Teaching financial concepts (v1.1)

While my students eventually learn to do the calculations to solve numerical problems, they often struggle to understand financial concepts. In the past, I gave them a handful of in-class essays that were graded and accounted for 10-20% of their overall grades, thus giving them a strong incentive to pay close attention to our discussion of financial concepts.

Since then, I have come to realize that motivation does not always result in better performance, if not accompanied by ability. Typically, their answers were very weak and showed a severe lack of understanding when answering questions like the following:

If the cost of capital depends only on the uses of capital and not on its sources, why do we calculate the cost of debt and the cost of equity when calculating the WACC?

This term, I’ve tried a new approach that seems to work much better and also saves me time by reducing the number of essay that I have to grade.

Once or twice per week, I present a relevant question, such as the one above, for discussion in class (usually on a slide) and ask students to come up with a written answer in a group of 2 to 4 students. Depending on the complexity of the question, students have 3 to 10 minutes to develop and write down an answer. I then call on 2 to 4 people from different groups to present the answer of their group.

We then discuss each answer in turn, highlighting the parts of the answer that address the question and make sense, and figuring out what kind of thinking lies behind the wrong parts of each answer. Doing this several times for the different groups helps students understand the relevant components of acceptable answers.

If I deem a question particularly important, I will ask my students to rewrite their answers at home and submit their individual answers a couple of days later, usually as a short essay in our learning management system. While still not perfect, their answers are typically much better now than when I just asked them to write down their answers in class after discussing the question with their neighbors.



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