TEACHING FINANCIAL MARKETS USING THE WALL STREET JOURNAL Developments in Business Simulation and Experiential Learning, Volume 28, 2001 TEACHING FINANCIAL MARKETS USING THE WALL STREET JOURNAL Richard Cohn, University of Hartford Cohn@mail.hartford.edu ABSTRACT This note describes how the Wall Street Journal can be employed as a substitute for a textbook in an M.B.A. course on money and capital markets. The typical textbook is two years out of date by the time it reaches the classroom. Rapid change in the financial markets renders the traditional textbook effectively obsolete. The Wall Street Journal provides a potential solution to this problem. INTRODUCTION The financial markets are an arena that has been changing very rapidly in recent years. Rapid consolidation along industry lines among banks, securities firms, and insurance companies has become the norm in the United States. This trend toward larger firms will undoubtedly be augmented in the next few years in response to the repeal, enacted in 1999, of the provisions of the Glass-Steagall and Bank Holding Company Acts that previously served to separate firms engaged in the businesses of banking, securities, and insurance. The elimination of these cross- industry barriers among financial firms will lead to further consolidation. The creation of Citigroup through the merger of Citicorp and Travelers is an early example of such consolidation. Innovations in financial theory and telecommunications technology, coupled with significant deregulation, have revolutionized the world of finance in the last quarter century, which has witnessed the introduction and rapid growth of many different kinds of derivative securities and tools for risk management. Middle-class American households have had to become sophisticated in financial matters just to manage their personal finances. Their world is a very different one from that of their parents, for whom bank accounts and life insurance represented the vast bulk of their financial wealth. Against this backdrop, the usefulness of traditional textbooks in courses on the financial markets has declined substantially. The problem is that the lag involved in composing, producing, and distributing a textbook virtually guarantees that the data presented will be at least two years old by the time that students get to use the book. That is simply inadequate in the present financial environment. To deal with this fundamental pedagogical problem, I have developed over the last ten years a curriculum for the M.B.A. course on money and capital markets that substitutes the Wall Street Journal for the traditional textbook. CLASSROOM ACTIVITY I devote part of the first weekly meeting of my course on the financial markets to the importance of the Wall Street Journal as a learning tool. I require the students to read the Wall Street Journal regularly, with emphasis on the third section of the newspaper, which is called “Money and Investing.” This is the section of the paper that provides news from the financial markets, including the results of the previous business day’s trading in the major securities markets of the world. In my experience most of the students choose to enter subscriptions to receive the paper on a daily basis, rather than rely on the library’s copy. I devote the second weekly meeting of the course to a single topic, “How to read the Wall Street Journal.” The students spend approximately two hours becoming acquainted with such daily features and columns as “Abreast of the Market” and “Heard on the Street.” They learn how to read stock and bond quotations. With the aid of the “Markets Diary,” they learn about the major market indexes and how they are constructed. They learn where in the paper to look for such important tools as the U.S. Treasury yield curve. The role of the instructor needs to reflect the students’ previous finance training (or the lack thereof). Beginning in the third week of the course, at least half of the classroom time is spent learning about the world of finance through the pages of that day’s Wall Street Journal. Each student is required to come to class with a copy of that day’s Wall Street Journal. I ask them to spend at least twenty minutes reading the paper prior to the beginning of the class. Over the course of the semester the Wall Street Journal becomes a vehicle for exploring both the financial markets themselves and the financial institutions that operate in them. There is not one substantive area or principle of the money and capital markets that cannot be taught effectively using the Wall Street Journal. It is practically made to order to illustrate and explain how the various financial markets relate to one another. Concepts like “equilibrium” and “arbitrage” take on real meaning. The purposes and roles of various networks of financial firms are illustrated in the articles, columns, and even in the advertisements. The instructor needs to be flexible enough to take advantage of major news stories, as they appear in order to 40 Developments in Business Simulation and Experiential Learning, Volume 28, 2001 introduce and develop substantive concepts. This requirement means that the instructor should be willing to develop topics out of the normal course sequence when the opportunity arises. LEARNING OBJECTIVES Over the course of the semester, students develop an ability to think like investors. They observe the role of “fads” in influencing the activities of commercial and investment bankers. They observe links between incentives and behavior. They learn to use the theory of the term structure of interest rates to interpret the information content of the Treasury yield curve. They come to appreciate the volatile ways of the stock markets of the world. By the end of the semester they have even begun to read between the lines. They discover that much conventional thinking in finance, duly reported in the pages of the Wall Street Journal, simply does not make sense. For example, the staff reporters of the newspaper often quote market participants who explain movements in stock prices as caused by investors putting money into, or taking money out of, stocks. But that is impossible. The students come to observe enough transactions in the financial markets to appreciate the fact that money cannot go into stocks and stay there. The reason is that transactions require both a buyer and a seller. Thus the money going “in” is equal to the amount of money coming “out” at the same time (neglecting transaction costs). It is only a small further step for them to understand why securities prices can change (and often do) without any transactions taking place. 41 Table of Contents Volume 28, 2001 Using A Web Based Tutorial Program To Enhance Student Learning Reflecting On Reflection: An Examination Of Reflective Learning And Assessing Outcomes Overcoming Obstacles To A Cross-Global Collaborative Classroom Panel Discussion On Building And Maintaining Trust In The Abselesque Classroom Cosmopolitan-Based Cross National Segmentation In Global Marketing Simulations Strategic Management And The Case Method: Survey And Evaluation In Hong Kong Designing Interactive Self-Learning Modules Using Macromedia Director Teaching Financial Markets Using The Wall Street Journal Core Course Outcomes Assessment And Program Continuous Improvement Using An Integrative Business Plan Œ An Empirical Evaluation Using A Mock Trial Activity For Interdisciplinary Learning Fidelity, Verifiability, And Validity Of Simulation: Constructs For Evaluation 2001 International Collegiate Business Strategy Competition: 37 Years Of Collegiate Competition Motivating Students: An Initial Attempt To Operationalize The Curiosity Gap Model E-Learning: The Next Wave Of Experiential Learning Helping New Game Adopters: Four Perspectives An Initial Validity Invesitigaion of A Test Assessing Total Enterprise Simulation Learning Administering A Marketing Simulation - Common And Varied Practices Among Instructors Issues In Case Method Instruction: Class Discussion Leadership Sex Composition, Cohesion, Consensus, Potency And Performance Of Simulation Teams Integrating Management Curriculum: Linking Courses With Frontpage Absel: The Way We Talk! Teaching Strategic Management: A Case Study In The Diffusion Of Innovation In Education A Demonstration Of Bussim Strategy A Total Enterprise Simulation Teaching Methods: Etic Or Emic Antecedents Of Work Team Performance In A Business Simulation: Personality And Group Interaction When Experiential Educators Reflect Upon Their Craft: A Qualitative Research Report Strategic Sensemaking In Organizations: Model Formulation And Operationalization Panel Discussion: A Model For Initiative Development: Discussion And Ideas Of Individual Spirit Harmonics Assessing The Efficacy Of Experiential Learning In A Multicultural Environment Are Business Schools Producing 21st Century Managers? Blue Horizon Cruises: An International Simulation Exercise To Illustrate Conflicting Economic And Cultural Models Different Perceptions Of The Same Thing: An Experiential Exercise Current Use Of Agribusiness Simulation Games: Survey Results Of University Agribusiness And Agricultural Economics Programs Team Building 101 For Accountants An Online Evaluation Of The Compete Online Decision Entry System (Codes) Total Enterprise Simulation Winners And Losers: A Preliminary Study Gilding The Lily, Enhancing The Pedagogical Experience, Or Fixing What Isn™t Broke: The Dilemma Of New Simulation Versions The Absel Endnote Database: The Perfect Tool For The Bernie Keys Library Decision-Making Exercises (A), (B), And (C): Examining The Role Of Conflict In Group Decision-Making Group Decision Simulation (A)-(F): Examining Procedural Justice In Group Decision-Making Processes Evaluation Of Performance In Business Games: Financial And Non Financial Approaches A Framework For Evaluating Simulations As Educational Tools Congruence II™: A Strategic Business Board Game The Tournament Concept: Extending The Idea Of Using Simulations As Instruments Of Assessment The Economic And Political Transition Of The Mexican State In The Threshold Of Twenty First Century: From The Entrepreneurial State To The State Of Entrepreneurs. Experiential Learning For Accountants: The Not For Profit Project An Investigation Of The Environmental Awareness Attained In A Simple Business Simulation Game A Daily Exercise In Theory Application: Is This Why I Had To Take Marketing, Management, Finance –? An Alternative View to Scoring Selected Simulation Games and Experiential Exercises