Behavioral Finance: The Second Generation

by Meir Statman

Behavioral finance presented in this book is the second-generation of behavioral finance. The first generation, starting in the early 1980s, largely accepted standard finance’s notion of people’s wants as “rational” wants—restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational”—succumbing to cognitive and emotional errors and misled on their way to their rational wants. The second generation describes people as normal. It begins by acknowledging the full range of people’s normal wants and their benefits—utilitarian, expressive, and emotional—distinguishes normal wants from errors, and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People’s normal wants include financial security, nurturing children and families, gaining high social status, and staying true to values. People’s normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing, and market efficiency.

Genres: Economics, Finance, Psychology

246 pages, Paperback

Published December 2, 2019

About the author

Meir 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. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets.

The questions he addresses include: What are the cognitive errors and emotions that influence investors? What are investor aspirations? How can financial advisers 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?

Meir’s research has been published in the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, the Journal of Financial and Quantitative Analysis, the Financial Analysts Journal, the Journal of Portfolio Management, and many other journals. The research has been supported by the National Science Foundation, the Research Foundation of the CFA Institute, and the Investment Management Consultants Association (IMCA). Meir is a member of the Editorial Board of the Financial Analysts Journal, the Advisory Board of the Journal of Portfolio Management, the Journal of Wealth Management and the Journal of Investment Consulting, an Associate Editor of the Journal of Financial Research, the Journal of Behavioral Finance, and the Journal of Investment Management and a recipient of a Batterymarch Fellowship, a William F. Sharpe Best Paper Award, a Bernstein Fabozzi/Jacobs Levy Outstanding Article Award, a Davis Ethics Award, a Moskowitz Prize for best paper on socially responsible investing, two Baker IMCA Awards, and three Graham and Dodd Scroll Awards. Meir consults with many investment companies and presents his work to academics and professionals in many forums in the U.S. and abroad.

Meir received his Ph.D. from Columbia University and his B.A. and M.B.A. from the Hebrew University of Jerusalem.

Reviews

[Thomas · Rating 3 out of 5]

"People want three types of benefits - utilitarian, expressive, and emotional - from every activity, product, and service, including financial ones."

Meir Statman looks back at a rich history of publications, fighting the orthodox yet myopic standard finance theories since the 1980s. En route he questions (and rejects) many dearly held notions about 'homo economicus.' By encouraging his readers to know themselves, the author wants us to make smarter financial decisions.

"It might be time to move on to a positive theory that is consistent with the evidence, and to remember that a normative theory is useless if investors cannot be persuaded to follow it."

[Nick Clark · Rating 4 out of 5]

An extraordinarily cogent (and at times even humorous) exposition from one of the founders of the field of behavioural finance.

[Grant Weaver · Rating 4 out of 5]

Why do humans make mistakes in finance? Humans are quite prone to errors. It's neat to see how terrible from a psychology perspective, humans are with money. I wish they would have more on how to combat these errors, besides just mentioning them.