Statman - Finance for normal people: How investors and markets behave

Finance for Normal People shows that self-knowledge is the most valuable investment skill of all. Meir Statmanone of the founders of Behavioral Financeuses fascinating new research about market imperfections and the psychology of decision-making to navigate normal people through the complexities of investing. The evidence is compelling and the writing is lucid William N. Goetzmann, Edwin J. Beineke Professor of Finance and Management Studies, Yale School of Management

Meir Statman has pioneered the integration of behavioral research with financial analysis. Finance for Normal People makes the insights of behavioral finance available to the ordinary investors, helping them to understand marketsand themselves. Baruch Fischhoff, Howard Heinz University Professor, Carnegie Mellon University, and co-author of RiskA Very Short Introduction

Standard finance theory assumes that investors and traders are rational super-computers, able to take into account all available information and process it logically. But, investors are normal, with normal wants and normal susceptibility to cognitive and emotional errors. Professor Statman has written an excellent guide to how finance actually works in practicenot just in theory. Yet, despite Statmans real-world approach, his book remains rigorous and evidenced by the very best research. Alex Edmans, Professor of Finance at London Business School

Behavioral finance pioneer Meir Statman describes normal people who care about investment profits but also about how investments make them look and feel. Normal people strive to reach many investment goals retirement, education, traveltaking different risks for different goals. Discover how stocks may be mispriced, but the index hard to beat. Learn how to create a portfolio that meets your goals. Terrance Odean, Rudd Family Foundation Professor of Finance, Haas School of Business, University of California, Berkeley

Insights into goals-based wealth management are some of the many insights in Meir Statmans superb book. Normal investors want financial benefits from their investment but they also want expressive and emotional benefits on the way to their life goals. This book should be on the must-read list of investors and financial advisers alike. Jean Brunel, editor of the Journal of Wealth Management and author of Goals-Based Wealth Management

Finance for Normal People is a tour de force. Literally covering the field of Behavioral Finance from A to Z, this is a user friendly book that should be read and on the shelf of every serious financial advisor/manager and all serious investors. Harold Evensky, Chairman at Evensky & Katz and Professor of Practice, Department of Personal Financial Planning, Texas Tech University

A pioneer of behavioral finance, professor Statman is offering us a wonderful book which explores how people actually make financial decisions, what are the salient features of financial markets, and how people could improve their financial decision making. Gur Huberman, Robert G. Kirby Professor of Behavioral Finance, Graduate School of Business, Columbia University

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Published in the United States of America by Oxford University Press

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Meir Statman 2017

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Library of Congress Cataloging-in-Publication Data

Names: Statman, Meir, author.

Title: Finance for normal people: how investors and markets behave / Meir Statman.

Description: New York City : Oxford University Press, 2017.

Identifiers: LCCN 2016041676 | ISBN 9780190626471 (hardback) | eISBN 9780190626495

Subjects: LCSH: Finance, Personal. | BISAC: BUSINESS & ECONOMICS / Budgeting. | PSYCHOLOGY / Applied Psychology.

Classification: LCC HG179 .S8117 2017 | DDC 332.024dc23

LC record available at https://lccn.loc.gov/2016041676

To Navah

You are contemplating a gift to your beloved and wonder whether it should be a red rose or $10, the price of the rose. You are a rational man who knows a bit of finance, so heres your thinking: A rose has no utilitarian benefitsshe cannot eat or drink it. And a rose is a waste. Shell toss it out after a few days, when the petals drop off.

Now, $10 is not a rose by any other name. Your beloved can put the $10 in her savings account, where it would grow to pay for nursing home expenses when shes old. And if she wants to spend the $10 now, what do you know of her preferences, or utility function, as economists call it? Perhaps a bottle of vinegar would maximize her utility function?

Wenormal peopleknow that this kind of thinking might be rational, but it is pretty stupid. Following this script would surely not make you her beloved. Normal people know that roses have no utilitarian benefits, but they have a lot of expressive and emotional benefits. A rose says, I love you. A rose says, Im a thoughtful manyoull do well to marry me. Imagine yourself instead at her doorstep on Valentines Day, holding a $10 bill as your gift.

Well, you say, this is a nice story, but what does it have to do with finance? I say it has much relevance because stocks, bonds, and all other financial products and services are like roses, watches, cars, and restaurant mealsall providing utilitarian, expressive, and emotional benefits. We miss many insights into our financial behavior and the behavior of financial markets when we think of financial products and services as providing only utilitarian benefits.

Behavioral finance is finance for normal people, like you and me. Normal people are not irrational. Indeed, we are mostly intelligent and usually normal-smart. We do not go out of our way to be ignorant, and we do not go out of our way to commit cognitive and emotional errors. Instead, we do so on our way to seeking and getting the utilitarian, expressive, and emotional benefits we want. Sometimes, however, we are normal-foolish, misled by cognitive errors such as hindsight and overconfidence, and emotional errors such as exaggerated fear and unrealistic hope.

This book is about behavioral financefinance for normal people and with normal people. It is about what wenormal consumers, savers, investors, and managerswant as we make financial choices, what we know, think, and feel about financial choices, how we behave, and how our behavior affects financial markets and is reflected in them.

This book is also about the transformation from a normal-ignorant stage to one of being normal-knowledgeable, learning the lessons of behavioral finance and applying them to reduce ignorance, gain knowledge, and increase the ratio of smart to foolish behavior on our way to seeking and getting what we want.