I’m sure many of you are aware of the work of Dr. Meir Statman, Ph.D., the Glenn Klimek Professor of Finance at the Leavey School of Business at Santa Clara University and an award-winning pioneer in the field of behavioral finance (visit his blog at http://whatinvestorswant.wordpress.com).
He recently stepped outside the academic community to explain the science of investor behavior in a way that is accessible to everyone. What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions is a book I highly recommend financial planners read and then pass along to their clients. Here’s why:
In What Investors Really Want, Statman uses an engaging, middle-ground approach to help “normal” people understand the thoughts, needs and emotions that drive the financial decisions they make. He describes his unique perspective in this way:
“Standard finance proclaims that investors are rational people, free of cognitive errors. On the other hand, much of behavioral finance says that investors are irrational, beset by a host of cognitive errors. Lost in the middle are normal investors like you and me. We are intelligent people, neither rational nor insane. We are ‘normal smart’ at some times and ‘normal stupid’ at others.”
As a framework for this discussion, Statman clearly defines the three types of benefits we all (financial planners and clients alike) derive from our investment choices:
Utilitarian benefits answer the question, “What will this investment do for me?” This is an objective evaluation based on the likelihood of increasing wealth via investment returns.
Expressive benefits answer the question, “What does this investment say about me?” In other words, what does this investment convey to me and to others about my values, tastes and status?
Emotional benefits answer the question, “How does this investment make me feel? Examples of positive emotions include excitement, hope and pride; whereas examples of negative emotions include regret, fear and shame.
Statman further explains that we can view these benefits in terms of what we should do versus what we want to do. For example, the investment advice you deliver to your clients is likely full of shoulds—save more, spend less, diversify, buy and hold—which emphasize the utilitarian benefits of investments. On the other hand, most individuals’ wants are more visceral and emphasize the expressive and emotional benefits of investments.
In exploring these and other motives, Statman offers advice and concrete lessons on how priorities can be set to help make tough decisions. In addition, he explains how age, gender, genetics and personality affect investment decisions and how people of different countries and cultures think about risk and return as well as poverty and wealth.
Lastly, Statman reminds us all that “investments are about life beyond money.” And, in the end, “we cannot take our investments with us.” Therefore, he encourages his readers to understand, embrace and enjoy all three benefits that investments provide—utilitarian, expressive and emotional.