Finance for Normal People: How Investors and Markets Behave

I have had the great pleasure of talking with and listening to Meir Statman on a number of occasions. I also enjoy reading his insights on how we, the people, are more normal than we think, even when we think we’re doing something wrong, when it comes to our money and finances.

I’ve had this book on pre-order since late 2016 when I first heard it was coming out knowing that it would be chocked full of gems and insights. He describes this work as follows: “Behavioral financed presented in this book is a second generation behavioral finance. The first generation, starting in the early 1980’s, 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 on the way to satisfying their rational wants. The second generation describes peoples as normal. Acknowledging the full range of people’s normal wants from errors … distinguishes normal wants from errors, and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants.”

Statman then walks us through what normal is like. I think people will begin to recognize a lot of themselves as they go through chapter by chapter. The puzzles presented in Chapter 7 were of particular interest: Dividend Puzzle (preference for stock dividends for income), Disposition Puzzle (realize gains quickly, but procrastinate on losses), dollar-cost averaging puzzle (investing a sum of money they presently have slowly rather than all at once), and the Time Diversification Puzzle (belief that risks from stocks decline as time grows longer).

Statman describes how a “Behavioral Portfolio” should be constructed and contrasts portfolio theory, standard life-cycle theory, and behavioral life-cycle theory as concepts to consider when we develop savings and spending plans. He also explains the why so many investors believe that markets are easy to beat, when, in truth, beating the markets is actually very hard to do with widely available information rather than narrowly available information.

Find out about “normal-smart,” “normal-foolish,” “normal-ignorant,” and “normal-knowledgeable.” We are all, with part of us, all of those states of mind and behaviors when we do different things at different times. Meir Statman will transform how you think about yourself, your money, and your finances as he turns on the lights in your mind to illuminate how we are indeed normal and what to do about that. I think you’ll enjoy reading his work as much as I do.

Photo source: “Finance for Normal People: How Investors and Markets Behave” by Meir Statman

 

About Larry Frank, Sr.

Larry R Frank Sr., MBA, CFP®, is an experienced financial advisor and a published author on Retirement Planning Research. Have a financial question? Click Here to Ask Larry

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