This is an extended version of the profile that appeared in the May issue of Investment Advisor, part of AdvisorOne's Special Report profiling this year's members of the IA 25, the most influential people in and around the advisor universe. See the complete list and Special Report schedule for extended profiles of all the 2011 members of the IA 25.
We’ve heard many different definitions for behavioral finance, but none so succinct.
“Behavioral finance is finance with normal people in it,” Meir Statman says matter-of-factly. “Sometimes we are normal-smart and sometimes we are normal-stupid.”
Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University and Visiting Professor at Tilburg University in the Netherlands. His research focuses on behavioral finance (obviously), and he attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets.
“What differentiates me from some of my colleagues in behavioral finance (and much of the application of behavioral finance among advisors) are their focuses on errors with little consideration of wants,” he says. “What we all need to realize is that these decisions are made on the way to getting what they want. We have to understand that this is the engine that drives the train, and the train’s cars are the biases and baggage they bring.”
For example, a common advisor complaint, he says, is that investors trade too much. But what if this is done because they simply enjoy the act of trading, like a skier enjoys skiing and akin to the same sort of thrill?
“Once we figure out what people want and why they want it, it gives advisors a powerful tool over and above a lecture about what advisors might feel is destructive behavior,” he says.
Meir's latest book, "What Investors Really Want," seeks to answer the following questions:
- What are the cognitive errors and emotions that influence investors?
- What are investor aspirations?
- How can financial advisors and plan sponsors help investors?
- What is the nature of risk and regret?
- How do investors form portfolios?
- How successful are tactical asset allocation and strategic asset allocation?
- What determines stock returns?
- What are the effects of sentiment?
- How successful are socially responsible investors?
Think you—and your clients—might be interested in the answers?
At one point (Chapter 16) Statman advocates for regulation to help drive positive behavior, but he recognizes the line between paternalism and libertarianism.
“Elizabeth Warren wrote that if we regulate lawn mowers, we should probably regulate mortgages as well,” he says. “This is something with which I happen to agree. But this is different from saying a mutual fund company can only charge a certain amount.”
We can only hope regulators and legislators recognize the difference.
Read more about the rest of the IA 25.
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