Stories | July 8, 2015

What Pinocchio can teach us about managing money

Children’s books can carry lessons for people of all ages.

And the Italian tale of the little wooden puppet Pinocchio is no exception.

It’s not just a story warning about the bad effects of telling lies.
The full version demonstrates some basic principles of investment associated with risk and return and the need to be aware of scams.

Is their nose growing?
The relationship between financial risk and returns on investments is explained here in a traditional way.
But in The Adventures of Pinocchio, the characters of a fox and a cat illustrate the principle in a more creative way.
The fox and the cat promise Pinocchio a fabulous return on his investment.
They say the wooden puppet needs to go to the Land of Barn Owls (Paese dei Barbagianni in Italian). Then he must bury his golden coins in the Field of Miracles (Campo dei Miracoli).

Value can go down as well as up
In the children’s tale, the message is delivered by a cricket who warns Pinocchio: “Don't trust, my boy, to those who promise to make you rich in a day. Usually they are either mad or rogues!”
As you might expect, this is more colourful than the usual warning on investment products -- that their value may "go down as well as up".
However, it is advice that Pinocchio doesn’t follow. He loses all his money.

Pinocchio was not the only one telling lies
Pinocchio might have asked a few more questions about the “field of miracles” but he too readily trusts a fox and cat, who are clearly intent on taking his money.
By not asking enough questions of and trusting these rogues, Pinocchio is tricked and, like many before him, falls for something like a Ponzi scheme.
One of the messages of this children’s book then is that it’s important to ask not only about risk and returns but also if the group offering them can be trusted.
If you want to read more, online versions of Pinocchio are readily available, including here.

eZonomics team
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