Dear Irrational (from a finance professor)

October 6, 2008 BY danariely

Dear Irrational,

I am a finance professor at one of the top business schools in the U.S., and I am starting to doubt the assumptions of irrationality based on what I see in my students.

Here is the story: Every year when I teach the basic finance class to either the MBAs or the executive MBAs we get to the point where we talk at length about the benefit of diversification, including how to think about risk and return.

Every year, I have made it the point of the class to emphasize how important it is to diversify, including the importance of diversification in their employee stock.

Every year I spend more time on this very clear and simple issue, and every year I come to the realization that they do not care or don’t remember this very simple lesson. My best example of this is a recent graduate, who took my class, and took a position with Bear Sterns. He was partly compensated with shares and options and he recently called to tell me how much he regretted not applying my warning. How can it be that such a smart student failed to take such a simple but important lesson?

So I am turning to you (ironic, I know). What can I do so that this lesson will get etched in their minds?

Yours truly,
A frustrated finance professor

Dear frustrated finance professor,

Here is what I would do:

First, it turns out that people do not learn or remember abstract lessons as well—so you need to make it concrete (this is why Harvard business cases are so often used—not because they are so great, but because students remember the story in them). I would use the example of the student from your class, I would ask for his permission and I would use his picture and life story to present an analysis on how much he lost. If he will come to the class to tell about his mistake this will be particularly powerful (maybe you can also take a video of him talking about his experience). I suspect that such a personal example will be very helpful in getting the students to remember the lesson.

Another idea is to make them a keychain, or a pen with the word “always diversify” on it, with the idea that if they use it they will have a constant reminder about their own pledge to diversity. Another approach to the same idea would be to use the school rings, if some people at your university get school rings, maybe you can get the words “always diversify” etched on the ring and this way they will remember this lesson.

A third approach would be to pair them up with another student and for each pair to agree that once a year they will review the financial allocation of the other person and give them neutral feedback about their allocations. This way they will get a checkup once a year on the wisdom of their decisions and will have to explain this to another person who is not invested in their finances.

Finally, get them a certificate at the end of your class saying that they now understand something about finance, and that they pledge to always diversify and get them to sigh this certificate and hang it on the wall in their office. Presumably the signature and pledge will remind them what they need to do.

If you end up trying one of these please let me know what you think.

Irrationally yours