Revolutionizing Financial Engineering Education: Simulation-Based Strategies for Learning

Abstract

On May 6, 2010, world financial markets experienced The Flash Crash, which affected trillions of dollars of securities in just mere minutes. Consensus of what caused this dramatic change in the market evaluation of thousands of assets is still not fully understood. To tackle problems like these, financial engineering students need a comprehensive understanding of complex market microsystems. These students must have a multidisciplinary skillset that incorporates an ever- widening array of disciplines to address markets that have grown increasingly tangled. Fundamental understanding of today’s financial markets requires students take courses in statistics, mathematics, computer programing, finance, and economics; however, due to the limited material that a single course can cover, traditional coursework cannot effectively teach the multidisciplinary competencies that are necessary.

In order to reduce the course load yet still learn fundamental financial engineering principles, we suggest taking a constructivist approach using market simulations as teaching tools. Simulations allow financial engineering students to learn the complex nature of markets more comprehensively and effectively by allowing them real-world experience in controlled, guided environments. Research supports their use and has shown simulations engage students and give them real-time knowledge of cause and effect in a complex marketplace. Moreover, they go beyond simply providing factual knowledge to offering students experience operating in the microstructure of markets. This environment also forces students to encounter unanticipated situations that traditional education methods do not allow.

In that spirit, this paper will present the use of simulations in a simulation-based lesson that will teach students how to devise and implement their own trading strategies, as well as give them invaluable experience in integrating the basics of statistics, programing, and design. This paper adds to the body of research that illustrates simulations have the ability to get students emotionally invested in learning and thereby more receptive to the minutia of financial markets and trading techniques. Simulation-based education can augment traditional education methods by providing a learning environment that promotes more skills and techniques to foster better fundamental knowledge.

Keywords: market microstructure, financial engineering, simulation, education

JEL Classification: D40