professor, UCLA Anderson
Financial literacy is defined as "the ability of people to make financial decisions in their own best short- and long-term interests" (Mandell, 2008). Unfortunately, this skill is in short supply, which may erode both personal and aggregate welfare (e.g., Lusardi and Mitchell, 2007). Indeed, consumer financial literacy has been at the center of current debate concerning the causes and catalysts of the recent financial crisis. Many homeowners did not appreciate the variable-rate clauses in their mortgages and their explicit exposure to interest rate risk. Many individuals failed to appreciate the fees and interest rate schedules used commonly in credit cards. Both exacerbated the amount of household debt, personal defaults and foreclosures during the crisis.
Finding the best way to address the scarcity of financial literacy has focused on three distinct channels. The first is directly improving financial literacy through better education and financial literacy training (e.g., Mandell, 2009; Bernheim and Garrett, 2003; Bernheim, Garrett, and Maki, 2001), though the evidence regarding the efficacy of these efforts is mixed. The second is improving access to advice and timely decision support. For example, Bertrand and Morse (2009) show that timely, salient information about the true costs of payday loans causes people to frame their decisions more broadly and consequently take up fewer loans. Lynch (2009) argues that timely decision support—apprising consumers of the consequences of various mortgage options before they choose a home—is preferable to increased disclosure in retail mortgage transactions. The third is implementing a policy of libertarian paternalism: nudging consumers in the right direction by judiciously choosing default options, thereby limiting the harm that arises from the failure to make an informed choice (Thaler and Sunstein, 2003; Choi, Madrian, Laibson, and Metrick, 2009).
Several important issues remain unresolved, however. First, it is unclear whether financial literacy training actually affects people's actions at an individual level, even if it does improve their knowledge about financial decisions. Indeed, many of the cited papers above analyze the uptake of information by subjects, not the effect of training on financial decisions. Second, it remains unclear how people extrapolate such training to other circumstances that are not specifically included in the training program and whether this leads to unintended consequences. Finally, it remains unknown how financial literacy training interacts with the other channels noted above.
Addressing such questions is usually difficult because the investigator is unable to control for unobserved variables that confound the analysis. For example, consider studying the effect of financial literacy training on a typical 50-year-old man. To calibrate the effect of the training, one would have to control for learned biases, previous advice, prior good and bad luck, and previous experiences. This often represents an insurmountable task.
Emeritus Professor of Finance, SUNY Buffalo
A Summary of the Results of the 2008 National Jump$tart Coalition Survey of High School and College Students. The 253-page book summarizing the results of all of the Jump$tart surveys may be found here.
The 2008 national Jump$tart survey of 6,856 high school seniors was the sixth such biennial survey and completed 10 years of measuring financial literacy in the United States. In 2008, the Jump$tart Coalition also conducted its first national survey designed to measure the financial literacy of college students. The two surveys present contrasting results.
The financial literacy of high school students fell in 2008 to its lowest level ever, with a score of just 48.3 percent. The average score for college students on the same 31-question exam, however, was 62.2 percent, nearly 15 percentage points above that of high school seniors. In fact, if measured on the high school senior base of 48.3 percent, college students actually did nearly 29 percent better. In addition, scores improved for every year of college, with seniors averaging 64.8 percent. The good news is that American graduates of four-year colleges are close to being financially literate and probably will be so with more life experience. The bad news is that just over a quarter of our young adults are earning four-year college degrees, and this number appears to have stabilized. This means that some three-quarters of young American adults are likely to lack the skills needed to make beneficial financial decisions.
The positive turnaround in high school financial literacy scores, first noted in the 2004 survey, continued only through 2006. Beginning with an average score of 57.3 percent in 1997, scores fell to 51.9 percent in 2000 and 50.2 percent in 2002 before staging a rebound to 52.3 percent in 2004. In 2006, the mean score increased by a tenth of a percent to 52.4 percent before falling to 48.3 percent in 2008.
On November 17, 2011, Bill Gross and Larry Fink joined together in conversation with Bloomberg's Erik Schatzker. The program was broadcast on Bloomberg TV and the LA Times ran a lengthy feature on the two, detailing their rise to the top of the financial world and their shared California roots. Titled "The rise of the bond barons" and authored by Nathaniel Popper and Walter Hamilton, the following is an excerpt, reprinted with permission from the LA Times article:
Bloomberg TV's Erik Schatzker with Bill Gross and Larry Fink
When the U.S. government needed expert help in evaluating the bonds that caused the 2008 financial crisis, there were only two men it could turn to.
Larry Fink, the founder of investment giant BlackRock Inc., and Bill Gross, the founder of Pacific Investment Management Co. (Pimco), are the generally acknowledged kings of the bond universe.
Together, the companies they run hold approximately 7.5 percent of all outstanding bonds. The $1.2 trillion managed by BlackRock and the $1.1 trillion at Pimco dwarf the holdings of the next largest bond players, according to data from Pensions & Investments.
The gregarious Fink, 59, and the more reserved Gross, 67, have very different personalities and run very different companies. Fink's asset management company, based in New York, has a much broader business model than Gross' more focused operation in Newport Beach, but their ascension to the top of the bond world has some striking parallels.
Both men created upstart behemoths in a financial industry that tends to favor experience. Gross was one of Fink's first big clients when he began trading bonds, and Fink used Gross as an advisor when BlackRock launched in 1989.
More strikingly, before starting their companies, they were both free-spirited California boys—Gross from the Bay Area, Fink in the San Fernando Valley. And the business training they received came not from some ivy-cloaked East Coast academic institution but at the less aristocratic business school at UCLA. They graduated within five years of each other.
"Maybe the laid-back philosophy allows you to think longer term," Fink said, only half in jest, during a recent interview at his New York office.
On how growing up in California and attending UCLA shaped their perspectives:
Fink and Gross credit their West Coast upbringing, far from the centers of financial power in cities such as New York and London, for giving them that broader perspective.
"The fact that UCLA was sort of different and outside the mold—certainly from the standpoint of what I wanted to do in finance—was very advantageous," Gross said in an interview.
"It's not being a part of groupthink," Fink said.
Their relationship, friendly but also rivals
Later, when Fink went off to start his current company, he went out to California with his co-founder, Ralph Schlosstein, to get Gross' advice on creating a bond investing firm.
"One would normally think that No. 1 and No. 2. would be highly competitive and hate each other," said Schlosstein, who has since gone on to lead Evercore Partners. "But in fact the relationship was always one of friendly competition and very high respect."
That's not to say, however, that there's no rivalry:
"It would be unrealistic to think that we didn't have our eyes on BlackRock and they didn't have their eyes on us," Gross said in an interview. "We're out for their customers and they're out for ours."
Although Fink and Gross are both known as bond experts, they have taken their careers and their companies in very different directions. Gross has continued to focus on investing, while Fink has developed into more of a traditional CEO, leaving the day-to-day investing to others. Fink early on took his company in more directions, adding consulting and stock investing, something Pimco has only recently done.
"What is remarkable about us is the longevity of our careers, and the successes we've had," Fink said.
The Fink Center co-sponsored the Inaugural Investing Conference on February 10, 2012, with Kenneth Broad ('94) and two student groups, the Investment Finance Association and Anderson Investment Association. More than 400 students, alumni and members of the local industry gathered in Korn Hall to hear well-respected executives share investing insights accumulated over years in the business, company history as well as career advice.
The conference was kicked off by James Ware, Founder of the Focus Consulting Group, a firm dedicated to helping investment leaders leverage their talent, followed by two panel discussions.
The first panel discussion, "Beating the Benchmark: Active Management and Efficient Markets" included Chris Brightman (director and head of investment management, Research Affiliates), J. David Carpenter (investment analyst, Capital Group), George Letteney (interim president and CIO, UCLA Investment Company), moderated by Drew Zager (managing director, private wealth management, Morgan Stanley). The second panel featured Steven Romick (managing partner, First Pacific Advisors) and Jonathan Sokoloff (managing partner, Leonard Green & Partners), moderated by C. Daniel Ewell, (chairman, western region investment banking, Morgan Stanley).
Howard Marks, chairman of Oaktree Capital Management, closed the conference as keynote speaker. The event also featured two book signings that included James Ware's book, titled "High Performing Investing Teams," and Howard Marks' book, titled "The Most Important Thing: Uncommon Sense for the Thoughtful Investor."
Opening speaker James Ware
First panel: Drew Zager (moderator), Chris Brightman, George Letteney, Dave Carpenter
Second panel: Dan Ewell (moderator), Jon Sokoloff, Steven Romick
Keynote, Howard Marks
The Fink Center Anderson Student Asset Management (ASAM) Speaker Series invites leading investment managers to speak to a select group of MBA students interested in pursuing a career in investment management. The students are members of ASAM, who manage an investment fund that aims to provide a competitive rate of risk-adjusted return to its investors, and engage in experiential learning through firm visits and guest speakers. This past fall, the following speakers presented: Michael Martin, editor of Martin Kronicle (October 11) and Mark Perry, vice president at Centinela Capital Partners (October 25).
|Sept. 30||Ed Van Wesep||University of North Carolina||The Timing of Pay|
|Oct. 7||Mark Westerfield||USC||Economic Ties: Evidence from Venture Capital Networks|
|Oct. 21||Andrew Hertzberg||Columbia Business School||Exponential Individuals, Hyperbolic Households|
|Oct. 28||Kenneth Ahern||University of Michigan||Who Writes the News? Corporate Press Releases During Merger Negotiations|
|Nov. 18||Milbradt Konstantin||MIT||Endogenous Liquidity and Defaultable Bonds|
|Dec. 2||Hui Chen||MIT||Marketing Timing, Investment and Risk Management (Draft)|
|Dec. 9||Ric Colacito||University of North Carolina||International Asset Pricing with Risk-Sensitive Agents|
|Dec. 16||Lukas Schmid||Duke||Innovation, Growth and Asset Prices|
Private Equity Summit
Keynote: Josh Lerner
First Annual Fink Center AIA Stock Pitch Competition
Participating student teams from UCLA, USC, HBS, Columbia, NYU
Private Equity Roundtable
Keynote: Joseph Dear
An article titled "What High IQ Investors Do Differently," written by Robert Shiller, Professor of Economics and Finance at Yale University, appeared in the Sunday New York Times on February 26 highlighting Mark Grinblatt's research on investor IQ and stock market participation. Grinblatt is the Japan Alumni Chair in International Finance. He has authored approximately 40 scholarly papers in finance and economics, several of which have won distinguished awards, as well as a corporate finance textbook and an edited book volume. His past research, which appears in most of the major journals in finance and economics, has focused on asset pricing, rational expectations equilibria, performance evaluation, stock market anomalies, corporate finance, derivatives valuation and investor behavior. The following is reprinted with permission from the N.Y. Times.
You don't have to be a genius to pick good investments. But does having a high IQ score help?
The answer, according to a paper published in the December issue of The Journal of Finance, is a qualified yes.
The study is certainly provocative. Even after taking into account factors such as income and education, the authors concluded that people with relatively high IQ's typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market. They also tend to favor small-capitalization stocks, which have historically beaten the broader market, as well as companies with high book values relative to their share prices.
The results are that people with high IQ's build portfolios with better risk-return profiles than their lower-scoring peers.
Certainly, caution is needed here. IQ tests are controversial as to what they measure, and factors such as income, quality of education and family background may not be completely controlled for. But the study's results are worth pondering for their possible implications.
The paper, by Mark Grinblatt of UCLA, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of the University of Chicago, took advantage of some unusual data. The crucial numbers came from, of all places, Finland.
A team led by UCLA research astronomer Michael Rich has used a unique telescope to discover a previously unknown companion to the nearby galaxy NGC 4449, which is some 12.5 million light years from Earth. The newly discovered dwarf galaxy had escaped even the prying eyes of the Hubble Space Telescope.
The research is published Feb. 9 in the journal Nature.
The larger, host galaxy, NGC 4449, may be "something of a living fossil," representing what most galaxies probably looked like shortly after the Big Bang, Rich said. The galaxy is forming stars "so furiously" that it has giant clusters of young stars and even appears bluish to the eye—a sign of a young galaxy—in large amateur telescopes, he said.
NGC 4449 has a nucleus that may someday host a black hole and an irregular structure, lacking the spiral arms characteristic of many galaxies, he said. It is surrounded by a huge complex of hydrogen gas that spans approximately 300,000 light years, which may be fueling its burst of star formation.
Rich collaborated with Francis Longstaff, a professor of finance at the UCLA Anderson School of Management and an amateur astronomer, in acquiring and using a specialized telescope designed to take images of wide fields of the sky. Known as the Centurion 28 (the diameter of the mirror is 28 inches), the telescope and the observatory the astronomers used, are located at the Polaris Observatory Association near Frazier Park in Kern County, Calif.
Longstaff is the Allstate Professor of Insurance and Finance at UCLA Anderson. He is a certified public accountant (CPA) and a chartered financial analyst (CFA). From 1995 to 1998, Longstaff was head of fixed-income derivative research at Salomon Brothers Inc. in New York. Longstaff has also worked in the research department of the Chicago Board of Trade and for Deloitte & Touche as a management consultant. His current research interests include the following: fixed-income markets and term structure theory, derivative markets and valuation theory, credit risk, computational finance, liquidity and its effects on prices and markets, as well as the role of arbitrage in financial markets. He has published nearly 40 articles in academic and practitioner journals. Many of his valuation models have been used widely on Wall Street and throughout the global financial markets. He has extensive experience as a consultant for many Wall Street firms, mutual funds, hedge funds, commercial banks and other financial institutions, software developers and risk management firms, as well as in litigation support. He is a frequent speaker at practitioner seminars and conferences.
Reprinted with permission from UCLA Media. Full article
Ivo Welch, editor of Critical Finance Review (CFR), starts this new journal with the aspirations of it being a high-quality top finance journal on par with the current three top journals in finance: the Journal of Finance, Journal of Financial Economics and Review of Financial Studies. Some distinctive features of CFR include the inclination toward controversial, provocative and high-impact papers, as well as more unusual ones, which include critiques of published papers, reviews and so forth. For more information, visit: http://www.critical-finance-review.org/journal.aspx?product=CFR.
Welch is the J. Fred Weston Professor of Finance at UCLA Anderson. He was on the Anderson faculty from 1989 to 2000. After stints at Yale's School of Management and Brown's economics department, he rejoined Anderson in 2011. He has placed among the top 100 most influential economists in some academic rankings. A number of his academic papers have won awards and are highly cited. Known for his work on informational cascades, he has also published in a variety of other areas, such as initial public offerings, capital structure, dividends, market-timing, performance evaluation, earnings management, overconfidence, socially responsible investing and bankruptcy. He has served as an associate editor at a number of the most prestigious academic finance journals, written an introductory corporate finance textbook (freely available at http://book.ivo-welch.info) and earned a number of teaching awards.
After a rigorous selection process, we are pleased to announce this year's Fellows. All are first-year MBAs, members of the Class of 2013.
Matthew Cautero most recently was an investment associate at University of Pennsylvania's Office of Investments, where he focused on private equity and absolute return investments within the university's $6 billion endowment fund. At UCLA, Cautero is a first-year director in the Investment Finance Association and a member of the Ski & Snowboard Club. Cautero attended Yale University, where he majored in history and was a four-year letter winner on Yale's Varsity Football Team. Upon graduation, he joined Lazard Fréres as an analyst in its Private Fund Advisory Group.
Cautero will be interning at Deutsche Bank in San Francisco this summer.
Rob Michlovich is pursuing an MBA in finance at UCLA Anderson. He spent the last four years working at UBS in New York City as a portfolio specialist on the municipal sales desk. Prior to the municipal sales desk, he was a member of the 2007 Graduate Training Program at UBS. At Anderson, Michlovich is a first-year director of investment banking in the Investment Finance Association and a member of the Wine Club and the Ski & Snowboard Club.
Michlovich graduated with a bachelors of science in finance from Penn State University, where he was president of the Smeal Business Consulting Group and an active member of the Penn State Dance Marathon.
Michlovich has accepted a summer position at Bank of America Merrill Lynch in New York.
Jordan Weitzen is pursuing his MBA at UCLA Anderson. Most recently, he worked at Fortress Investment group in New York City, where he focused on investing in distressed credit and equity opportunities. At UCLA, Weitzen is a first- year director of investment banking in the Investment Finance Association and a member of the Entrepreneurial Association.
Weitzen attended Harvard University, where he majored in economics and was a four-year starter on the Men's Division I Varsity Volleyball Team. Upon graduation, he took a role as a strategy execution consultant at BTS USA, a spinoff of Bain & Company.
Weitzen is spending the summer at Barclays in Los Angeles.
John Hertzer is pursuing his MBA in finance at UCLA. At Anderson, John is a first-year director of the Investment Association, a CFA Level III candidate and a member of the Outdoor Adventure Club. This past summer, Hertzer completed the Death Ride, a 130-mile, one-day bicycle ride in the California Sierras.
Hertzer graduated from Dartmouth with a degree in economics and was Academic All-Ivy in 2004. At Dartmouth, he was captain of the Varsity Lightweight Rowing Team and won the 2004 World Indoor Rowing Championship. After graduation, he moved to San Francisco to work for Fisher Investments in the Research group, where he worked for the past seven years. During his time there, Hertzer worked as a fundamental and quantitative research analyst, risk manager, project manager and helped the CEO research his 2006 bestseller, "The Only Three Questions That Count."
Hertzer is doing a summer internship at Dimensional Fund Advisors.
Shiv Verma is a member of the class of 2013 at UCLA Anderson. Prior to UCLA Anderson, Verma worked in investment management at Symphony Asset Management in San Francisco, where he was an investment analyst focused on high-yield and leveraged credit and structured products. Earlier in his career, he was an investment banking analyst for J.P. Morgan in New York. At UCLA Verma is actively involved in the Anderson Investment Association, the Sports Business Association and the Riordan Scholars program. Verma holds a degree in economics from Stanford University.
Verma will be doing credit research for the high-yield team at Franklin Templeton this summer.
Arun Rao is pursuing his MBA at the UCLA Anderson School of Management. He is studying investments and is a first-year director in the Anderson Investment Association and a board fellow in the Venice Community Housing Corporation.
Before business school, Rao worked in the investment management industry doing equity and macro research at Sterling Stamos Capital Management, a $7 billion hedge fund and private equity subsidiary of Merrill Lynch. He also worked in business development and strategy at Hall Capital Partners, a $22 billion endowment investing firm, while completing all three levels of the CFA exam.
Prior to that, Rao was a journalist intern writing for the finance and investing section for the Economist Magazine in London and a Teach for America teacher. Rao is a dual-degree graduate with a BSE in finance from Wharton and a BA in classics from the College at the University of Pennsylvania, where he was a Joseph Wharton Scholar and a Benjamin Franklin Scholar. He is an avid reader, runner and hiker.
Rao will be a portfolio management intern this summer at Pimco.
The Fink Center is deeply grateful to members of the finance community who have participated as mentors in the Investment Banking and Investment Management Fellowship program. Without their help, this program would not be possible. We thank the following mentors for sharing their time, expertise, and guidance with our Fellows.
Investment Banking Mentors:
- Anish Aswani ('05, Moelis)
- Mark Brofka ('02, Evercore)
- Andrew Chassin ('03, Bank of America Merrill Lynch)
- Andrew Chien ('03, Greenhill)
- Arun Master ('02, Deutsche Bank Securities)
- James Meehan ('05, Barclays)
- David Kieske ('02, Wachovia)
- Daniel Kim ('04, Macquarie Capital)
- Samardh Kumar (MBA '02, Deutsche Bank Securities )
Investment Management Mentors:
- Jeff Cornell ('08, Dimensional Fund Advisors)
- Peter Dillard ('07, Dimensional Fund Advisors)
- Madeleine Horton (Oaktree)
- Jason Hsu (Ph.D. '05, Research Affiliates)
- Evan Pan (FEMBA '07, CalTech Endowment Fund )
- Ted Randall (FEMBA '07, Dimensional Fund Advisors)
- Michael Terry ('04, PIMCO)
- Suzanne Trepp (FEMBA '98, WAMCO)
- Richard Weiss (American Century Investments)
- Josh Yafa ('07, Franklin Templeton)
The Fink Center for Finance & Investments
UCLA Anderson School of Management
110 Westwood Plaza, Los Angeles, CA 90095