Critical thinking: What’s the ROI?

Young male teacher lecturing in front of a projection screen in a classroom

“Invest a few moments in thinking. It will pay good interest.” While interest earned is is an important concept in finance, we want students to know more than how to calculate the correct answers to problems. We want them to think critically about interpreting problems, designing solutions, and analyzing and evaluating solutions. One of the challenges in an introductory finance course is how to help students learn the tools of analysis, but more importantly to help them understand intuitively what they are doing in that analysis. To that end, every semester I assign each of my students a “real world” company to analyze in three separate exercises in a finance project. First, students gather company information by downloading the financial statements from Thomson Reuters. Second, they calculate historical yearly sales growth rates, identify analyst estimates of growth, and perform a regression analysis of sales growth. Students use the regression output to forecast future sales. Third, students perform discounted cash flow (DCF) analysis using the two estimated sales forecasts. The ultimate goal is to estimate the stock price of their company using the DCF model.

To conduct this analysis and forecast the future and discount those cash flows, they must make many assumptions about specific variables. Once the analysis is done, the student must compare their forecasted stock price to the actual stock price and articulate why the two values may be different. In other words, they must identify the variables that may have affected the stock value by doing a sensitivity analysis. This is the part of the project where many students struggle because they need to think critically about what they have done in the analysis and articulate it in a one-page description backed up by their analysis. It is not the tools of analysis where students struggle, but it is the articulation and understanding of what they did with the tools that is difficult for them.

This is exactly where the eight elements of critical thinking can be integrated into the assignment to help students develop that ability to think critically and thus, better understand intuitively what they are doing in the finance project. To promote this critical thinking, we ask the students to answer the following questions based on the eight elements of critical thinking and incorporate it into their description:

Purpose: What is your goal in doing the discounted cash flow analysis?

Question at Issue: What is (are) the key question(s) you are trying to answer in this project?

Information: What data did you use to answer the question(s) and where did you get it?

Interpretation and inference: Does your evidence and data support the valuation of the company you analyzed?

Concepts: What techniques and concepts did you use to analyze and value your company?

Assumptions: What assumptions did you make in coming up with your calculated value and stock price of your company? Why are your assumptions reasonable?

Implications: Did you perform a sensitivity analysis and what variables from that analysis showed the biggest effect on the stock price? As a result, what is your recommendation about the variables affecting the stock value?

Point of View: From what point of view are you analyzing the stock value? In other words, might there be some inherent biases in your overall analysis? If not, why not?

Then I ask the TAs in the course to grade the assignment using the six “intellectual standards” from the Foundation for Critical Thinking. These are standards that can be used for students to evaluate their own work or critique others’ work or for use in grading a critical thinking assignment. These standards are, (1) Clarity: Can others understand the student’s point? (2) Precision: Is the student’s point specific enough? (3) Relevance: Do the points connect? (4) Accuracy: Is the point correct? (5) Depth: Do the students address the complexity of the topic? (6) Breadth: Do the students cover all KEY viewpoints? I give the TAs a grading rubric to use for this assignment and it makes the assignment much easier to grade.

The eight elements of critical thinking can be integrated into a variety of other assignments in the introductory finance course as well as any other course. The eight elements can be used for case analyses, current events, and class discussions. I assign MyFinanceLab to all students in the course and ask them to articulate the “muddiest point” in any assignment. Then we take some class time to go through some of the critical thinking elements to try to analyze their thinking on the assignment. By consistently using the elements and standards of critical thinking, I hope that my students will become better thinkers and will be able to communicate what they know to a greater extent than when they enter the course.

 

Read Karen’s educator study regarding her use of MyFinanceLab, which shows the statistical increase in achievement.

 

About the Author
Karen Hallows

Karen Hallows

Karen Hallows is a fulltime lecturer in the finance department at the Robert H. Smith School of Business at the University of Maryland since August of 2011. She currently teaches business finance in the undergraduate program. She has published in academic and trade journals in the areas of the economics of education, financial management education, and international business education. Currently, her research is focusing on case writing in financial management and has published 3 finance cases in the Case Research Journal in the past three years. Prior to joining the Smith School, Karen was the director of the executive MBA program, academic director of executive programs, and a finance faculty member at George Mason University from 1998 – 2011.

In 2009, she was awarded one of six GMU University-wide Teaching Excellence Awards and she has received several other School of Management teaching awards while at GMU. Karen has led many short-term study abroad courses to Asia, Europe, Africa and South America. Each year from 2003 – 2009, she conducted a week-long EMBA financial markets residency in New York City. She has conducted many finance executive education seminars and has provided consulting services for corporate and government participants. She served as the Academic Director of the Ford Foundation Business Journalist 4-week summer program held at the University of Missouri from 1987-2000. Karen has an undergraduate degree from Central Missouri State University, a master’s degree from Purdue University and a PhD degree from the University of Nebraska.