At The Money: Meir Statman on What Investors Really Want, (January 17, 2024)
What do investors really want? Long-term capital appreciation and income are the obvious answers. But, it turns out, they actually want a lot more than that. I speak with Professor Meir Statman of Santa Clara University — he is an award-winning expert on investor behavior and financial decision-making.
Full transcript below.
About this week’s guest: Meir Statman is Professor of Finance at Santa Clara University. His book “What Investors Really Want” has become a classic that explains what drives investors.
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[Musical intro: “You can’t always get what you want.”]
Barry Ritholtz: Long-term capital appreciation and income. If you think that’s all investors actually want, you’re kidding yourself. As it turns out, investors want a lot of things. Many of which have nothing whatsoever to do with money.
I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss what investors really want. To help us unpack this and what it means for your portfolio, let’s bring in Meyer Statman, professor of finance at Santa Clara University. He is an award-winning expert on investor behavior and decision-making. His book, What Investors Really Want, has become a classic that explains what drives investors’ behavior.
So, professor, let’s start with the basics. In your book, you explain investors are motivated Not just by financial returns, but by expressive and emotional benefits. Explain what those are.
Meir Statman: Well, yes, they are. Utilitarian benefits are those risks and especially returns that you just mentioned. But there are also expressive and emotional benefits now. For people in marketing, of course, this is so trivial. All products and services have utilitarian expressive and emotional benefits. Think about automobiles.
Compare a Toyota to a BMW. Both cars will take you from home to work and back. But there is a difference, you know. When you, compare them, you can see that while they have the same utilitarian benefits getting you from one place to another driving a BMW is driving the ultimate driving. A machine.
You say something to yourself and you say something to other people. And there is a zoom-zoom sense of pride when you drive it. I say I drive a Toyota. I say that when I get out of my Toyota in the parking lot. I lock it and move away fast so people will not see my car. But if I had the BMW, I would kind of linger, just making sure that people see me.
The same applies to financial products. People in finance often, regularly, ignore that. Think about Bitcoin. Sure, people who buy Bitcoin buy it for the high returns, but there is more to it. You know, that is, if you are into Bitcoin, you say, I am young, at least young at heart, and you so you, you express yourself this way, and you get those emotional benefits, including perhaps primarily hope that you’re going to strike it rich. That is, the volatility of Bitcoin is really an advantage to those holding them because many consider it their retirement plan. So, think about all other products, financial products, and other products. All of them have those utilitarian, expressive, and emotional benefits. And it’s important for us to identify them.
Barry Ritholtz: So, investors always seem to be looking for a free lunch. They want bigger profits, but at the same time, they want to assume lower risks. You’ve described this as free lunch or no lunch. Tell us about the relationship between “Risk and Reward.”
Meir Statman: I like to say that people want two things in life. One is to be rich, and the other is not to be poor. And those two battle inside us.
And so, for one thing, it is smart to divide the portfolio instead of kind of by risk, you know? Two, two segments. One for being rich, Say in stocks and options, maybe Bitcoin and the other for not being poor in bonds, money market funds and similar, so in this sense, you limit your losses, but you allow yourself a some gain if you are trying to do both of them together.
It is really impossible because it is impossible to invest in riskless stocks, but if you don’t invest in risky things, in risky investments, you are not likely to accumulate enough. unless you are a child of very wealthy parents who are also very generous to you. And so you just have to accept that, that you cannot beat the market and don’t make it an issue of beating the market.
Make it an issue of what is it that you want in life and follow that route.
Barry Ritholtz: So, we’re talking about risk. We’re talking about reward. How does this vary by — by age, by gender, by personality? Does it vary by country or culture? Or is this pretty much the same for all people?
Meir Statman: No, it varies. It varies by all of these. It is not a very strict rules that that is there are men who are very risk averse and women who are not risk averse at all. But generally, women are more risk averse than men. So think for example of the following gamble. Suppose that I say, would you take a 50/50 gamble chance to either double the value of your portfolio or see it cut by 20%? Would you take that that kind of gamble? If you are very risk averse, you would not. If you’re less risk averse, you will. (And you can vary the percentages to kind of get it more precisely calibrated.)
I did that kind of question in 23 countries among students. And what I found was that,in all of them, with no exception, women were less. tolerant, more risk averse, than men. And so that, that really is, is one of those things.
Think about the issue of,personality. There’s a notion of the big five anxiousness. It’s about a conscientiousness. It’s about being outgoing open. What I find is that people who are conscientious. are very good at saving and they’re not very good at taking risk. People who are extroverts are not as good at saving, but they are more willing to take risk. And so, personality does matter.
And, culture matters. That is, if you think about two kinds of cultures that people talk about, being individualistic, as in the United States, or collectivistic, as in China. People are willing to take more risk, in fact, in China than in the United States. And if you ask yourself why, there are two possible answers. One is what is called the cushion hypothesis that because China is collectivistic, people can rely on family. And so if you know that you can take risk on the upside, because if you fall on your face, you can expect your brothers and sisters and cousins and so on to come to your aid. Whereas you cannot expect that generally in the United States, where at least from your brothers, you don’t expect support.
One of the interesting things is that when you have a brother who suddenly has sort of a major liquidity event, say he was part of a startup, and now he is a multimillionaire and you are still working as a regular Joe, and you feel really envious in China.
It is different because you know that those millions of your rich brothers will support you if you fall on bad times. And so all of those things – we’re all the same inside, we are all people, we’re all normal, but a culture gender personality all matter.
Barry Ritholtz: So, how can we perform post-mortems on the financial decisions we made? How can we evaluate our process to make sure that we’re making good decisions?
Meir Statman: One thing is really to be able to step away from yourself, to step away from the bias introduced, say, by pride and regret, and assess your performance objectively. So for example, keep a log of your gains and losses.
Don’t just keep them in your mind because you’re likely to keep track of your gains, but somehow push away your losses. Many people fail to realize losses because this allows them to think that those losses are not really losses. The other thing is to use science – that is not to reach general conclusions from very small samples from experiences.
I, for example, play an investment game with my students when I teach an investment class on. So I let them invest in whatever they want, and I just invest in the total stock market index fund. Now they really want to draw very great conclusions from how well they did. Then they say things like next time, I will not buy this stock. Of course, that stock went down.
And I tried to impress on them that the way they should do that is not just judge their performance or their portfolio. Look at the overall portfolio and what you’re going to find, I say, is that some people had some elaborate logical strategies, in fact, ended up towards the bottom. Some people who worked on luck alone ended up on top. So the reason I invest in the total stock market is because I know something about the science of finance. I know the benefits of diversification. I know the dangers of judging from small samples.
Barry Ritholtz: So to wrap up, investors want more than just capital appreciation and income. We want to feel validated by our choices. We want to avoid. Regret, and we want to show off our status. But these non-financial factors can lead to decisions that may not be in our best interest. We need to be aware of this and avoid those poorly motivated emotional decisions.
I’m Barry Ritholtz. And this is Bloomberg’s at the Money.