When I was a college senior in the middle of the last century I took a senior year elective, a one semester course in Experimental Psychology. I had to get waivers for lower level prerequisites in the subject that caused me some trepidation as I attended the first classes. However, after I got used to the extra work entailed in researching terminology, definitions and concepts from the lower level courses, I found that I really enjoyed the study of how one went about making experimental investigation and characterization of how people reasoned, felt and behaved.
I had a kind of déjà vu experience as I read ‘What Investors Really Want’ by Meir Statman (McGraw-Hill, 2011). Prof Statman is Glenn Klimek Professor of Finance at Santa Clara University and Visiting Professor of Finance at Tilburg University – Netherlands. The book brought back the same intrigue I felt a half a century ago in the college course.
Why do people do what they do? When it comes to investors, they sometimes do things that seem to border on the irrational. I found myself marveling at the tales, both experimental and anecdotal, that fill this book.
And then I started to notice that some of the behaviors documented were the same or similar to things I had done or had thought of doing and somehow avoided. At this point in my life I think I have avoided some of the pitfalls more by luck than by much in the way of psychological insight. And mistakes I have made that I found recounted in this book came burning back into my consciousness. And those mistakes that had proven to be costly were not made any easier to rationalize by learning that others had gone down the same paths.
Statman has produced an eminently readable book. The organization of the material is excellent in two almost diametrically opposed ways: Each section and chapter flows effortlessly into the next and yet one can also totally absorb the material with variably spaced short reading sessions. I found that, on those occasions that I didn’t pick the book up for a couple of days, I was able to start right back in at the previous break point and continue with full understanding of the new material and recall, as appropriate, what I had read days earlier.
Some readers may criticize Statman for not going further into giving more ideas about how one should invest to be successful. However, I believe that would actually diminish the overall merit of what he has done. He does describe how many investors are better served by index investing than by trying to chase winners and gives details about some of the psychology that produces urge to ‘chase the winners’. He also discusses in a summary way the concept of diversification and of portfolio balancing. However, he doesn’t overly proselytize on these topics. These topics are discussed with just enough detail that Statman can effectively describe relationships to human behavior.
Statman ventures into the effects of such variables as culture, mental conditioning by seemingly minor circumstances and the influence of following the herd. He brings in stories of how human behavior influenced various financial stress events, such as stock market crashes and the banking credit/debt crisis of 2007-08. We come to see that some of the effects that separate humans from the wealth they could acquire by logical processes are shared by titans of finance, the relative novice investor and all levels of sophistication in between. I came to the feeling that logically speculators and investors should be residing in two different groups but the two kinds of sheep keep wandering out of their respective pens. And there are wolves outside the pens.
I cannot begin to enumerate all of psychological pressures faced by investors that Statman brings to the table in ‘What Investors Really Want’. I’ve tried to mention a few, but what I can say in a few hundred words doesn’t begin to describe the breadth of material he addresses. The best thing I can do is say that in reading this book you will have a lot of ‘a ha!’ moments as you relate various points to those you know and to your own experiences. If you can’t find yourself in this book many times then you simply aren’t paying attention.
Ego and Riches by Meir Statman