This week on our Masters in Business radio podcast, we sit down with Meir Statman, Santa Clara University Professor of Finance Professor of Finance, author of numerous books on the behavioral aspects of investing, including What Investors Really Want: Know What Drives Investor Behavior and his latest book, Finance for Normal People: How Investors and Markets Behave.
He tells of being an MBA student at Hebrew University of Jerusalem, where Danny Kahneman and Amos Tversky were doing their groundbreaking research one building over. As a broke grad student, he often participated in some of the psychology department’s experimental studies. He eventually shifted his focus from Finance to Behavioral Economics
He was one of the early researchers into Behavioral Economics, especially how it applied to investors. He is able to contextualize the development of the field, especially as it has gotten (ever so slowly) applied to finance and investing. Statman discusses the wild “over-reaction” to his earliest papers on human behavior and finance — people threatened to boycott the finance journal over his “heretical” presentation. Since then, the field has not only become accepted, his research and papers on behavioral economics have won numerous awards.
His book What Investors Really Want is a look at how rational, utilitarian decision-making is so often replaced with emotional choices that satisfy other (non-pecuniary) needs. He explains the way people look for expressive and emotional benefits beyond the mere utilitarian of profit maximization in their investments — self-validation, ego-gratification, social status seeking — none of which has anything to do with one’s portfolios returns.
His latest book Finance for Normal People, he looks at what Behavioral Economics has called “irrational” and instead describes this as “normal.” Its not that people make “stupid decisions,” but rather, it is that they engage in “normal human decision-making.” That leaping off point leads to a way of thinking about investing that is quite different than most other investment psychology.
He describes the challenges of having the great financial historian, economist and educator Peter L. Bernstein (Against the Gods) as his mentor.
All of the books Statman discusses can be found here.
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Next week, we speak with Michael Zezas, Morgan Stanley’s Chief Municipal Bond Strategist.