A study in the use of financial planning software in the classroom as it relates to student's learning styles.

• Author: Estes, James

1. INTRODUCTION

   This paper is a study of the use of simulation software using actual investments results for over 20,000 mutual funds individually selected and blended by students to illustrate principles in finance related to investments and how a student's preferred learning style impacts the retention of such simulation software. The software includes but is not limited to: diversification, beta, alpha (in the simulations the students develop their own personal alpha for their portfolio), risk return tradeoff, efficient frontier, the Sharpe principal, standard deviation, correlation and volatility. The students are able to create, study, and alter their portfolios as market conditions change and compare results to other student's performance. The software, Steele Mutual Fund Systems, is publically available and can be purchased for under $70.00 and downloaded via the web. The Index of Learning Styles (ILS) is publically available and can be located on the Internet at: http://www.engr.ncsu.edu/learningstyles/ilsweb.html.

2. BACKGROUND

   Computer simulations in the classroom have been commonplace for some time now. In the field of portfolio management they have long been used in the workplace both for testing models and demonstrations to clients. Blending the two on a scale that is understandable to finance students represents a unique opportunity and challenge. In addressing this issue the authors have been using "Steel's Mutual Fund Systems" for over 7 years and have found the results exceptional. This type of program, commonly used in the field of Financial Planning, offers great versatility and opportunity to apply several principles in finance simultaneously. The use of models is increasingly common because of the versatility they afford (Trippi, 1996). The software clearly demonstrates to students the lack of available information or contrarily the abundance of non relevant information on accurate forecasting in the building of portfolios and those limitations that are faced in the real world as a result.

   The process of learning from real world examples and consequences of decisions made are invaluable in illustrating such principles as risk return trade off, diversification and the efficient frontier. Similar to the program that General Electric uses to illustrate the risk return trade of short term vs. long term planning as pointed out by Santandreu and Smith (2001), but not limited by the costs involved, this software uses actual mutual fund results as applied to the blend of funds the student selects. This program can be developed with a minimal amount of outlay and by using a version, which Steele would provide, that is 12 months or more old and then updating through the current edition, which you must purchase, students are able to construct and see the effects of their judgments on returns. As can be learned from the most recent downturn, unless you see the cataclysmic event coming, there is little that can be done with the exception of a balanced approach to investing to minimize losses.

   There are several problems associated with courses in Finance today. These include but are not limited to the orientation to memorization and the resultant lack of application to the practical, the tendency of students to focus on the process rather than the application, and the vast differences in mathematical preparation in high school among the students. Employers complain that students are not capable of independent thinking and critical evaluation (Fowler, 2006). While these may be overcome with crude simulations such as the use of dice, those applications lack real world applicability. The Steele Mutual Fund Software is taken monthly from Standard and Poor's database and applied to over 20,000 mutual funds updating the real returns monthly. This enables us to begin with a two year old data base and through selections observe firsthand what the consequence of risk return tradeoff as well as portfolio diversification are on a quarterly or semiannual update. Thus we are able to include the actual random walk of the market with the necessity of using appropriate finance principles in building a portfolio, incorporating time frame with risk. Like the simulation studied by Foster & Stine (2006), the study allows first hand, individualized by their mutual fund selections, the observations of how various combinations and weights of asset class affect return in various markets and a better understanding of volatility and variance.

   One benefit of the software is it can be used to stimulate discussions surrounding risk and portfolio construction around risk tolerance. Often these discussions center on formulas and more advanced concepts that are used with senior level students who can grasp the ideas because of prior coursework. However, the authors have found that by exposing junior level students to the concepts, students are not only able to grasp the concept before understanding the 'how' that is provided by coursework, but additionally are able to grasp how the concepts can apply to their personal investments. Once this bridge has been crossed we have an increasing number of finance majors and finance minors because of this early exposure.

   Our experience indicates that the optimum method to convey the risk tolerance and portfolio construction is a combination of the Steele software and conventional textbook teachings. As cited in research by Chapman and Sorge (1999), "researchers investigating the effectiveness of simulations in business education have produced contradictory results and inconclusive findings". Part of this may be attributed to the general use of business simulations in sales force management. In specific areas of finance, such as the risk and portfolio construction cited above, the results can be immediately discerned and measured in a real world environment using actual performance. Many comparisons cited above are a combination of both simulations and traditional instruction methods. Similar inconclusive results were found in a study by Fowler (2006), in the financial accounting field. In our study we measured these same factors and found that the results proved more conclusive than prior studies, though on a narrower basis.

   In using simulations that are mathematically based historical simulations of results to illustrate consequences to students investment decisions, we encounter certain risks. Pritsker stated, "historical...