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Speaker 1: What could your future hold more than you think, Because

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Speaker 1: Fenner and Smith Incorporated, a Registered Broker Dealer member s

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Speaker 1: I PC. This is Masters in Business with Barry Riddholts

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Speaker 1: on Bloomberg Radio. This week. On the podcast, I have

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Speaker 1: an extra special guest. He is Professor Meyer Stateman of

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Speaker 1: Santa Clara University, and really he completes our cycle of

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Speaker 1: behavioral economists, beginning with Professor Schiller, going on to Sailor

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Speaker 1: Ekonoman and now Stotman. We've essentially hit for the whole cycle. UM.

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Speaker 1: He's written a number of books on behavioral economics. He's

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Speaker 1: advised a number of financial institutions UM, both in real

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Speaker 1: life and online versions. Uh. He is extremely knowledgeable about

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Speaker 1: not just behavioral economics, but contextualizing the development of this

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Speaker 1: field relative to finance over the years. And I really

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Speaker 1: enjoyed the way he described first generation, second generation and

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Speaker 1: in the not too distant future third generation behavioral economics,

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Speaker 1: because it shows how our understanding of homo economists, of

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Speaker 1: of humans as perfectly efficient, rational profit maximizers, how that

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Speaker 1: model was so far off, how we began to recognize

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Speaker 1: it being often And you'll hear in the podcast portion

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Speaker 1: the discussion of how one of his first papers back

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Speaker 1: in generated so much pushback. It was one of the

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Speaker 1: first behavioral economics papers published in a major nal of finance.

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Speaker 1: People threatened to never submit a paper again. And it's

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Speaker 1: really fascinating how the world has caught up. It only

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Speaker 1: took so you go back to what is it thirty years,

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Speaker 1: thirty plus years before the world of finance has gotten

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Speaker 1: up to academia. I found him to be charming and delightful,

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Speaker 1: and I think you will as well. So, with no

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Speaker 1: further ado, my conversation with Professor Meyer Stateman. This is

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Speaker 1: Master's in Business with Barry Ridholts on Bloomberg Radio. I'm

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Speaker 1: Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio.

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Speaker 1: My extra special guest today is Professor Meyer Stateman. He

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Speaker 1: is the Glenn Clinic Professor of Finance at Santa Clara University.

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Speaker 1: If you follow behavioral finance. You should certainly be familiar

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Speaker 1: with his work. His research has been published in the

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Speaker 1: Journal of Finance, Review of Financial Studies. He's won numerous awards,

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Speaker 1: Bill Sharp Best Paper Award, Bernstein Fabazzi, Jacob Leavy Outstanding

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Speaker 1: Article Award, the Moscow It's Prize, the MacArthur Industry Pioneer Award,

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Speaker 1: i am c A Journal Awards, and three Graham and

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Speaker 1: Dot Awards. He is on the Wealth Front Investment Advisory Board,

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Speaker 1: and he was named one of twenty five most influential

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Speaker 1: people by Investment Advisor Meyer Stateman. Welcome to Bloomberg. Delighted

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Speaker 1: to be with you, Barry So. By the way, that

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Speaker 1: is really the short version of your curriculum, Vita. I

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Speaker 1: could go on and on about um, lots and lots

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Speaker 1: of stuff, but let's jump into it because you have

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Speaker 1: such an interesting background and your work is so fascinating. Um,

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Speaker 1: you were at the University of Jerusalem, and also at

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Speaker 1: the University of Jerusalem were Danny Kahneman and Amos Tversky.

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Speaker 1: Did your time their overlap at all with theirs? Death

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Speaker 1: is a very interesting question. Yeah, it is the Hebrew

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Speaker 1: University of Jerusalem and and and the Economics building where

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Speaker 1: I studied is right next to the psychology building, and

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Speaker 1: and during my studies I earned pocket money by walking

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Speaker 1: over to the psychology department and serving as a guinea

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Speaker 1: pig for experiments. It turns out that these were not

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Speaker 1: by Karman and Trusting themselves. When I talked to them

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Speaker 1: and identify them, it was others. But I had no

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Speaker 1: idea of who they are, and I had no idea

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Speaker 1: of their work. And and it can tell you that

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Speaker 1: that while there were just feet separating the two buildings,

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Speaker 1: the world that separated psychology and economics and finance was

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Speaker 1: really very very tall, like some other wall I will

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Speaker 1: not mention well. In the Undoing Project, which Michael Lewis

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Speaker 1: just published last year, he said he spent a lot

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Speaker 1: of times speaking to people at the university, and I

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Speaker 1: guess later in their careers there were some really fascinating

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Speaker 1: tales about about the two of them. I think your

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Speaker 1: age difference you might have been sort of in between

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Speaker 1: that just before they they became quite famous. Death is right. Yeah,

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Speaker 1: I became aware of their work really at the very

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Speaker 1: beginning of nine, when I came to Santa Clarian University

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Speaker 1: and I met her cheffering and her cheffering now of

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Speaker 1: his work, of their work through a Dick Taylor when

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Speaker 1: they were both at Rochester, and from that it was

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Speaker 1: off to the races, to say the least. So, so

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Speaker 1: let's get into a little bit about um finance and psychology.

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Speaker 1: You have an m b A. But you also have

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Speaker 1: spent a lot of time in the world of psychology.

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Speaker 1: How do you go from studying finance, how do you

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Speaker 1: morph towards towards the psychology side of it? Well, I've

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Speaker 1: always been interested in human behavior any any time when

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Speaker 1: I think about my childhood, and then I thought that

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Speaker 1: learning about economic behavior would tell me a whole lot.

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Speaker 1: It did, And I always felt that there was something

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Speaker 1: missing in those models, but I could not identify precisely what.

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Speaker 1: And it was only kind of thing in hindsight that

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Speaker 1: I can see how things come together. Uh. And it

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Speaker 1: was of course the work of khanmon In firs Key

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Speaker 1: that creative structure, and I could see the connection between

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Speaker 1: what they were doing and what it is that I

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Speaker 1: had in mind. So, so let's talk a little bit

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Speaker 1: bit about where economics misses the human behavioral side. How

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Speaker 1: did we ever begin with the assumption that humans or

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Speaker 1: rational profit maximizing actors. If you spend any time with humans,

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Speaker 1: it's pretty clear they're not especially rational. Well, that too

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Speaker 1: is a very interesting question, because I wrote a paper

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Speaker 1: that led me to go back to all the issues

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Speaker 1: of the genre finance and the financial analysts, you know,

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Speaker 1: And if you look at stuff that was written in

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Speaker 1: it's very clear that people in finance knew about human behavior.

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Speaker 1: For example, I saw an article that wrote about the

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Speaker 1: reluctance of people to realize losses and how they they

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Speaker 1: just hope against hope that it will come back, and

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Speaker 1: and and that author tried to persuade them that tax

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Speaker 1: considerations should drive them to realize their losses. Well, that

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Speaker 1: was really lost once we got to Miller and Modigliani

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Speaker 1: and the rational view of finance that fit in simple

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Speaker 1: mathematical models. And then it became the models became sort

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Speaker 1: of the jail of people, and and people were cut

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Speaker 1: and quartered to fit into the models rather than the

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Speaker 1: models expanding to fit what people really are. So that

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Speaker 1: naturally leads to the question, um our markets really efficient?

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Speaker 1: And is the efficient market hypothesis is it truly valid? Well,

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Speaker 1: there's great confusion about this issue of market efficiency. Uh,

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Speaker 1: there's a claim that behavior finance great contribution is to

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Speaker 1: show that markets are not efficient. That I think is

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Speaker 1: not so. There are two concepts, two notions of market

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Speaker 1: efficiency there are that are regularly confused. One is the

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Speaker 1: notion that efficient markets and markets were price equals value,

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Speaker 1: and the other is the notion that markets are hard

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Speaker 1: to beat. Now. Price equal value markets, for example, do

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Speaker 1: not allow for bubbles because bubbles imply divergence of price

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Speaker 1: from value. But knowing that you will have bubbles does

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Speaker 1: not mean that you know when they occur when it

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Speaker 1: is time to actually take advantage of them. Coming up,

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Speaker 1: we continue our conversation with Professor Meyer Stateman discussing Finance

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Speaker 1: for Normal People. I'm Barry Ritolts. You're listening to Masters

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Speaker 1: in Business on Bloomberg Radio. My special guest today is

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Speaker 1: Professor Meyer Stateman. He teaches at Santa Clara University, focusing

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Speaker 1: on finance and behavioral economics. UM, so let's talk about

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Speaker 1: your most recent book, Finance for Normal People. I have

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Speaker 1: to ask you about the title. How did that come about? Well,

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Speaker 1: I've been speaking for a long time about people as normal.

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Speaker 1: People like me, people like you, people like your listeners.

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Speaker 1: The The history of the field is that we start

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Speaker 1: with the standard rational people, people who are immune to

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Speaker 1: cognitive errors, people who look only for risk and return

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Speaker 1: when they choose products, financial products, financial services. Then we

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Speaker 1: moved to the first generation of behavioral finance, where we

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Speaker 1: declared people irrational. Uh, subject to all kinds of cognitive errors.

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Speaker 1: They are overconfident, they are suffering from hindsight bias, and

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Speaker 1: so on. Almost people are stupid. Uh. What I say

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Speaker 1: is that I'm not stupid. You're not stupid. Your listeners

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Speaker 1: are not stupid. We are normal. Sometimes we behave in

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Speaker 1: foolish ways, but normal people have normal wants. And you

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Speaker 1: can see that in ads or financial services companies. You

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Speaker 1: see a grandfather and and and a grandchild. Uh, they

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Speaker 1: are fishing together. Uh. This tells you what is the

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Speaker 1: money for? You know, we we we talked about how

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Speaker 1: you make the most money, But what is the money for.

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Speaker 1: It is for the financial security of the grandfather. It

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Speaker 1: is for the ability of that grandfather to help his

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Speaker 1: grandchild and so on. So one of the things that

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Speaker 1: people care about is financial security. Another thing they care

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Speaker 1: about is family. And once you begin with what people want,

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Speaker 1: then you can ask yourself. What kind of mistakes do

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Speaker 1: people make on the way to what they want? And

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Speaker 1: this is really where cognitive and emotional errors come in.

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Speaker 1: So so what I'm hearing from you is that investors

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Speaker 1: should be goal oriented, not merely money oriented. It and

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Speaker 1: the money itself should serve a certain purpose. And that's

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Speaker 1: what you're working towards, not just how could I maximize

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Speaker 1: what my stock participation on my precisely precisely that the

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Speaker 1: question is what is the peney for? Uh? And people

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Speaker 1: don't stop and ask this question, you know. I I

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Speaker 1: kind of joke about about an investor who comes to

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Speaker 1: his advisor, UH in early two tho nine, and the

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Speaker 1: advisor all shaking, of course, and the advisor says, what

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Speaker 1: they're complaining about? I put you on the efficient frontier. Well,

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Speaker 1: of course we know exactly what he is complaining about.

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Speaker 1: He is complaining because he is no longer sure that

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Speaker 1: promised himself to do. Uh. So we have to be

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Speaker 1: is that normal people want? And this is why call

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Speaker 1: the book Findance for normal people. So in the book

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Speaker 1: common wants and desires. But that raises a question, can

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Speaker 1: investors really get everything that they want? No, investors, we

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Speaker 1: cannot get everything we want. We have of course trade offs.

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Speaker 1: We can. We can give money to charity, uh, and

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Speaker 1: that is going to feel good, and that is going

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Speaker 1: to be consistent with our values, but it might if

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Speaker 1: we give too much. Imperial our financial security and that

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Speaker 1: is one thing that we want as well. And so

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Speaker 1: you can see that there are many competing ones. And

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Speaker 1: one of the things that we do in life, of

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Speaker 1: course is balance them and ask ourselves what is most important.

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Speaker 1: And that really matters also to people who are older

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Speaker 1: people who ask themselves, of now what am I going

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Speaker 1: to do with that money? We have used become used

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Speaker 1: to saving. We are good at saving if we already

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Speaker 1: have saved a good amount, but now we find that

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Speaker 1: terrific difficult to spend. So what they're going to spend

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Speaker 1: the money on? And and some people live as if

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Speaker 1: they are poor when they have a ton of money

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Speaker 1: because they've learned to save, but they've never learned to send.

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Speaker 1: That raises an interesting question. We see this all the

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Speaker 1: time in that people who who start out very risk

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Speaker 1: embracing very aggressive they start businesses, they're entrepreneurs, they start companies,

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Speaker 1: and they're used to taking a lot of risk, and

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Speaker 1: suddenly they're sixty years old, they've sold their business, they're

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Speaker 1: thinking about philanthropy, retirement, wealth, generational transfers, and you it's

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Speaker 1: very challenging to get them to wreck nies. They shouldn't

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Speaker 1: be taking as much risk. They should become a little

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Speaker 1: more conservative because they've already they've already hit the jackpot.

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Speaker 1: They don't need to to embrace more risk. And that's

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Speaker 1: a really challenging transition. How do you get people to

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Speaker 1: recognize that their needs and wants change over time. Well,

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Speaker 1: I think that people need to be reflective, and people

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Speaker 1: need to be helped in becoming reflectives. An advisor can

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Speaker 1: help them do that. I mean, here, here's a personal story. Uh,

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Speaker 1: my wife and I flew to Israel a few months ago.

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Speaker 1: We bought coach tickets and we were on the weightlist

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Speaker 1: for upgrade. It would have cost us six hundred dollars

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Speaker 1: a piece each way to get us too from California

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Speaker 1: to You should have spent the money so so we

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Speaker 1: were not upgraded. Uh so we decided that we are

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Speaker 1: old enough and well off enough to buy regular business

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Speaker 1: class tickets, even though you know, I feel a bit

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Speaker 1: like like a fold because it costs four or four

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Speaker 1: five times flight. Who needs exactly? If you can afford

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Speaker 1: it and your kids are taking care of and so on,

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Speaker 1: what will you do with that money? So you have

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Speaker 1: to figure out what matters to you. This is one example.

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Speaker 1: In another example, we decided to buy a regular car

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Speaker 1: and donate the savings relative to a prestige car to

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Speaker 1: charity because it gives us more pleasure and they're going

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Speaker 1: to feel awkward in one of those luxury cars. That's interesting.

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Speaker 1: So really you're raising the point, how should investors and

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Speaker 1: indeed families who are putting together a household budget, how

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Speaker 1: should they prioritize their wants and needs exactly? And that

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Speaker 1: is true for the saving stage, the working life, as

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Speaker 1: well as the retires stage. Coming up, we continue our

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Speaker 1: conversation with Professor Meyer Stateman of Santa Clara University discussing

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Speaker 1: what investors really want. I'm Barry Ridhults. You're listening to

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Speaker 1: Masters in Business on Bloomberg Radio. My special guest today

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Speaker 1: is Meyer Stateman. He is the Glenn Clinic Professor of

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Speaker 1: Finance at Santa Clara University. He is also the author

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Speaker 1: of Finance for Normal People. His previous book, What Investors

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Speaker 1: Really Want Know What Drives Investor behavior and makes Smarter

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Speaker 1: financial Decisions is highly regarded and available on Amazon or

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Speaker 1: your favorite book bookseller. Let's talk about what investors really want?

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Speaker 1: You know. We briefly touched upon economic rationality um before,

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Speaker 1: but that kind of demands that investors seek utilitarian benefits

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Speaker 1: from investing. That doesn't really seem to be how people operate.

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Speaker 1: We're not just measuring risk and putting it up against

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Speaker 1: potential reward, are we? That is right. We we do

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Speaker 1: look for utilitarian benefits. We do look to increase our

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Speaker 1: wealth at the level of risk that is right for us.

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Speaker 1: But we also look for expressive and emotional benefits. You know.

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Speaker 1: I like to tell the story of a man who

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Speaker 1: is considering whether to give his beloving a red rose

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Speaker 1: or ten dollars, which is the price of that row.

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Speaker 1: As well, A rational man would say, why not give

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Speaker 1: her ten dollars? This way she can choose what she wants.

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Speaker 1: A rational single man, a rational single married man knows

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Speaker 1: better those who are still married. Yeah. So, so the

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Speaker 1: idea is, and let's bring this back to investing. There

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Speaker 1: are expressive and emotional benefits to what we do with

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Speaker 1: our money that go over and above the mere utilitarian

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Speaker 1: function of it. Is that a fair way to absolutely

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Speaker 1: and so and so I think think about about donations

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Speaker 1: to charity. When you donate to a charity, you give

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Speaker 1: up utilitarian benefits of money that you just donated. But

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Speaker 1: hopefully you get a sense that you are true to

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Speaker 1: your value, that you have done good for people who

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Speaker 1: don't have as much as you do, and that is

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Speaker 1: sufficient compensation in expressive and emotional benefits for the utilitarian

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Speaker 1: benefits that you lose. So let's let's again let's talk

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Speaker 1: about some things. Um, the sort of emotional benefits investors get.

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Speaker 1: A positive one you mentioned previously was security and the

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Speaker 1: ability to help the next generation in their family as

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Speaker 1: well as as well as philanthropy. But but I want

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Speaker 1: to talk a little bit about what I like to

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Speaker 1: call the cocktail party factor. And we see less of

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Speaker 1: this today than perhaps we used to. If you remember

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Speaker 1: in the ninety nineties, you couldn't go to a cocktail

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Speaker 1: party or a barbecue or a dinner party where all

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Speaker 1: the people outside of the industry, the finance industry, all

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Speaker 1: they could talk about was their favorite stock, what they

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Speaker 1: were buying, how much money they were going to make.

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Speaker 1: We saw something similar in the two thousands with at

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Speaker 1: least the first half with houses and this and that. So,

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Speaker 1: what is the emotional benefit of being able to chat

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Speaker 1: about your stock picking prowess, how great your hedge fund

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Speaker 1: manager is, etcetera. What what is the value of that

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Speaker 1: irrational or not to investors? Well, what is the value

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Speaker 1: of solving puzzles? Uh? You know if if you fun

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Speaker 1: entertainment exactly, and and so for for lots of people,

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Speaker 1: it is fun entertainment and also demonstration of their ability

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Speaker 1: off their smarts, and so I can pick stocks that

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Speaker 1: are going to beat the markets. TIChE is that it is.

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Speaker 1: It is a self satisfaction. It is an image of

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Speaker 1: myself as a competent person and a demonstration to other

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Speaker 1: people that I'm a competent person. And so I invest

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Speaker 1: sometimes in individual stocks which I don't. But but but

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Speaker 1: if that typical person you're talking about, uh, most likely

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Speaker 1: tells others only of those stocks that went up, uh,

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Speaker 1: not those that went down because he's trying to demonstrate

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Speaker 1: competence to himself but also to other people. That selection

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Speaker 1: selective retention. Uh, people only remember their winners, they don't

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Speaker 1: remember their losers. Do that. Yeah, well they have not

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Speaker 1: really lost anything because they have not realized that loss yet.

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Speaker 1: So so let's talk a little bit about um some

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Speaker 1: other ways this manifests itself. We see index funds gaining

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Speaker 1: in popularity. Uh, that doesn't really give people much to

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Speaker 1: talk about at at dinner parties. How does the rise

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Speaker 1: of indexing chan enge investor behavior? Well, I think I

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Speaker 1: think that finally people are getting the point that if

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Speaker 1: you are a typical individual investor, markets are difficult to beat.

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Speaker 1: Their hard to beat. Yes, hedge fund managers do beat them,

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Speaker 1: but you do not. And so people are moving towards

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Speaker 1: index funds and in in an odd way, Uh, they're

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Speaker 1: getting the same kind of satisfaction of feeling clever, feeling

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Speaker 1: smart by buying index funse. That is what I do.

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Speaker 1: That is, I look at people who try to play

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Speaker 1: the market, and I think about them as idiots, and

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Speaker 1: I take pleasure and being smart enough not to waste

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Speaker 1: my money on attempts to beat the market. Coming up,

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Speaker 1: we continue our conversation with Professor Meyer Stateman of Santa

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Speaker 1: Clara University discussing the details of behavioral finance. I'm Barry Ridholts.

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Speaker 1: You're listening to Mass Teas in Business on Bloomberg Radio.

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Speaker 1: My guest today is Professor Meyer Stateman of Santa Clara University,

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Speaker 1: who is an expert in both finance and behavioral economics. Uh.

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Speaker 1: Let's let's talk a little bit about something you alluded

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Speaker 1: to earlier. First generation behavioral economics, second generation, third generation.

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Speaker 1: So you started out saying first generation was the recognition

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Speaker 1: that people aren't rational, and the second generation was, well,

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Speaker 1: people make bad decisions, they make mistakes, but that doesn't

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Speaker 1: mean they're stupid. That's just humans being humans. What is

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Speaker 1: third generational? What I'm still I'm still in the second generation.

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Speaker 1: In the first generation, Yeah, people are are irrational, people

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Speaker 1: are idiots. Uh, but of course we are not idiots.

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Speaker 1: There are things we want so so consider for example, trading.

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Speaker 1: Trading has been attributed to a cognitive era. Why is

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Speaker 1: it that people trade so much because they're overconfident in

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Speaker 1: their abilities? Yes, that is true, but as we mentioned,

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Speaker 1: it is also a matter of entertainment. Why is it

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Speaker 1: that people play video games? For some people, trading is

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Speaker 1: the equivalent of video games. But with money, there's there's

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Speaker 1: I used to call it atari for money. You basically

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Speaker 1: would sit at a screen lightswood flash, things would move,

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Speaker 1: and you were trying to shoot the bad guys in

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Speaker 1: order to make money. And it was absolutely an addictive

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Speaker 1: adrenaline rush, as intense as any video game. Yeah, and

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Speaker 1: if you do it, you know, with with a measure,

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Speaker 1: just a little, you'll be fine. Think about buying a

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Speaker 1: lottery ticket. You know, people who buy lottery tickets are

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Speaker 1: derided as people who don't know math. But but you know,

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Speaker 1: a lottery ticket costs a dollar or five and it

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Speaker 1: gives as hope for the entire week before we find

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Speaker 1: out that we lost again, and hope. Now, think about movies,

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Speaker 1: you know, movies of fiction, and yet we pay real

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Speaker 1: money for them. You're entertained for two hours. Buy a

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Speaker 1: lottery ticket, you get to talk about here's what I

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Speaker 1: would do with the hundred million dollars exactly, and and

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Speaker 1: and so and so. The question really is not uh

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Speaker 1: but mistakes. You have to begin with what it is

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Speaker 1: that people want, and then ask yourself, how should you

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Speaker 1: go towards what you want without making mistakes. And so

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Speaker 1: buying one lottery ticket a week that's fine. Spending half

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Speaker 1: your pay on lottery ticket, that's an error. That's a problem.

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Speaker 1: That's a real problem. So you're drawing an interesting dividing

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Speaker 1: line between the both emotional and utilitarian uses of either

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Speaker 1: investing or money or what have you. And it sounds

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Speaker 1: like you leave we run into trouble when we don't

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Speaker 1: acknowledge or recognize the legitimate, expressive and emotional side of

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Speaker 1: investing and not contain it. Don't try and completely shut

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Speaker 1: it out, but you have to contain it in a

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Speaker 1: dollar a week for a lottery ticket isn't the end

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Speaker 1: of the world, precisely. And so think about socially responsible investing.

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Speaker 1: If you if you invest in a way that's socially responsible,

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Speaker 1: you may say, lose one percentage point of your return,

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Speaker 1: it will give you expressive and emotional benefits. You have

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Speaker 1: to ask yourself whether that one percent laws in utilitarian

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Speaker 1: benefit UH is not too large relative to the benefits

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Speaker 1: that you derive from it UH. And so all of

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Speaker 1: those things have to be done in proportion, in in

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Speaker 1: a in a good sense. The same applies to things

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Speaker 1: hedge funds. You know, hedge funds are prestigious because not

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Speaker 1: everyone is allowed to buy a hedge funds, so you

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Speaker 1: can signal your wealth by doing so. But buying hedge

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Speaker 1: funds for prestige and ending up losing money that is

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Speaker 1: not really a very good way off achieving prestige. I'm

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Speaker 1: gonna I'm gonna share a personal anecdote. There was a

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Speaker 1: friend of the family who asked my opinion of a

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Speaker 1: specific hedge fund manager who I personally um suggested he

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Speaker 1: stay away from famous guy regard well regarded early in

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Speaker 1: his career, not so much lately, And this person ignored

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Speaker 1: the advice and spent the next five years gleefully. I

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Speaker 1: can't describe it any way other way than bragging about

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Speaker 1: how much money this fund manager was losing for him.

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Speaker 1: And it took me a while to realize, Oh, he's

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Speaker 1: not complaining, he's bragging. He is so much money. This

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Speaker 1: guy could lose a millions and it doesn't affect them.

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Speaker 1: And exactly what you're saying, it's not the dollar side

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Speaker 1: of it, it's the prestigi and emotional side of it. Yeah. Well,

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Speaker 1: one of one of the things that I discovered very

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Speaker 1: soon after I came to the United States, is that

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Speaker 1: people in the United States, like in Israel, are very

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Speaker 1: interested in money, and very interested in in their own

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Speaker 1: income but incomes of other people. But Americans are very

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Speaker 1: secretive about that. The last question you would ask somebody

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Speaker 1: here is how much money do you make? But people

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Speaker 1: signal how much money they have in all kinds of ways,

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Speaker 1: you know, dropping hands about their extra house and upstate

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Speaker 1: New York or or or whatever, or through the cars

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Speaker 1: they drive, or the vacations they take, or the stories

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Speaker 1: they tell. And again, you know, if you do it

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Speaker 1: in a way that is within reason, and you don't

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Speaker 1: waste too much money doing so, fine, but be reasonable.

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Speaker 1: Some people get into trouble putting up a good front,

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Speaker 1: spending more than they can afford for show. And that's

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Speaker 1: a problem that is exactly another a facet of it.

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Speaker 1: So let's let's talk a little bit about um some

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Speaker 1: of the things you've learned having studied behavioral finance for

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Speaker 1: so long. First, once we become aware of our own

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Speaker 1: behavioral foibles and cognitive areas, what can we do to

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Speaker 1: overcome them? Or can we? We can? We can? The

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Speaker 1: first thing is to stop and think now you don't

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Speaker 1: have to do it, which is and every and every decision.

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Speaker 1: You're at a restaurant and and there is fish, and

430
00:29:41,320 --> 00:29:43,480
Speaker 1: there is beef, and there is chicken. What will you

431
00:29:43,560 --> 00:29:46,440
Speaker 1: choose as well? I don't know. I feel like fish today.

432
00:29:46,840 --> 00:29:49,400
Speaker 1: That debt is fine. But if you're going to buy

433
00:29:49,400 --> 00:29:52,760
Speaker 1: a house, or if you're going to invest, you bet

434
00:29:52,760 --> 00:29:56,040
Speaker 1: to pause and ask yourself whether you should not engage

435
00:29:56,120 --> 00:30:00,600
Speaker 1: what we call system to the thinking system, uh, to

436
00:30:00,760 --> 00:30:06,640
Speaker 1: consider your choices. UH. So, for example, for me, whenever

437
00:30:07,000 --> 00:30:10,800
Speaker 1: somebody tells me about something that was absolutely clear in

438
00:30:10,840 --> 00:30:14,440
Speaker 1: the past, you know nine eleven or or or the

439
00:30:14,480 --> 00:30:18,800
Speaker 1: results of the recent election, I say, you know, my

440
00:30:18,880 --> 00:30:22,880
Speaker 1: mind kind of rings and says hindsight. Check to see

441
00:30:22,920 --> 00:30:28,120
Speaker 1: what people actually said before nine eleven or before the election,

442
00:30:28,560 --> 00:30:30,960
Speaker 1: and you see that it's different. And so the first

443
00:30:30,960 --> 00:30:34,760
Speaker 1: thing is to recognize the kinds of mistakes people make,

444
00:30:34,920 --> 00:30:41,240
Speaker 1: whether it is hindsight or framing, and try to hold

445
00:30:41,280 --> 00:30:46,280
Speaker 1: yourself two ways that will correct them. This the same

446
00:30:46,560 --> 00:30:50,960
Speaker 1: thing applies to emotions. We can step bay back from

447
00:30:50,960 --> 00:30:55,360
Speaker 1: our fears, from our anger. Count ten before you speak

448
00:30:55,400 --> 00:30:58,480
Speaker 1: when you're angry, they say, uh. And so we can

449
00:30:58,520 --> 00:31:02,000
Speaker 1: help ourselves do better in life. That makes a lot

450
00:31:02,040 --> 00:31:06,000
Speaker 1: of sense. I'm I've noticed following this election in the

451
00:31:06,080 --> 00:31:09,239
Speaker 1: United States a lot of I guess I would call

452
00:31:09,280 --> 00:31:13,800
Speaker 1: it the narrative fallacy. People are creating these stories that

453
00:31:13,920 --> 00:31:19,040
Speaker 1: pretty much describe the outcome as inevitable, when in reality,

454
00:31:19,120 --> 00:31:22,320
Speaker 1: this was in a very close election and it could

455
00:31:22,360 --> 00:31:24,520
Speaker 1: have just as easily gone one way or the other.

456
00:31:24,920 --> 00:31:28,480
Speaker 1: And yet we've convinced ourselves this was the inevitable outcome

457
00:31:28,880 --> 00:31:32,200
Speaker 1: and we knew it all along. That exactly is what

458
00:31:32,280 --> 00:31:35,440
Speaker 1: hindsight is. And you have to be careful. So let's

459
00:31:35,440 --> 00:31:37,680
Speaker 1: talk a little bit. Let's talk a little bit about

460
00:31:37,960 --> 00:31:41,080
Speaker 1: um something you you had referenced in one of the

461
00:31:41,080 --> 00:31:45,040
Speaker 1: book that the numbers are just astonishing. If we go

462
00:31:45,160 --> 00:31:47,120
Speaker 1: back to the beginning of the Tao, if we look

463
00:31:47,160 --> 00:31:51,080
Speaker 1: at eighteen nine on the Dow Jones industrials, the year

464
00:31:53,160 --> 00:31:57,960
Speaker 1: the average was at forty one. Fast forward a century,

465
00:31:58,160 --> 00:32:01,960
Speaker 1: and that hadn't grown fairly bust lye to over nine thousand.

466
00:32:02,480 --> 00:32:07,280
Speaker 1: But that doesn't include reinvested dividends. Tell us what happens

467
00:32:07,280 --> 00:32:10,640
Speaker 1: over that same period if you reinvest dividends, well, I'll

468
00:32:10,640 --> 00:32:14,640
Speaker 1: tell you better. I'll update it to about today. So

469
00:32:14,840 --> 00:32:18,960
Speaker 1: right now the Dow is at the around twenty thousand,

470
00:32:19,520 --> 00:32:24,280
Speaker 1: from from forty one in eight exactly to twenty thousand.

471
00:32:24,600 --> 00:32:28,960
Speaker 1: If you were counting dividends and their reinvestment, it would

472
00:32:29,000 --> 00:32:33,520
Speaker 1: amount to two point three million. Wow, that's that's a

473
00:32:33,600 --> 00:32:36,240
Speaker 1: lot of money. Why why do we not? Why can't

474
00:32:36,280 --> 00:32:42,000
Speaker 1: we conceptualize exponential growth like that? Because we are really

475
00:32:42,080 --> 00:32:46,360
Speaker 1: anchored to the level today. We've been speaking with Professor

476
00:32:46,440 --> 00:32:50,360
Speaker 1: Meyer Stateman of Santa Clara University. If people want to

477
00:32:50,400 --> 00:32:54,160
Speaker 1: find your work, the books are obviously available at um

478
00:32:54,320 --> 00:32:58,040
Speaker 1: find bookstores everywhere. Where else can they find your writings? Oh,

479
00:32:58,240 --> 00:33:03,640
Speaker 1: they can find a both books on Amazon. The second book,

480
00:33:05,520 --> 00:33:09,160
Speaker 1: Finance for Normal People, will appear on May one, but

481
00:33:09,400 --> 00:33:12,520
Speaker 1: you can pre order it. Uh. They can also look

482
00:33:12,600 --> 00:33:15,200
Speaker 1: up my name and get to my website and see

483
00:33:15,920 --> 00:33:18,840
Speaker 1: papers that I have written. If you enjoy this conversation,

484
00:33:18,920 --> 00:33:21,400
Speaker 1: be sure and stick around for the podcast extras, where

485
00:33:21,440 --> 00:33:24,960
Speaker 1: we keep the tape rolling and continue discussing all things

486
00:33:25,000 --> 00:33:30,320
Speaker 1: behavioral finance. We love your comment, feedback and suggestions. Be

487
00:33:30,440 --> 00:33:34,440
Speaker 1: sure to write to us at m IB podcast at

488
00:33:34,480 --> 00:33:37,920
Speaker 1: Bloomberg dot net. Check out my daily column on Bloomberg

489
00:33:38,000 --> 00:33:41,120
Speaker 1: view dot com or follow me on Twitter at rid Halts.

490
00:33:41,720 --> 00:33:44,480
Speaker 1: I'm Barry rid Holts. You've been listening to Masters in

491
00:33:44,520 --> 00:33:50,400
Speaker 1: Business on Bloomberg Radio. Technology shifts, policy changes, new regulations.

492
00:33:50,680 --> 00:33:53,520
Speaker 1: When it comes to investing, things move quickly, so you

493
00:33:53,600 --> 00:33:56,640
Speaker 1: need a partner you can trust. At Merrill Lynch. That's

494
00:33:56,680 --> 00:33:59,440
Speaker 1: been our goals since day one. It's why we explain

495
00:33:59,520 --> 00:34:02,320
Speaker 1: our service is in fees, measure progress around your life

496
00:34:02,320 --> 00:34:05,600
Speaker 1: and goals, and offer access to resources whenever and however

497
00:34:05,680 --> 00:34:08,319
Speaker 1: you want. At Merrill Lynch, we are bullish on the

498
00:34:08,320 --> 00:34:11,880
Speaker 1: future yours. Visit mL dot com and learn more about

499
00:34:11,880 --> 00:34:15,239
Speaker 1: Merrill Lynch. An affiliated Bank of America. Merror Lynch makes

500
00:34:15,239 --> 00:34:18,400
Speaker 1: available products and services offered by Merrill Lynch. Pierce, Fentner

501
00:34:18,400 --> 00:34:21,680
Speaker 1: and Smith Incorporated, a Registered Broker Dealer member s I PC.

502
00:34:22,719 --> 00:34:25,759
Speaker 1: Welcome to the podcast, UM, Professor Statman, thank you so

503
00:34:25,840 --> 00:34:28,120
Speaker 1: much for doing this and being so generous with your time.

504
00:34:28,600 --> 00:34:33,240
Speaker 1: I find this endlessly fascinating and there's so many questions

505
00:34:33,280 --> 00:34:36,000
Speaker 1: I haven't got to. I have to, uh, I have

506
00:34:36,120 --> 00:34:39,120
Speaker 1: to follow up with you on starting with we really

507
00:34:39,160 --> 00:34:43,880
Speaker 1: didn't talk about this. You're on the Wealthfront Investment Advisory Board.

508
00:34:44,719 --> 00:34:47,719
Speaker 1: How did that come about and and what influence are

509
00:34:47,760 --> 00:34:50,600
Speaker 1: you having over I don't I don't know if the

510
00:34:50,680 --> 00:34:54,880
Speaker 1: term robo advisor is all that accurate. But software driven

511
00:34:55,320 --> 00:34:59,720
Speaker 1: UM asset allocation models. Well, I was asked to join

512
00:35:00,000 --> 00:35:03,760
Speaker 1: as an advisor to wealth Front because of my work

513
00:35:03,880 --> 00:35:06,759
Speaker 1: in behavior finance. And of course, if you're going to

514
00:35:06,920 --> 00:35:11,560
Speaker 1: do a platform, whether it is with the flesh and

515
00:35:11,600 --> 00:35:15,800
Speaker 1: blood advisors or or it is with an automated system,

516
00:35:16,600 --> 00:35:19,239
Speaker 1: you need to understand people. You need to understand what

517
00:35:19,360 --> 00:35:21,759
Speaker 1: it is that they want, the kind of mistakes they make,

518
00:35:21,960 --> 00:35:27,880
Speaker 1: and help them identify their ones, balance them and avoid mistakes.

519
00:35:27,920 --> 00:35:30,160
Speaker 1: So speaking of mistakes, let's talk a little bit about

520
00:35:30,160 --> 00:35:33,040
Speaker 1: Social Security and four oh one K, four one K

521
00:35:33,280 --> 00:35:37,480
Speaker 1: and four h three being another tax deferred SARCEP other

522
00:35:37,520 --> 00:35:42,200
Speaker 1: tax deferred retirement accounts have been pretty strongly criticized. Do

523
00:35:42,320 --> 00:35:45,399
Speaker 1: you look at the returns since the early seventies, they

524
00:35:45,480 --> 00:35:49,359
Speaker 1: haven't been great despite having one of the greatest ball

525
00:35:49,440 --> 00:35:52,880
Speaker 1: markets of all time right in the middle. What's wrong

526
00:35:52,920 --> 00:35:57,279
Speaker 1: with four oh one ks and and their ILK? What

527
00:35:57,360 --> 00:35:59,440
Speaker 1: do we do wrong setting that up? Or is it

528
00:35:59,560 --> 00:36:02,680
Speaker 1: just four one ks are fine? And it's the behavioral

529
00:36:02,719 --> 00:36:07,280
Speaker 1: side that's the problem. It is not the behavioral side.

530
00:36:08,000 --> 00:36:13,319
Speaker 1: It is how programs are structured. I, for example, like

531
00:36:13,480 --> 00:36:18,440
Speaker 1: fellow academics, have been on a defined contribution plan for

532
00:36:18,520 --> 00:36:22,759
Speaker 1: a three B plan since I first was teaching at

533
00:36:22,800 --> 00:36:27,839
Speaker 1: the City University of New York in nineteen seventy five. Now,

534
00:36:27,880 --> 00:36:30,920
Speaker 1: how does that differ from a traditional four ones as

535
00:36:30,960 --> 00:36:34,560
Speaker 1: exactly four a one exactly like not a defined benefit.

536
00:36:34,560 --> 00:36:37,960
Speaker 1: It's defined defined contribution. So I've never had defined benefit.

537
00:36:38,040 --> 00:36:40,359
Speaker 1: I've never had a pension plan. And I can tell

538
00:36:40,400 --> 00:36:43,000
Speaker 1: you without bragging, that I have a lot of money. Now,

539
00:36:44,680 --> 00:36:47,640
Speaker 1: now let me guess you're you started early. Every time

540
00:36:47,680 --> 00:36:52,160
Speaker 1: you gotta raise, you raised your No, okay, So here's

541
00:36:52,200 --> 00:36:55,719
Speaker 1: the story. The story is that the City University of

542
00:36:55,880 --> 00:36:59,680
Speaker 1: New York contributed I think in the twelve or fifteen

543
00:36:59,680 --> 00:37:03,640
Speaker 1: percent into my measly salary at the time. I added

544
00:37:03,719 --> 00:37:07,800
Speaker 1: to it. Same at Rutgers College and at Santa Clara

545
00:37:07,880 --> 00:37:12,200
Speaker 1: University today, and that is common. The university contributes ten

546
00:37:12,280 --> 00:37:16,000
Speaker 1: percent on top of my salary, no matching, no anything

547
00:37:16,320 --> 00:37:18,880
Speaker 1: I can add to that, and I do, and I do.

548
00:37:19,320 --> 00:37:23,919
Speaker 1: They contribute. There's that top out at I want to say,

549
00:37:24,040 --> 00:37:28,320
Speaker 1: either eighteen or twenty four No real, it is without limit.

550
00:37:28,520 --> 00:37:30,719
Speaker 1: So this is like a rough four oh three b.

551
00:37:31,080 --> 00:37:34,360
Speaker 1: Is it pre tax or post tax? It is it

552
00:37:34,680 --> 00:37:37,960
Speaker 1: is pre tax. The thing that thing. Here's the thing.

553
00:37:38,640 --> 00:37:41,640
Speaker 1: There are two aspects to the move from from pension

554
00:37:41,719 --> 00:37:45,600
Speaker 1: plans to define contribution. One has to do with who

555
00:37:45,640 --> 00:37:49,080
Speaker 1: bears the risk, and so now it is the individual

556
00:37:49,120 --> 00:37:51,600
Speaker 1: employee of the company. The other has to do with

557
00:37:51,680 --> 00:37:57,160
Speaker 1: how much the employer contributes. Employers used to contribute to

558
00:37:57,200 --> 00:38:01,000
Speaker 1: pension plans the equivalent of about eight per center, perhaps

559
00:38:01,000 --> 00:38:05,800
Speaker 1: even ten percent. Now yeah, now, if you're lucky to

560
00:38:05,880 --> 00:38:09,200
Speaker 1: contribute three percent, my office is a four percent match,

561
00:38:09,360 --> 00:38:12,000
Speaker 1: that is, and and ask for a match and it

562
00:38:12,120 --> 00:38:15,200
Speaker 1: tops out. That is the problem. The problem is not

563
00:38:15,360 --> 00:38:17,920
Speaker 1: with the four one k. The problem is where the

564
00:38:18,000 --> 00:38:23,359
Speaker 1: miserly corporations that contribute so little to it. Because employees

565
00:38:23,640 --> 00:38:27,640
Speaker 1: in the early stages need the money, you know, for

566
00:38:27,640 --> 00:38:31,919
Speaker 1: for for for diapers, and and for for rent and

567
00:38:32,000 --> 00:38:35,439
Speaker 1: so on. It's very hard to save when you are young.

568
00:38:35,640 --> 00:38:38,200
Speaker 1: So Santa Clara could do a ten percent. It's not

569
00:38:38,239 --> 00:38:40,600
Speaker 1: even a match. It's a straight up ten percent. It

570
00:38:40,760 --> 00:38:44,000
Speaker 1: is not just Santa Clara, it is Harvard. It is

571
00:38:44,600 --> 00:38:48,040
Speaker 1: all private institutions do that. That's a nice that's a

572
00:38:48,120 --> 00:38:51,759
Speaker 1: nice uh number. Well, that that is the way it

573
00:38:51,800 --> 00:38:56,239
Speaker 1: should be. And that is a point that is not made. Uh.

574
00:38:56,400 --> 00:39:00,400
Speaker 1: Instead we are pushing it to the employee ease and

575
00:39:00,440 --> 00:39:04,480
Speaker 1: call them irresponsible and talk about how to nudge them.

576
00:39:04,520 --> 00:39:07,799
Speaker 1: I say, I say enough of that. First of all,

577
00:39:08,280 --> 00:39:10,520
Speaker 1: you don't need to nudge people, you need to shove

578
00:39:10,600 --> 00:39:15,719
Speaker 1: them into So you and Dick Taylor disagree about this, I, well,

579
00:39:16,000 --> 00:39:19,799
Speaker 1: I think that we differ in some way. Uh they

580
00:39:20,680 --> 00:39:22,759
Speaker 1: really is the politics of it, it is it is

581
00:39:22,880 --> 00:39:29,319
Speaker 1: very hard to have mandatory contributions given given the political situation.

582
00:39:29,920 --> 00:39:33,640
Speaker 1: But but I think that that there's a need to

583
00:39:33,840 --> 00:39:38,920
Speaker 1: have a system that is structured kind of like source security,

584
00:39:39,000 --> 00:39:42,440
Speaker 1: not extending source of security, but mandatory like source security.

585
00:39:42,640 --> 00:39:46,120
Speaker 1: And there's really a need for employers to step up

586
00:39:46,640 --> 00:39:52,120
Speaker 1: and contribute a whole lot more two employees retirement accounts.

587
00:39:52,760 --> 00:39:58,160
Speaker 1: M that's quite interesting. Um, wow, all right, I think

588
00:39:58,160 --> 00:40:01,280
Speaker 1: that's quite fascinating. You know, the ail er nudge thesis

589
00:40:01,440 --> 00:40:06,200
Speaker 1: is simply get people to pre first of all, make

590
00:40:06,239 --> 00:40:11,160
Speaker 1: the four one K enrollment automatic, make the rise and contribution.

591
00:40:11,280 --> 00:40:14,719
Speaker 1: Have people agreed to do that or opt out. So

592
00:40:14,920 --> 00:40:18,080
Speaker 1: how you set the defaults make a big difference. But

593
00:40:18,160 --> 00:40:21,160
Speaker 1: you're taking it a step further and saying employers need

594
00:40:21,239 --> 00:40:24,080
Speaker 1: to really be part of this that. How do you

595
00:40:24,160 --> 00:40:27,239
Speaker 1: persuade companies to do that? I mean, think about think

596
00:40:27,280 --> 00:40:31,680
Speaker 1: about pensions. People did not have a choice. It was mandatory.

597
00:40:31,719 --> 00:40:34,080
Speaker 1: In fact, people did not have a choice. Do you

598
00:40:34,120 --> 00:40:36,440
Speaker 1: want a pension or do you want to get the

599
00:40:36,480 --> 00:40:40,160
Speaker 1: money right now up front? Uh, it was done in

600
00:40:40,200 --> 00:40:44,759
Speaker 1: a paternalistic way without nudging people and so on. How

601
00:40:44,840 --> 00:40:47,200
Speaker 1: is it that we got ourselves into the nudging thing.

602
00:40:47,560 --> 00:40:51,840
Speaker 1: We just moved really by accident, almost from pensions to

603
00:40:51,880 --> 00:40:55,960
Speaker 1: defined contributions, and nobody asked should it be voluntary or

604
00:40:55,960 --> 00:40:58,160
Speaker 1: should it be mandatory? Oh, I don't think it was

605
00:40:58,200 --> 00:40:59,920
Speaker 1: an accident. I think it was a big money, say

606
00:41:00,600 --> 00:41:03,840
Speaker 1: much less headache for the companies. And that's why they

607
00:41:03,880 --> 00:41:08,480
Speaker 1: want the nature of it as being voluntary. That was

608
00:41:08,560 --> 00:41:12,239
Speaker 1: something that could have been made one way or the other.

609
00:41:12,560 --> 00:41:15,160
Speaker 1: It could have been made mandatory. So once we started

610
00:41:15,160 --> 00:41:18,000
Speaker 1: giving up pensions, for one, every company with more than

611
00:41:18,080 --> 00:41:21,239
Speaker 1: ex employees should offer a four oh one K and

612
00:41:22,160 --> 00:41:23,920
Speaker 1: you know, whether you match or not, you should at

613
00:41:24,000 --> 00:41:26,120
Speaker 1: least set it up and run it, and you should

614
00:41:26,200 --> 00:41:28,879
Speaker 1: and you should not even have it as a matching thing.

615
00:41:29,680 --> 00:41:33,319
Speaker 1: You should just have it as a straight contribution. That is,

616
00:41:33,480 --> 00:41:37,640
Speaker 1: matching helps people like me and like you that there's

617
00:41:37,719 --> 00:41:40,879
Speaker 1: people who have enough money to actually save and then

618
00:41:40,920 --> 00:41:44,280
Speaker 1: they get the bonus. But the people who really need

619
00:41:44,320 --> 00:41:47,880
Speaker 1: to save, the people who find it hardest, and many

620
00:41:47,920 --> 00:41:50,839
Speaker 1: times they just forego the match because they don't have

621
00:41:51,360 --> 00:41:54,120
Speaker 1: the money to make their own contributors. We see it

622
00:41:54,160 --> 00:41:57,319
Speaker 1: all the time. Let's um, let's shift gears a little bit.

623
00:41:57,360 --> 00:41:59,919
Speaker 1: I want to talk about the hard to beat mark

624
00:42:00,000 --> 00:42:04,759
Speaker 1: it hypothesis, not necessarily the efficient market hypothesis. What is

625
00:42:05,000 --> 00:42:07,640
Speaker 1: the hard to beat market hypothesis and what does that

626
00:42:07,680 --> 00:42:12,080
Speaker 1: mean um for investors? Well, the hard to beat market

627
00:42:12,200 --> 00:42:20,840
Speaker 1: hypothesis says that gaining consistent advantage in the market, gaining

628
00:42:20,920 --> 00:42:26,959
Speaker 1: consistent above average return is very hard to do. Very

629
00:42:27,040 --> 00:42:31,560
Speaker 1: hard does not mean impossible. Hedge fund managers do that,

630
00:42:32,160 --> 00:42:37,040
Speaker 1: many active mutual fund managers do that, and so on.

631
00:42:37,520 --> 00:42:43,960
Speaker 1: Insiders definitely do that. The question really is who can

632
00:42:44,080 --> 00:42:47,560
Speaker 1: do that? We talked about them. Who cannot do that?

633
00:42:47,880 --> 00:42:51,760
Speaker 1: The typical amateur individual investors cannot do that. In fact,

634
00:42:52,360 --> 00:42:57,000
Speaker 1: the reason those professionals are able to beat the market

635
00:42:57,160 --> 00:42:59,520
Speaker 1: is because they take money out of the pockets of

636
00:42:59,680 --> 00:43:05,040
Speaker 1: the idiot individual investors who try to to compete against them,

637
00:43:05,080 --> 00:43:08,160
Speaker 1: and so and so. It's not the question of whether

638
00:43:08,239 --> 00:43:11,400
Speaker 1: the market is is efficient, and if it's not efficient,

639
00:43:11,480 --> 00:43:14,640
Speaker 1: then anything goes and it's very easy to beat the market.

640
00:43:14,880 --> 00:43:17,680
Speaker 1: You have to ask yourself what edge do you have.

641
00:43:18,920 --> 00:43:21,759
Speaker 1: If you have an edge, by all means, trade on

642
00:43:21,840 --> 00:43:25,120
Speaker 1: it and beat the market. But if not, just buy

643
00:43:25,160 --> 00:43:28,080
Speaker 1: an index fund and forget it and be better off.

644
00:43:28,440 --> 00:43:31,360
Speaker 1: So you you there's something in and I don't recall

645
00:43:31,440 --> 00:43:34,960
Speaker 1: which of the books um you reference it. It might

646
00:43:35,000 --> 00:43:39,160
Speaker 1: be the more recent one about investors who have weak

647
00:43:39,239 --> 00:43:44,440
Speaker 1: self control and how they can manage their own um behavior.

648
00:43:44,480 --> 00:43:47,200
Speaker 1: And one of the things you suggested is, hey, you

649
00:43:47,239 --> 00:43:50,840
Speaker 1: could spend your dividends but never dip into capital. So

650
00:43:50,840 --> 00:43:54,799
Speaker 1: so describe the sort of rules that makes sense for

651
00:43:54,920 --> 00:43:59,839
Speaker 1: people who, under normal circumstances are perfectly rational. But hey,

652
00:44:00,000 --> 00:44:04,359
Speaker 1: at the market drop and people start to freak out. Well,

653
00:44:04,719 --> 00:44:09,360
Speaker 1: the distinction people make between income and capital is a

654
00:44:09,520 --> 00:44:14,320
Speaker 1: very basic one, and and it is usually very helpful

655
00:44:14,520 --> 00:44:17,960
Speaker 1: when you're saving. It is very helpful because it means

656
00:44:18,520 --> 00:44:22,399
Speaker 1: this portion of the cake you can eat, but this

657
00:44:22,520 --> 00:44:27,359
Speaker 1: portion you cannot touch. You cannot dip into capital. Uh.

658
00:44:27,520 --> 00:44:31,560
Speaker 1: The problem with it is that people are trying to

659
00:44:31,600 --> 00:44:36,120
Speaker 1: get yield. People are trying to get income because interest

660
00:44:36,200 --> 00:44:39,239
Speaker 1: rates are low and dividend rates are low, and they

661
00:44:39,280 --> 00:44:45,000
Speaker 1: get themselves into dividend capture funds for example, that waste

662
00:44:45,040 --> 00:44:49,600
Speaker 1: their money. They create something they can call income by

663
00:44:49,640 --> 00:44:53,960
Speaker 1: getting more dividends, or they get into junk bonds because

664
00:44:54,000 --> 00:44:58,920
Speaker 1: they have more higher interest rate. But but they're oblivious

665
00:44:59,000 --> 00:45:01,839
Speaker 1: to the kind of risk that taking when they do that,

666
00:45:02,000 --> 00:45:05,799
Speaker 1: and they're oblivious that those high rates that are promised.

667
00:45:06,360 --> 00:45:09,920
Speaker 1: I'm not realistic because of course this assumes that none

668
00:45:10,160 --> 00:45:14,240
Speaker 1: of those companies will go bankrupt. So I recall something

669
00:45:14,280 --> 00:45:17,160
Speaker 1: else you wrote, and I hope I'm not mangling this

670
00:45:17,239 --> 00:45:22,840
Speaker 1: too badly. Someone is presented with the choice of owning

671
00:45:23,920 --> 00:45:25,839
Speaker 1: either a stock or an index that pays a lot

672
00:45:25,840 --> 00:45:32,160
Speaker 1: of dimonends and taking the dividends, or or just recognizing

673
00:45:32,239 --> 00:45:35,879
Speaker 1: the difference in tax rates on dividends and long term

674
00:45:35,920 --> 00:45:40,280
Speaker 1: capital gains and instead just shaving off the equivalent amount

675
00:45:40,320 --> 00:45:44,399
Speaker 1: of stock selling it instead of of the dividend. Why

676
00:45:44,440 --> 00:45:47,359
Speaker 1: do people have such a hard time doing the math

677
00:45:47,440 --> 00:45:51,560
Speaker 1: on that and understanding, Hey, it's better under these circumstances

678
00:45:51,600 --> 00:45:54,919
Speaker 1: and this tax differential to sell a little bit then

679
00:45:54,960 --> 00:45:59,560
Speaker 1: hold onto it, take the dividend, and pay a higher tax. Well,

680
00:45:59,680 --> 00:46:03,440
Speaker 1: that's difference between rational people and normal ones. Rational people

681
00:46:03,800 --> 00:46:08,080
Speaker 1: say money is money, Uh, call it capital, call it dividends.

682
00:46:08,120 --> 00:46:10,680
Speaker 1: If I don't get dividends, I can simply sell a

683
00:46:10,680 --> 00:46:14,440
Speaker 1: few shares and get the equivalent of that. That is

684
00:46:14,480 --> 00:46:19,640
Speaker 1: what Miller Modigliani show does. But but again for normal people,

685
00:46:19,840 --> 00:46:24,280
Speaker 1: there's a problem of self control creates a need to

686
00:46:24,640 --> 00:46:28,439
Speaker 1: have rules that will prevent you from spending too much.

687
00:46:29,239 --> 00:46:34,040
Speaker 1: And one of those rules is spend dividends, but don't

688
00:46:34,120 --> 00:46:38,319
Speaker 1: dip into capital. And that is very helpful during your

689
00:46:38,360 --> 00:46:41,839
Speaker 1: working years. But then when you retire and you need

690
00:46:41,920 --> 00:46:46,960
Speaker 1: to actually dip into capital, people find it really really difficult,

691
00:46:47,560 --> 00:46:51,200
Speaker 1: and and they go in foolish ways to generate income,

692
00:46:52,040 --> 00:46:55,759
Speaker 1: where in fact they should find the way themselves with

693
00:46:55,840 --> 00:47:00,319
Speaker 1: an advisor to depend too capital, because after all, uh,

694
00:47:00,800 --> 00:47:04,319
Speaker 1: people don't live forever. Sorry to break the news, So

695
00:47:05,760 --> 00:47:09,680
Speaker 1: there was something, um interesting, I'm gonna I'm gonna do

696
00:47:09,680 --> 00:47:13,840
Speaker 1: that again. Edit that out. Um, your own behavior. You

697
00:47:13,920 --> 00:47:18,600
Speaker 1: mentioned you um tend to index, but as an investor,

698
00:47:19,000 --> 00:47:23,440
Speaker 1: what else has changed in the way you interact with

699
00:47:23,560 --> 00:47:29,799
Speaker 1: investing in markets based on studying investor behavior. Well, of

700
00:47:29,840 --> 00:47:33,120
Speaker 1: course I've I've learned about markets and I've learned about myself.

701
00:47:33,400 --> 00:47:37,399
Speaker 1: And I find that even today, when I begin an

702
00:47:37,440 --> 00:47:41,200
Speaker 1: investments class and I asked people what it is that

703
00:47:41,239 --> 00:47:45,640
Speaker 1: they expect to know by the time this course is done, Uh,

704
00:47:45,719 --> 00:47:48,399
Speaker 1: somebody is going to say, I want to know how

705
00:47:48,480 --> 00:47:52,200
Speaker 1: to pick the best stocks, and so I have to

706
00:47:52,520 --> 00:47:56,319
Speaker 1: go and explain why that is not likely to be

707
00:47:57,280 --> 00:47:59,840
Speaker 1: a good idea to try to do that unless they

708
00:47:59,840 --> 00:48:03,600
Speaker 1: are going to be investment professionals. Uh. And so it

709
00:48:03,719 --> 00:48:06,799
Speaker 1: is still hard for people to get. But by the

710
00:48:06,800 --> 00:48:08,600
Speaker 1: time they're done with the course, and by the time

711
00:48:08,640 --> 00:48:12,440
Speaker 1: they read not just my writings, but of course this

712
00:48:12,560 --> 00:48:17,520
Speaker 1: is now widespread the Jack Bogel and and Worn Buffett

713
00:48:17,560 --> 00:48:22,960
Speaker 1: and so on have said it. People are getting the point,

714
00:48:23,320 --> 00:48:27,360
Speaker 1: and people in fact invest in index fund And sometimes

715
00:48:27,360 --> 00:48:29,879
Speaker 1: I hear from students who took my class many years

716
00:48:29,920 --> 00:48:33,360
Speaker 1: ago and right to say, thank you, that's that's wonderful.

717
00:48:33,680 --> 00:48:37,600
Speaker 1: What what are the most challenging biases to overcome what

718
00:48:37,760 --> 00:48:43,480
Speaker 1: cognitive errors present. The biggest problem, Oh, I think that framing,

719
00:48:44,239 --> 00:48:47,640
Speaker 1: uh is a problem. That is, when we are faced

720
00:48:47,760 --> 00:48:51,680
Speaker 1: with a problem, we simplify it by framing. And so

721
00:48:51,719 --> 00:48:57,240
Speaker 1: they give an example, well, again dividends and and capital.

722
00:48:57,400 --> 00:49:00,680
Speaker 1: You know, we frame it as being two separate money

723
00:49:00,760 --> 00:49:03,680
Speaker 1: is as if they have different colors. But but money

724
00:49:03,760 --> 00:49:05,960
Speaker 1: is fungible. A dollar is a dollar no matter what

725
00:49:06,000 --> 00:49:09,479
Speaker 1: it comes exactly, and and so and so there's really

726
00:49:09,480 --> 00:49:14,200
Speaker 1: a need to recognize that framing and frame it correctly

727
00:49:15,160 --> 00:49:17,840
Speaker 1: as one part of money, and you have to find

728
00:49:17,880 --> 00:49:22,760
Speaker 1: ways to dip into it in a responsible fashion. But

729
00:49:22,760 --> 00:49:26,200
Speaker 1: but don't get confused as no, I cannot really dip

730
00:49:26,600 --> 00:49:31,120
Speaker 1: into capital because it's a different color money. That's quite

731
00:49:31,239 --> 00:49:37,280
Speaker 1: quite interesting. So we we've talked in general about um

732
00:49:37,520 --> 00:49:42,600
Speaker 1: various cargnit veras we've talked about behavioral issues. How can

733
00:49:42,920 --> 00:49:49,080
Speaker 1: people self identify their own blind spots? The classic Dunning

734
00:49:49,200 --> 00:49:54,640
Speaker 1: Krueger um people who aren't especially talented have a blind

735
00:49:54,640 --> 00:49:57,560
Speaker 1: spot for their own lack of talent in that given space.

736
00:49:58,239 --> 00:50:02,160
Speaker 1: What can people do to not be as susceptible to

737
00:50:02,400 --> 00:50:06,880
Speaker 1: their own cognitive deficits, to their own emotions and to

738
00:50:07,000 --> 00:50:11,880
Speaker 1: their own second generation behavioral problems. Well, we need we

739
00:50:11,960 --> 00:50:17,319
Speaker 1: need to know ourselves. And sometimes the way you see

740
00:50:17,360 --> 00:50:21,280
Speaker 1: yourself when you shave is to use a mirror. And

741
00:50:21,600 --> 00:50:26,680
Speaker 1: the way you see yourself in terms of investment is

742
00:50:26,719 --> 00:50:30,920
Speaker 1: sometimes to read, uh, to speak with people who are

743
00:50:31,040 --> 00:50:35,879
Speaker 1: knowledgeable in the field, knowledgeable I mean knowledgeable in say,

744
00:50:35,920 --> 00:50:41,120
Speaker 1: those cognitive errors identifying wants and and this way you

745
00:50:41,200 --> 00:50:44,600
Speaker 1: kind of change your way of thinking. Uh. And so

746
00:50:44,719 --> 00:50:48,600
Speaker 1: you learn, you learn rules that are in fact useful. Again,

747
00:50:49,080 --> 00:50:52,440
Speaker 1: you learn to step away from your emotions. For example,

748
00:50:52,600 --> 00:50:56,040
Speaker 1: whether fear, uh, you're you're afraid, but then you say,

749
00:50:57,200 --> 00:51:01,680
Speaker 1: well what can possibly happen? Uh? And and you can

750
00:51:02,640 --> 00:51:07,160
Speaker 1: put it in perspective anger, a hope Uh. You know

751
00:51:07,239 --> 00:51:11,040
Speaker 1: it is again something where where you cannot just just

752
00:51:11,120 --> 00:51:15,400
Speaker 1: go buy hope and buy lottery ticket with with abandoned.

753
00:51:16,160 --> 00:51:19,319
Speaker 1: So there was um, I'm paraphrasing this, And again I

754
00:51:19,320 --> 00:51:22,879
Speaker 1: don't remember which of the two books this was from.

755
00:51:22,920 --> 00:51:26,319
Speaker 1: There's discussion on how much money we need to be

756
00:51:26,400 --> 00:51:31,400
Speaker 1: happy and what having more than enough money does to

757
00:51:31,480 --> 00:51:34,919
Speaker 1: our psychology. Am I am I capturing that right? Well,

758
00:51:35,000 --> 00:51:39,560
Speaker 1: one aspect of it of more than enough uh. For

759
00:51:39,680 --> 00:51:43,160
Speaker 1: some people of course there's never enough. And and if

760
00:51:43,160 --> 00:51:46,399
Speaker 1: you ask yourself, really, why is it that somebody who

761
00:51:46,480 --> 00:51:49,799
Speaker 1: has two billion dollars strive so much to get three

762
00:51:49,840 --> 00:51:53,719
Speaker 1: billion dollars? Uh, well, three is more than two exactly.

763
00:51:53,719 --> 00:51:56,440
Speaker 1: Well but but but you know they they but that

764
00:51:56,480 --> 00:51:59,520
Speaker 1: doesn't sound health standard. Well, the standard finance or the

765
00:51:59,560 --> 00:52:02,840
Speaker 1: standard economics says, why do you say so that you

766
00:52:02,880 --> 00:52:08,520
Speaker 1: can spend, so you can have a security, so you

767
00:52:08,560 --> 00:52:11,560
Speaker 1: don't have to worry about health care costs? Exactly? But

768
00:52:11,560 --> 00:52:14,320
Speaker 1: but then you see many people and not just the

769
00:52:14,560 --> 00:52:18,799
Speaker 1: very wealthy, who have way way more then they need,

770
00:52:18,880 --> 00:52:22,160
Speaker 1: say for retirement or even for their family, and and

771
00:52:22,200 --> 00:52:27,040
Speaker 1: the next generation who still strive for more. And the

772
00:52:27,120 --> 00:52:33,040
Speaker 1: answer is status, because because two billion dollars is a

773
00:52:33,040 --> 00:52:36,880
Speaker 1: lot of money, but three billion dollars is more. And

774
00:52:36,960 --> 00:52:41,640
Speaker 1: if you are in this company of people for whom

775
00:52:41,920 --> 00:52:46,160
Speaker 1: money is in billions, it matters whether you have two

776
00:52:46,640 --> 00:52:49,640
Speaker 1: or three. It matters whether the fellow who was below

777
00:52:49,719 --> 00:52:52,920
Speaker 1: you with one and a half now exceeds you with three,

778
00:52:53,040 --> 00:52:56,960
Speaker 1: because now your relative status goes down. And so one

779
00:52:57,000 --> 00:53:01,240
Speaker 1: of the things that we want and we have recognize it,

780
00:53:01,280 --> 00:53:05,839
Speaker 1: is social status. And social status is relative, which makes

781
00:53:05,880 --> 00:53:08,520
Speaker 1: it really really hard. It means that that that we

782
00:53:08,560 --> 00:53:11,560
Speaker 1: are competitive to the end. And so if you can

783
00:53:11,640 --> 00:53:15,880
Speaker 1: just step back and say, hey, you know, you don't

784
00:53:16,000 --> 00:53:19,840
Speaker 1: have as much as Warren Buffett, uh, but you have

785
00:53:20,160 --> 00:53:24,040
Speaker 1: more than you need. The Leon Cooperman is a hedge

786
00:53:24,040 --> 00:53:27,600
Speaker 1: fund manager and he's one of the people who signed

787
00:53:27,600 --> 00:53:31,239
Speaker 1: the pledge to give away half his money in his lifetime.

788
00:53:31,800 --> 00:53:34,759
Speaker 1: And he's worth several billion dollars. And he tells the

789
00:53:34,840 --> 00:53:38,200
Speaker 1: story at when he signed the pledge, He's at a

790
00:53:38,239 --> 00:53:42,239
Speaker 1: dinner with about eight people, and there's Bill Gates at

791
00:53:42,239 --> 00:53:44,440
Speaker 1: the table and Warren Buffet at the table and a

792
00:53:44,440 --> 00:53:50,359
Speaker 1: handful of other people and the check comes and they

793
00:53:50,400 --> 00:53:54,320
Speaker 1: give it to him. And the reason why Warren Buffet

794
00:53:54,320 --> 00:53:56,480
Speaker 1: and Bill Gates and the rest of the table gave

795
00:53:56,560 --> 00:54:01,040
Speaker 1: the check to Cooperman is he was worth three billion dollars.

796
00:54:01,360 --> 00:54:03,840
Speaker 1: He was the poorest man at the table. So the

797
00:54:03,960 --> 00:54:06,479
Speaker 1: rule is the poorest guy has to pick up the check.

798
00:54:07,040 --> 00:54:10,439
Speaker 1: And that's pretty you think about that, that's pretty hilarious.

799
00:54:10,840 --> 00:54:14,160
Speaker 1: But even at that level of wealth, people are still

800
00:54:15,320 --> 00:54:19,960
Speaker 1: measuring and comparing and and are aware. He he actually

801
00:54:19,960 --> 00:54:23,359
Speaker 1: describes it as I was the piker at the table. Well,

802
00:54:23,400 --> 00:54:25,880
Speaker 1: and you can see how people treat their wealth. You

803
00:54:25,920 --> 00:54:28,680
Speaker 1: can see what Bill Gates is doing with his wealth,

804
00:54:29,239 --> 00:54:32,360
Speaker 1: and Buffett as well, Buffett as well. And then you

805
00:54:32,400 --> 00:54:37,480
Speaker 1: can see people who create those a generations, skipping trusts

806
00:54:37,480 --> 00:54:40,239
Speaker 1: and so on and and and keep the money as

807
00:54:40,320 --> 00:54:43,320
Speaker 1: if they can take it with them to the next world.

808
00:54:43,600 --> 00:54:48,320
Speaker 1: Cooperman actually is driving an old car, and I for him.

809
00:54:48,320 --> 00:54:51,319
Speaker 1: I yelled at him, and I said, listen, you don't

810
00:54:51,320 --> 00:54:53,560
Speaker 1: have to go out and spend two hundred thousand dollars

811
00:54:53,600 --> 00:54:58,160
Speaker 1: on some insane thing. But the new cars have bluetooth

812
00:54:58,280 --> 00:55:01,560
Speaker 1: and safety things and better air bags. You don't need

813
00:55:01,640 --> 00:55:05,200
Speaker 1: to be driving a fifteen year old Lexus. You could,

814
00:55:05,400 --> 00:55:07,440
Speaker 1: you could, He goes, I feel like it's not my money.

815
00:55:07,480 --> 00:55:12,360
Speaker 1: I'm spending money that will be better used for charitable purposes. Well,

816
00:55:12,480 --> 00:55:15,319
Speaker 1: that is really a kind of you said the same time.

817
00:55:15,880 --> 00:55:19,560
Speaker 1: That is right, you. We we develop habits, we develop

818
00:55:19,640 --> 00:55:23,400
Speaker 1: an image of ourselves. I mean, you know, seeing myself

819
00:55:23,440 --> 00:55:27,440
Speaker 1: in a Lamborghini. I can buy Lamborghini, but I'm going

820
00:55:27,480 --> 00:55:30,040
Speaker 1: to feel ridiculous. You can get in low enough to

821
00:55:30,080 --> 00:55:32,160
Speaker 1: get in the car such as that you know that

822
00:55:32,200 --> 00:55:34,959
Speaker 1: that that is it just I just don't have enough

823
00:55:34,960 --> 00:55:38,520
Speaker 1: hair for a Lamborghini. I've seen plenty of people without

824
00:55:38,520 --> 00:55:41,319
Speaker 1: a lot of hair and Lamborghinis. I just don't see

825
00:55:41,360 --> 00:55:45,680
Speaker 1: that being in the Santa Clara University Faculty parking lot.

826
00:55:46,120 --> 00:55:48,520
Speaker 1: It would stand out a little bit that that is

827
00:55:48,560 --> 00:55:52,400
Speaker 1: also true. And and you really it is an image

828
00:55:52,440 --> 00:55:56,200
Speaker 1: that you have in your own eyes and in the

829
00:55:56,239 --> 00:55:59,880
Speaker 1: eyes of others. And so yeah, I would be perceived

830
00:55:59,880 --> 00:56:03,239
Speaker 1: a bragger if if I if I drove one. Now,

831
00:56:03,640 --> 00:56:07,359
Speaker 1: if you were a hedge fund manager, the perception would

832
00:56:07,360 --> 00:56:11,200
Speaker 1: be different. Your peer group might perceive it differently. It

833
00:56:11,719 --> 00:56:14,840
Speaker 1: is true, and I'm happy I'm not in that company.

834
00:56:15,239 --> 00:56:18,040
Speaker 1: So before we get to some of our favorite questions,

835
00:56:18,080 --> 00:56:22,480
Speaker 1: I have a handful of things that that I want

836
00:56:22,520 --> 00:56:25,799
Speaker 1: to go over that I think we skipped. There's a

837
00:56:25,880 --> 00:56:28,440
Speaker 1: question I have on risk aversion that we didn't get to.

838
00:56:29,280 --> 00:56:33,359
Speaker 1: And there was one other question. Um, well, we really

839
00:56:33,400 --> 00:56:37,160
Speaker 1: talked about priorities. Do you do you look at smart

840
00:56:37,239 --> 00:56:39,520
Speaker 1: beta at all? Have you have you researched much of that?

841
00:56:39,560 --> 00:56:43,320
Speaker 1: Because because because we're now over half a billion I'm sorry,

842
00:56:43,320 --> 00:56:47,200
Speaker 1: we're now over half a trillion dollars in smart Beta,

843
00:56:47,400 --> 00:56:50,359
Speaker 1: how much of this is people just chasing the new thing,

844
00:56:51,120 --> 00:56:54,840
Speaker 1: or is is this chasing factors that have worked in

845
00:56:54,840 --> 00:56:56,960
Speaker 1: the past, or or is this something that's just a

846
00:56:56,960 --> 00:57:00,920
Speaker 1: fad and it's going to fade one day. Well, here's

847
00:57:00,920 --> 00:57:06,399
Speaker 1: an academic answer. Unfortunately, the the the question really is

848
00:57:06,680 --> 00:57:10,080
Speaker 1: what does the extra return that you get with a

849
00:57:10,120 --> 00:57:14,880
Speaker 1: smart beta represent. Is it representing beating the market or

850
00:57:15,160 --> 00:57:19,600
Speaker 1: is it representing just a fair return on your money? Anything,

851
00:57:19,640 --> 00:57:22,880
Speaker 1: You're assuming more risks, so therefore your potentially generating either

852
00:57:23,080 --> 00:57:29,720
Speaker 1: risk or or it is. It is simply how returns

853
00:57:29,760 --> 00:57:32,840
Speaker 1: are determined. And so if you have, for example, that

854
00:57:32,960 --> 00:57:36,240
Speaker 1: returns are higher for value stocks and small cap stocks,

855
00:57:36,400 --> 00:57:39,240
Speaker 1: it is not necessarily risk. It might be other preferences,

856
00:57:40,720 --> 00:57:45,720
Speaker 1: but value. If so, if you tilt, if you tilt

857
00:57:45,760 --> 00:57:50,440
Speaker 1: your portfolio towards value, towards small perhaps a low low beta,

858
00:57:50,640 --> 00:57:55,240
Speaker 1: and so on, you get essentially your money's worth, you're

859
00:57:55,280 --> 00:57:59,560
Speaker 1: not beating the market. And and does it really work,

860
00:57:59,640 --> 00:58:02,440
Speaker 1: does it really add as much as it really stable?

861
00:58:03,000 --> 00:58:05,600
Speaker 1: I don't know. I mean, I telled my portfolio towards

862
00:58:06,120 --> 00:58:09,800
Speaker 1: value and small, so but I don't really go much

863
00:58:09,840 --> 00:58:13,440
Speaker 1: beyond that. We do something very similar. The thing that

864
00:58:13,520 --> 00:58:16,200
Speaker 1: I think a lot of people forget when they're looking

865
00:58:16,200 --> 00:58:20,000
Speaker 1: at returns, they should really be looking at risk adjusted returns.

866
00:58:20,040 --> 00:58:22,680
Speaker 1: So if you're gonna if you're gonna assume a little

867
00:58:22,680 --> 00:58:25,760
Speaker 1: more risk and a little more volatility, let's say with

868
00:58:25,840 --> 00:58:30,680
Speaker 1: smaller cap stocks, you should be compensated for that additional risk. Yes,

869
00:58:30,960 --> 00:58:34,840
Speaker 1: But more than that, you have to be aware of

870
00:58:34,880 --> 00:58:38,280
Speaker 1: the cost. Uh. That is, the people who promote those

871
00:58:38,360 --> 00:58:41,080
Speaker 1: smart beta funds and so on, they take big chunks

872
00:58:41,120 --> 00:58:44,800
Speaker 1: for themselves. Doesn't leave you anything that that's that's the

873
00:58:44,840 --> 00:58:49,160
Speaker 1: general problem with the hard to beat market. That is,

874
00:58:49,560 --> 00:58:52,760
Speaker 1: it's not that money managers don't beat the market, it

875
00:58:52,920 --> 00:58:55,480
Speaker 1: is that they don't share it with their investors. Well,

876
00:58:55,520 --> 00:59:00,160
Speaker 1: someone's got to keep those Lamborghini dealers happy, right. So

877
00:59:00,160 --> 00:59:02,840
Speaker 1: so my last question before I get to the favorites.

878
00:59:03,240 --> 00:59:08,320
Speaker 1: We briefly talked touched on risk aversion and loss of version.

879
00:59:08,880 --> 00:59:13,760
Speaker 1: Is there really a big difference between the two? Well

880
00:59:13,880 --> 00:59:17,160
Speaker 1: not really. In daily language, when we talk about risk,

881
00:59:17,240 --> 00:59:19,800
Speaker 1: we really talk about laws. That is, we are not

882
00:59:19,960 --> 00:59:26,400
Speaker 1: really talking about about gambles. Where where it is if

883
00:59:26,440 --> 00:59:29,600
Speaker 1: you if you lose, you win just one hundred dollars

884
00:59:29,640 --> 00:59:32,760
Speaker 1: and if you win, you win a thousand. Uh. It

885
00:59:32,960 --> 00:59:37,920
Speaker 1: is always uh, you possibly can lose. You put in

886
00:59:37,960 --> 00:59:41,320
Speaker 1: one hundred dollars, you might end up with zero, or

887
00:59:41,360 --> 00:59:44,840
Speaker 1: you might end with two hundred dollars and so and

888
00:59:44,920 --> 00:59:48,400
Speaker 1: so that is what loss of version. Actually, they really

889
00:59:48,440 --> 00:59:53,000
Speaker 1: interesting distinction in my mind is between loss of version

890
00:59:53,960 --> 00:59:58,240
Speaker 1: and short fall version. That is what's the difference. So

891
00:59:58,240 --> 01:00:03,480
Speaker 1: so so think about think about the case where you

892
01:00:03,600 --> 01:00:07,560
Speaker 1: bought a stock for one dollars and now it is

893
01:00:07,640 --> 01:00:15,640
Speaker 1: trading at sixty. Well, the forty are lost. An economists

894
01:00:15,640 --> 01:00:17,880
Speaker 1: will tell you the forty dollars are lost whether you

895
01:00:17,960 --> 01:00:23,840
Speaker 1: realize the lass. But but your aspiration, but your reference

896
01:00:23,920 --> 01:00:28,960
Speaker 1: point is the one hundred, and so you hate that shortfall.

897
01:00:29,080 --> 01:00:31,880
Speaker 1: And so you are reluctant to realize the loss because

898
01:00:31,920 --> 01:00:35,560
Speaker 1: you're still trying to get even. Uh. And we heard

899
01:00:35,640 --> 01:00:38,680
Speaker 1: that countless times from investors. Dear God, just let me

900
01:00:38,680 --> 01:00:41,200
Speaker 1: get back to break even, and I'll never buy another

901
01:00:41,280 --> 01:00:45,480
Speaker 1: fill in the blank friend. So and so, when you

902
01:00:45,520 --> 01:00:50,200
Speaker 1: think about ambition more generally, that is that is shortfall version.

903
01:00:50,520 --> 01:00:52,680
Speaker 1: That is, I am now in a position where I

904
01:00:52,760 --> 01:00:57,160
Speaker 1: make ten dollars an hour. My aspiration is to get

905
01:00:57,200 --> 01:01:01,480
Speaker 1: a job that pays thirty dollars an hour. I am

906
01:01:01,560 --> 01:01:05,040
Speaker 1: now in a short fall position. That gives me the

907
01:01:05,560 --> 01:01:11,840
Speaker 1: ambition to go study, what do whatever is necessary to

908
01:01:11,960 --> 01:01:15,040
Speaker 1: upgrade my skill sech that I can get more. Uh,

909
01:01:15,080 --> 01:01:17,560
Speaker 1: and so that that really is so. So you can

910
01:01:17,600 --> 01:01:22,640
Speaker 1: have five billion dollars. But but if your benchmark, if

911
01:01:22,680 --> 01:01:26,280
Speaker 1: your inspiration is ten, you feel as if you are

912
01:01:26,320 --> 01:01:31,160
Speaker 1: still a loser and you're trying to reach that aspiration. Huh,

913
01:01:31,560 --> 01:01:35,520
Speaker 1: that's amazing. So let me jump into my favorite questions.

914
01:01:35,520 --> 01:01:38,400
Speaker 1: In the last twenty or so minutes we have we

915
01:01:38,520 --> 01:01:44,440
Speaker 1: have left UM. So we described discussed a little bit

916
01:01:44,480 --> 01:01:53,080
Speaker 1: about your time UM at Hebrew University and in Rusal University. No,

917
01:01:53,160 --> 01:01:58,520
Speaker 1: it's Hebrew Investigation. UM. Your undergraduates where you have an

918
01:01:58,640 --> 01:02:02,920
Speaker 1: m b a. In finance. Yeah, what what did you

919
01:02:03,000 --> 01:02:07,360
Speaker 1: study undergraduate? Well, and the righteous studies in Israel are

920
01:02:07,360 --> 01:02:10,720
Speaker 1: different from from the United States, uh, in that you

921
01:02:11,520 --> 01:02:16,080
Speaker 1: begin with majors, and so my majors were economics and statistics,

922
01:02:16,240 --> 01:02:19,120
Speaker 1: and so it was very much a finance oriented Well

923
01:02:19,240 --> 01:02:22,360
Speaker 1: it was. It was an economics and statistics and then

924
01:02:22,600 --> 01:02:25,600
Speaker 1: and then I continued on for an n b A.

925
01:02:25,800 --> 01:02:29,880
Speaker 1: Immediately after I got my undergraduate degree. Uh. And they're

926
01:02:30,520 --> 01:02:34,480
Speaker 1: my focus was on finance. And when you come to

927
01:02:34,520 --> 01:02:37,040
Speaker 1: the United States, you go to Columbia, you get a PhD.

928
01:02:37,800 --> 01:02:40,800
Speaker 1: Is that where psychology started to come into this? So

929
01:02:41,000 --> 01:02:44,120
Speaker 1: I I had, like all PhD students, I had some

930
01:02:44,240 --> 01:02:48,760
Speaker 1: smattering of psychology there. But but that's not really where

931
01:02:48,800 --> 01:02:53,280
Speaker 1: where it came from. What what the experience in New

932
01:02:53,360 --> 01:02:55,760
Speaker 1: York and the experience of living in the United States,

933
01:02:55,760 --> 01:02:58,600
Speaker 1: of course stayed with me. One of the things that

934
01:02:58,800 --> 01:03:03,640
Speaker 1: I years later in my studies is is the time

935
01:03:04,000 --> 01:03:08,320
Speaker 1: of the energy crisis UH seventy three seventy four, when

936
01:03:08,400 --> 01:03:14,360
Speaker 1: conn Edison eliminated its dividends and and the the annual

937
01:03:14,440 --> 01:03:18,720
Speaker 1: meeting was raucous and people wanted to hang the chairman.

938
01:03:19,320 --> 01:03:21,920
Speaker 1: So Professor statmon tell Us, who were some of your

939
01:03:21,960 --> 01:03:26,440
Speaker 1: early mentors, Well, I was fortunate to have very many,

940
01:03:26,720 --> 01:03:30,680
Speaker 1: and I tried to reciprocate now by mentoring my students

941
01:03:30,760 --> 01:03:35,200
Speaker 1: and my younger colleagues. It goes back. I can think

942
01:03:35,280 --> 01:03:39,200
Speaker 1: of of high school where my English teacher said, I

943
01:03:39,240 --> 01:03:43,280
Speaker 1: can see you doing a master's degree. Well, you know

944
01:03:43,360 --> 01:03:46,520
Speaker 1: when we are in high school, just just the sense

945
01:03:46,640 --> 01:03:50,560
Speaker 1: that that the grown up is is saying that you

946
01:03:50,600 --> 01:03:55,480
Speaker 1: can set your sights high it's really very QUI care

947
01:03:55,680 --> 01:04:01,080
Speaker 1: exactly and and you know, I think of Peter Burn's uh,

948
01:04:01,200 --> 01:04:06,560
Speaker 1: Peter Bernstein. I got to know because I sent him

949
01:04:06,600 --> 01:04:10,560
Speaker 1: some some paper and he and he took to the

950
01:04:10,640 --> 01:04:14,360
Speaker 1: ideas of behavior of finesse right away. I mean, it

951
01:04:14,560 --> 01:04:16,920
Speaker 1: was right in him. And it was his book on

952
01:04:17,120 --> 01:04:21,360
Speaker 1: Risk against the Gods is just spectacle, is spectacular. And

953
01:04:21,400 --> 01:04:25,160
Speaker 1: I have I have his book on gold literally on

954
01:04:25,240 --> 01:04:27,920
Speaker 1: my desk. It's two or three back in the queue,

955
01:04:28,400 --> 01:04:31,120
Speaker 1: but it's it's on my list. So you know how

956
01:04:31,160 --> 01:04:34,720
Speaker 1: fortunate I am that that's amazing as as a mentor,

957
01:04:34,760 --> 01:04:37,480
Speaker 1: and so he opened he opened many doors for me,

958
01:04:37,520 --> 01:04:41,920
Speaker 1: and he encouraged me to do that work. Uh and

959
01:04:41,920 --> 01:04:44,720
Speaker 1: and in between so you met him just merely by

960
01:04:44,960 --> 01:04:47,680
Speaker 1: sending him a paper I sent him, Yeah, I sent

961
01:04:47,800 --> 01:04:52,200
Speaker 1: him a paper very very early nineteen eighty probably, uh,

962
01:04:52,880 --> 01:04:55,960
Speaker 1: a simple paper about betas and and so on and

963
01:04:55,960 --> 01:04:58,960
Speaker 1: and and he accepted it for the John Portfolio Management.

964
01:04:59,600 --> 01:05:03,480
Speaker 1: He was he was editing that at the time. And

965
01:05:03,480 --> 01:05:06,880
Speaker 1: and then I sent him some more and we got

966
01:05:06,880 --> 01:05:11,120
Speaker 1: it too into a correspondence. And he's he was always

967
01:05:11,200 --> 01:05:14,360
Speaker 1: interested in ideas. That the last thing that matters to

968
01:05:14,520 --> 01:05:17,520
Speaker 1: him a status. You know, you're you're a full professor

969
01:05:17,640 --> 01:05:22,000
Speaker 1: or or assistant. He just he just thrilled two new ideas,

970
01:05:22,040 --> 01:05:25,280
Speaker 1: and so and so and and he was always innovative,

971
01:05:25,360 --> 01:05:29,120
Speaker 1: and so it was. It was really quite quite a pleasure,

972
01:05:29,800 --> 01:05:33,000
Speaker 1: uh and and very very beneficial. So so he recommended

973
01:05:33,040 --> 01:05:36,280
Speaker 1: me for a particular award. He put me on on

974
01:05:36,360 --> 01:05:41,240
Speaker 1: some board of a money management company, and and so on.

975
01:05:42,040 --> 01:05:45,240
Speaker 1: And he was he was a very tough mentor. That

976
01:05:45,240 --> 01:05:48,919
Speaker 1: that is really he would uh sometimes I would get

977
01:05:49,040 --> 01:05:54,120
Speaker 1: I would get comments on on papers that really uh

978
01:05:54,440 --> 01:05:58,520
Speaker 1: didn't make me cry, but but surely surely we were

979
01:05:58,600 --> 01:06:02,280
Speaker 1: were painful, but of course these were comments that helped

980
01:06:02,280 --> 01:06:06,560
Speaker 1: me do better. He is a meticulous writer. Everything I've

981
01:06:06,600 --> 01:06:11,439
Speaker 1: ever read of his, every page is just filled with

982
01:06:12,440 --> 01:06:15,680
Speaker 1: not only deep research, but you could see the structure

983
01:06:16,240 --> 01:06:18,600
Speaker 1: of the structure of the book, the structure of the chapter,

984
01:06:19,080 --> 01:06:23,680
Speaker 1: the way he puts paragraphs together. So much thought and

985
01:06:23,720 --> 01:06:28,080
Speaker 1: consideration goes into it. He's just a wonderful writer. So

986
01:06:28,120 --> 01:06:33,720
Speaker 1: if he likes your writing, that that says a lot. Well. Yeah,

987
01:06:33,840 --> 01:06:36,160
Speaker 1: as I said, he was a tough mentor, but that

988
01:06:36,320 --> 01:06:39,400
Speaker 1: a very very good one and a very kind one overall.

989
01:06:39,440 --> 01:06:42,360
Speaker 1: That that is even even when he was tough uh

990
01:06:42,440 --> 01:06:45,200
Speaker 1: and and I had I had many others who are

991
01:06:45,280 --> 01:06:50,080
Speaker 1: kind to me at Columbia, and and any stand out

992
01:06:50,120 --> 01:06:52,440
Speaker 1: who do you want to mention at Columbia. At Columbia,

993
01:06:52,720 --> 01:06:56,240
Speaker 1: you know two professors who actually left not long after

994
01:06:56,520 --> 01:07:00,360
Speaker 1: I came, but but helped me even after they left.

995
01:07:01,200 --> 01:07:07,080
Speaker 1: Richard Rippy uh and Jerry SCHNEI have been exceedingly helpful

996
01:07:07,160 --> 01:07:10,640
Speaker 1: to me at a time when I really needed most.

997
01:07:10,960 --> 01:07:14,080
Speaker 1: And it was quite a pleasure to send them um

998
01:07:15,160 --> 01:07:19,160
Speaker 1: my book uh and and add an inscription that that

999
01:07:19,360 --> 01:07:23,040
Speaker 1: really thanks them for for their help when I needed

1000
01:07:23,080 --> 01:07:27,320
Speaker 1: it most. So, so let's talk about investors who influenced

1001
01:07:27,360 --> 01:07:31,520
Speaker 1: your approach to investing and what other investors affected how

1002
01:07:31,600 --> 01:07:37,120
Speaker 1: you looked at the world of behavior. Well, you know,

1003
01:07:37,360 --> 01:07:39,160
Speaker 1: I mean, you can think of of Peter Bernstein as

1004
01:07:39,160 --> 01:07:45,520
Speaker 1: an investor, but but I have not really followed a

1005
01:07:45,600 --> 01:07:49,280
Speaker 1: particular investor. I like the insights of Warren Buffett. Warren Buffett,

1006
01:07:49,280 --> 01:07:53,160
Speaker 1: I think is very good at recognizing precisely the difference

1007
01:07:53,240 --> 01:07:57,760
Speaker 1: between markets were price equals value and markets that are

1008
01:07:57,840 --> 01:08:01,000
Speaker 1: hard to beat and and so and so. He says, yes,

1009
01:08:01,160 --> 01:08:07,240
Speaker 1: markets are such that prices deviate from value. But when

1010
01:08:07,280 --> 01:08:11,360
Speaker 1: it comes to individual investors, you say, invest in index

1011
01:08:11,400 --> 01:08:14,440
Speaker 1: funds because markets are hard to beat. And so that

1012
01:08:14,960 --> 01:08:18,160
Speaker 1: these kinds of insights really stayed with me. And now

1013
01:08:18,280 --> 01:08:21,560
Speaker 1: let's talk a little bit about about books. I referenced

1014
01:08:21,880 --> 01:08:26,240
Speaker 1: Peter Bernstein's Against the Gods The Untold Story of Risk.

1015
01:08:26,760 --> 01:08:30,280
Speaker 1: Tell us about some books that have been either influential

1016
01:08:30,400 --> 01:08:33,080
Speaker 1: to you or that you've just enjoyed or or what

1017
01:08:33,240 --> 01:08:36,560
Speaker 1: have you. Well, on the on the just enjoyed or

1018
01:08:36,680 --> 01:08:40,760
Speaker 1: touching a book, a book in Hebrew that just was translated.

1019
01:08:40,800 --> 01:08:44,679
Speaker 1: It's called Judah, and it's about the story of Judah.

1020
01:08:45,960 --> 01:08:49,559
Speaker 1: Is scary it and it kind of twists the story

1021
01:08:50,200 --> 01:08:55,920
Speaker 1: where by Judah becomes becomes the the the hero of

1022
01:08:56,080 --> 01:08:59,519
Speaker 1: the story under Jesus of course, uh. And it is

1023
01:08:59,560 --> 01:09:02,479
Speaker 1: said in Jerusalem, Jerusalem that I know, and so it

1024
01:09:02,720 --> 01:09:06,880
Speaker 1: was very very touching to me. On on the nonfiction,

1025
01:09:06,960 --> 01:09:11,920
Speaker 1: of course, I read recently the Undoing Projects by Michael

1026
01:09:12,000 --> 01:09:14,400
Speaker 1: Lewis that we just talked about, and and one of

1027
01:09:14,479 --> 01:09:20,360
Speaker 1: the things that really struck me there was one how Calman.

1028
01:09:20,479 --> 01:09:24,320
Speaker 1: At first you were laughing as they did. And when

1029
01:09:24,360 --> 01:09:27,360
Speaker 1: I think of my work with her, chafferd my good

1030
01:09:27,439 --> 01:09:30,920
Speaker 1: friend and colleague. We did the same thing. You know

1031
01:09:31,080 --> 01:09:34,479
Speaker 1: that the people really wondered why is that we love

1032
01:09:35,040 --> 01:09:37,720
Speaker 1: so much? But but that is one. The other thing

1033
01:09:37,840 --> 01:09:41,240
Speaker 1: that struck me is the struggle for status. I mean

1034
01:09:41,600 --> 01:09:43,479
Speaker 1: between the two of them, between the two of them

1035
01:09:43,800 --> 01:09:48,280
Speaker 1: ultimately ultimately broke them up. And so if you needed

1036
01:09:48,439 --> 01:09:52,439
Speaker 1: some piece of evidence of how important social status is

1037
01:09:52,520 --> 01:09:55,560
Speaker 1: to us, you have that. And it's kind of this.

1038
01:09:55,800 --> 01:09:57,920
Speaker 1: This part of it, of course, is a sad story.

1039
01:09:58,320 --> 01:10:01,880
Speaker 1: I knew just a bit about it, but not but

1040
01:10:02,120 --> 01:10:06,040
Speaker 1: not much. Uh, And that exposed it. And I look

1041
01:10:06,120 --> 01:10:09,639
Speaker 1: at them and I say, they are There are people

1042
01:10:09,760 --> 01:10:13,400
Speaker 1: like me and you. There are normal people. And and

1043
01:10:13,600 --> 01:10:17,400
Speaker 1: when one feels that he is treated unfairly, and and

1044
01:10:17,600 --> 01:10:20,479
Speaker 1: and there are want of fairness is another thing. We

1045
01:10:20,640 --> 01:10:25,920
Speaker 1: want one response in ways that that really terminates a

1046
01:10:26,080 --> 01:10:30,919
Speaker 1: good friendship. That's fascinating. Any other books you want to reference,

1047
01:10:31,160 --> 01:10:35,120
Speaker 1: It doesn't even have to be financed related. Oh I don't.

1048
01:10:35,240 --> 01:10:38,559
Speaker 1: I don't find myself reading too many books. What are

1049
01:10:38,560 --> 01:10:40,479
Speaker 1: you reading right now? What's the most recent book you

1050
01:10:40,520 --> 01:10:44,280
Speaker 1: read other than undoing projects? Well, I'm beginning to read

1051
01:10:44,320 --> 01:10:49,240
Speaker 1: the book in Hebrew again about that that relates to

1052
01:10:49,360 --> 01:10:52,720
Speaker 1: kind of the political situation that they sort of back

1053
01:10:52,760 --> 01:10:58,200
Speaker 1: and forth between between Israelis and Palestinians. That goes nowhere,

1054
01:10:58,240 --> 01:11:00,479
Speaker 1: and it kind of makes a story of their about

1055
01:11:00,600 --> 01:11:06,960
Speaker 1: how how Palestinians arranged for a demonstration. Israelis have a

1056
01:11:07,080 --> 01:11:10,320
Speaker 1: rule book is how to disperse the demonstration, and so

1057
01:11:10,600 --> 01:11:13,120
Speaker 1: and and so it kind of goes one step here

1058
01:11:13,200 --> 01:11:16,719
Speaker 1: and one step. They're wasting time and energy and lives

1059
01:11:17,400 --> 01:11:24,559
Speaker 1: and getting exactly what um or the author I don't remember, Okay,

1060
01:11:24,960 --> 01:11:28,000
Speaker 1: emailed me. I'll add it to the list. Um let's

1061
01:11:28,080 --> 01:11:31,240
Speaker 1: keep going down our our favorite questions. So, since you

1062
01:11:32,160 --> 01:11:35,280
Speaker 1: joined the world of academia and since you've started studying

1063
01:11:35,360 --> 01:11:40,000
Speaker 1: finance and behavior, what's the single most significant change that

1064
01:11:40,240 --> 01:11:45,640
Speaker 1: you've you've become aware of? Well, in in finance, I

1065
01:11:45,760 --> 01:11:48,160
Speaker 1: think I think that it's not just because I'm biased,

1066
01:11:48,360 --> 01:11:51,080
Speaker 1: was behavioral finance, but but one of the things that

1067
01:11:51,800 --> 01:11:55,320
Speaker 1: that has changed really is the reception of not just

1068
01:11:55,560 --> 01:11:59,519
Speaker 1: behavioral finnance, but but generally looking at individuals, looking at people,

1069
01:12:00,080 --> 01:12:04,120
Speaker 1: I'm asking how is it that that they behave? When

1070
01:12:04,720 --> 01:12:08,679
Speaker 1: her schefferd and I in fact wrote the very first

1071
01:12:08,760 --> 01:12:11,599
Speaker 1: paper that was published in in a in a top

1072
01:12:11,680 --> 01:12:15,200
Speaker 1: academic journal, journal Financial Economics. Uh and it was published

1073
01:12:15,200 --> 01:12:17,719
Speaker 1: in nine and it has to do with this issue

1074
01:12:17,760 --> 01:12:23,240
Speaker 1: of dividends. There was there was almost a riot there

1075
01:12:23,360 --> 01:12:27,840
Speaker 1: at Rochester uh and and people and we heard later

1076
01:12:28,080 --> 01:12:32,040
Speaker 1: that that that people uh said that they will never

1077
01:12:32,160 --> 01:12:34,960
Speaker 1: ever send another paper to this journal if they published

1078
01:12:35,040 --> 01:12:38,720
Speaker 1: this one. Uh and And Merton Miller two years later

1079
01:12:39,680 --> 01:12:46,280
Speaker 1: wrote a paper essentially attacking our paper exactly exactly when

1080
01:12:46,360 --> 01:12:51,360
Speaker 1: when Merton Miller does that today, you know, it's not

1081
01:12:51,479 --> 01:12:55,120
Speaker 1: that the work is how harmed, not at all that

1082
01:12:55,280 --> 01:13:00,400
Speaker 1: there's really no exciting work, informative work, but you don't

1083
01:13:00,400 --> 01:13:04,559
Speaker 1: really have the kind of struggle that we had at

1084
01:13:04,600 --> 01:13:07,120
Speaker 1: the time in the al the eighties. So Merton Miller

1085
01:13:07,280 --> 01:13:12,000
Speaker 1: attacked your paper made it more well known by the attack.

1086
01:13:12,400 --> 01:13:16,320
Speaker 1: Have you ever heard the phrase the Streisan effect? So

1087
01:13:16,439 --> 01:13:20,640
Speaker 1: this is an interesting little bit of internet lore. Barbara Streisan,

1088
01:13:20,800 --> 01:13:25,960
Speaker 1: the famous Center has this beautiful California ocean front home

1089
01:13:26,040 --> 01:13:29,599
Speaker 1: on the top of a cliff. Some company does all

1090
01:13:29,680 --> 01:13:33,120
Speaker 1: these aerial footage and they sell the footage to things

1091
01:13:33,200 --> 01:13:36,439
Speaker 1: like Google Maps and to real estate companies because they

1092
01:13:36,600 --> 01:13:39,759
Speaker 1: want to you know, it's a it's a useful tool

1093
01:13:40,320 --> 01:13:42,840
Speaker 1: if you're if if you're doing construction, if you're looking

1094
01:13:42,920 --> 01:13:46,840
Speaker 1: at environmental impact. There's a ton of uses for it. So,

1095
01:13:48,040 --> 01:13:53,480
Speaker 1: but theoretically these one thousand foot flyovers violate people's privacy.

1096
01:13:53,800 --> 01:13:56,880
Speaker 1: It turns out it doesn't. But Barbara streisand sued the

1097
01:13:56,960 --> 01:14:01,400
Speaker 1: company because they violated her privacy. All the documents that

1098
01:14:01,640 --> 01:14:03,920
Speaker 1: no one have you know, it's one house of a

1099
01:14:04,080 --> 01:14:07,120
Speaker 1: million along the coast, no one would have known it's hers.

1100
01:14:07,560 --> 01:14:10,960
Speaker 1: But as part of the litigation, the specific house, the location,

1101
01:14:11,080 --> 01:14:14,960
Speaker 1: the address, all this stuff becomes public and since then,

1102
01:14:15,360 --> 01:14:19,280
Speaker 1: um people have taken the attempt to suppress something and

1103
01:14:19,439 --> 01:14:23,559
Speaker 1: accidentally making it more broadly distributed. Is the strides and effect?

1104
01:14:23,840 --> 01:14:27,360
Speaker 1: Merton Miller did that for you in part. Yeah, he

1105
01:14:27,560 --> 01:14:32,000
Speaker 1: did that. Yeah, it is. It is really nice to

1106
01:14:32,280 --> 01:14:36,840
Speaker 1: sort of struggle against something. If something is is fully accepted,

1107
01:14:36,960 --> 01:14:40,439
Speaker 1: it is no longer that's exactly that's exactly right. What

1108
01:14:40,640 --> 01:14:44,560
Speaker 1: about UM so you mentioned that that was one of

1109
01:14:44,680 --> 01:14:47,280
Speaker 1: the changes that took place a little more acceptance of

1110
01:14:47,400 --> 01:14:50,479
Speaker 1: behavioral finance. What do you see as the next shifts

1111
01:14:51,160 --> 01:14:55,080
Speaker 1: in the future. Well, I think I think that that

1112
01:14:55,320 --> 01:15:01,320
Speaker 1: it is about creating a structure for behavioral finance. Really

1113
01:15:01,880 --> 01:15:06,360
Speaker 1: central to my second book, UH, is to dispel the

1114
01:15:06,479 --> 01:15:09,920
Speaker 1: notion that behavior finance is is kind of a set

1115
01:15:10,000 --> 01:15:14,360
Speaker 1: of interesting stories about people who behave and in ways

1116
01:15:14,400 --> 01:15:17,760
Speaker 1: that are not entirely rational, and so on. But people say,

1117
01:15:17,920 --> 01:15:21,240
Speaker 1: where is your portfolio theory, where's your answer pricing theory,

1118
01:15:21,360 --> 01:15:25,640
Speaker 1: where's your market deficiency theory? And my answer is that

1119
01:15:26,520 --> 01:15:28,280
Speaker 1: is that we have all of that, and that is

1120
01:15:28,320 --> 01:15:30,920
Speaker 1: what I tried to show that that is, you have

1121
01:15:31,160 --> 01:15:35,120
Speaker 1: rational people, we have normal people. You have a standard

1122
01:15:35,760 --> 01:15:40,559
Speaker 1: mean variance portfolio theory, we have a behavior portfolio theory,

1123
01:15:40,920 --> 01:15:45,400
Speaker 1: and so on. And uh, just just to add Harry Markowitz,

1124
01:15:46,000 --> 01:15:49,719
Speaker 1: uh is modern portfolio your portfolio theory. He is also

1125
01:15:49,840 --> 01:15:54,160
Speaker 1: a great fan of behavior portfolio theory. Uh. Harry Marcos

1126
01:15:54,240 --> 01:15:58,720
Speaker 1: really knows investors and he knows behavior. Uh. And he

1127
01:15:59,000 --> 01:16:02,680
Speaker 1: think of himself with a good amount of justification as

1128
01:16:02,720 --> 01:16:06,680
Speaker 1: being one of the fathers of behavior. Sure, if you

1129
01:16:06,800 --> 01:16:11,360
Speaker 1: think about modern portfolio theory there it's certainly he is

1130
01:16:11,400 --> 01:16:16,360
Speaker 1: an intellectual father of the of the study. Right. Well,

1131
01:16:16,439 --> 01:16:18,519
Speaker 1: But but more than that, you know that there's one

1132
01:16:18,720 --> 01:16:22,519
Speaker 1: one of the central things about me in variance portfolio

1133
01:16:22,640 --> 01:16:25,080
Speaker 1: theory is that you have to look at your portfolio

1134
01:16:25,160 --> 01:16:28,000
Speaker 1: as a whole, meaning the combination of stocks, bonds, and

1135
01:16:28,080 --> 01:16:30,840
Speaker 1: other non concided as I I I liken it to

1136
01:16:31,560 --> 01:16:34,719
Speaker 1: looking at a food from the perspective of the stomach,

1137
01:16:34,800 --> 01:16:39,200
Speaker 1: where it's all mixed together. It's not it's not starch, protein, vegetables.

1138
01:16:40,360 --> 01:16:45,680
Speaker 1: That's interesting. But but uh, he understands that that you

1139
01:16:45,840 --> 01:16:49,080
Speaker 1: have to begin with people's goals. UH, so you have

1140
01:16:49,200 --> 01:16:51,400
Speaker 1: this kind of goal based planning. And so he and

1141
01:16:51,560 --> 01:16:54,479
Speaker 1: I and two of our colleagues wrote the paper together

1142
01:16:55,240 --> 01:16:58,880
Speaker 1: Marcos Marco Witz. What year was? What was published in

1143
01:16:59,160 --> 01:17:05,720
Speaker 1: two thousand ten, and and we developed a a uh

1144
01:17:05,880 --> 01:17:10,400
Speaker 1: a mental accounting portfolio theory where where people keep their

1145
01:17:10,479 --> 01:17:18,320
Speaker 1: money in separate pockets, separate goals UH, for example retirement

1146
01:17:18,680 --> 01:17:24,080
Speaker 1: and college education and bequest UH and they optimize each

1147
01:17:24,160 --> 01:17:27,720
Speaker 1: of them by the rules of mean variance and then

1148
01:17:27,840 --> 01:17:30,879
Speaker 1: put it together. And so we show some some interesting

1149
01:17:31,640 --> 01:17:36,320
Speaker 1: theoretical results. But the most interesting part really is to say, yeah,

1150
01:17:36,640 --> 01:17:40,000
Speaker 1: normal people think this way. They don't think about money

1151
01:17:40,080 --> 01:17:43,400
Speaker 1: as being kind of generic. They think about it money

1152
01:17:43,560 --> 01:17:46,920
Speaker 1: that I need for this goal of that goal. Portfolio

1153
01:17:47,040 --> 01:17:52,040
Speaker 1: optimization with mental accounts exactly fun with Google. Uh and

1154
01:17:52,360 --> 01:17:54,800
Speaker 1: and um oh that's quite that's quite fascinating. And I'll

1155
01:17:54,840 --> 01:17:58,280
Speaker 1: have to take a look. There is a non technical

1156
01:17:58,479 --> 01:18:01,280
Speaker 1: version of that in the ce J S t o R.

1157
01:18:01,600 --> 01:18:06,680
Speaker 1: It's uh, the Journal of Financial and Quantitative Debt one.

1158
01:18:06,760 --> 01:18:10,599
Speaker 1: But but the other one is in in the Journal

1159
01:18:10,880 --> 01:18:14,120
Speaker 1: of Wealth Management. Okay, I will, I will, I will

1160
01:18:14,240 --> 01:18:17,400
Speaker 1: make I'll add that link for when we uh, let's

1161
01:18:17,400 --> 01:18:20,040
Speaker 1: see Journal of Wealth Management. See if they instantly called

1162
01:18:20,080 --> 01:18:25,200
Speaker 1: that portfolios for people who want to restore goals or

1163
01:18:25,280 --> 01:18:28,439
Speaker 1: something when here here's how someone else described it, when

1164
01:18:28,520 --> 01:18:33,040
Speaker 1: behavioral portfolio theory meets Markowitz. That that's interesting, all right,

1165
01:18:33,040 --> 01:18:35,080
Speaker 1: So I will find all those links and make sure

1166
01:18:35,400 --> 01:18:38,680
Speaker 1: they're included. I'm down to my last three questions. So

1167
01:18:38,960 --> 01:18:41,920
Speaker 1: what do you do to relax or keep mentally fit

1168
01:18:42,479 --> 01:18:46,680
Speaker 1: outside of the office? Oh? You know, I I exercise. No,

1169
01:18:46,760 --> 01:18:48,639
Speaker 1: what do you do? What do you do to exercise? Oh?

1170
01:18:49,280 --> 01:18:52,559
Speaker 1: You know, I have equipment a treadmill and a bike

1171
01:18:52,800 --> 01:18:58,000
Speaker 1: and one of those whatever that that that helps kind

1172
01:18:58,000 --> 01:19:04,120
Speaker 1: of the equivalent of lifting weights and and what else

1173
01:19:04,200 --> 01:19:06,960
Speaker 1: do I do? You know? Mentally? Of course, my my

1174
01:19:07,200 --> 01:19:09,880
Speaker 1: my work, and and and politics and and the like,

1175
01:19:10,360 --> 01:19:15,000
Speaker 1: of course, keep me, keep me alive. But you know,

1176
01:19:15,120 --> 01:19:18,400
Speaker 1: around the houses, it is odd. I I kind of

1177
01:19:18,479 --> 01:19:24,880
Speaker 1: take delight in doing projects like like building, uh and

1178
01:19:25,040 --> 01:19:28,920
Speaker 1: enclosure for for for storage, and and and and so on.

1179
01:19:29,120 --> 01:19:31,599
Speaker 1: And so I have to ask you a political question

1180
01:19:31,720 --> 01:19:36,640
Speaker 1: because uh, this has been a very political era. But

1181
01:19:36,800 --> 01:19:40,040
Speaker 1: I can't help but notice that the way Americans argue

1182
01:19:40,120 --> 01:19:45,240
Speaker 1: over politics is very different the way Europeans or Israeli

1183
01:19:46,240 --> 01:19:50,040
Speaker 1: argue over You know, israelis canna have a political argument, debate,

1184
01:19:50,120 --> 01:19:53,160
Speaker 1: discussion and then say let's go to launch and it's

1185
01:19:53,200 --> 01:19:57,960
Speaker 1: forgotten Americans. It goes into two camps and neither side.

1186
01:19:58,040 --> 01:20:00,520
Speaker 1: Here's what the other side says. What do you attribute

1187
01:20:00,560 --> 01:20:04,320
Speaker 1: those differences to you? You've seen both countries long enough.

1188
01:20:04,720 --> 01:20:07,640
Speaker 1: Culture is very is very different. That That is one

1189
01:20:07,680 --> 01:20:10,840
Speaker 1: of the things that struck me when I came to

1190
01:20:10,920 --> 01:20:16,880
Speaker 1: the United States. In in Israel, Uh, if people agree

1191
01:20:16,960 --> 01:20:19,800
Speaker 1: with you, they are quiet. But if they disagree, you

1192
01:20:19,840 --> 01:20:23,400
Speaker 1: will hear them. In the United States is the opposite. Uh,

1193
01:20:23,600 --> 01:20:25,880
Speaker 1: you will know that they disagree with you if they

1194
01:20:25,880 --> 01:20:29,880
Speaker 1: are quiet, rather than telling you that they agree and

1195
01:20:30,080 --> 01:20:33,040
Speaker 1: and so and so, they they they are very Americans.

1196
01:20:33,160 --> 01:20:40,720
Speaker 1: We are very debate argument of verse and land. Well, no, no,

1197
01:20:40,880 --> 01:20:43,360
Speaker 1: but I think that it's actually good. It's it's kind

1198
01:20:43,400 --> 01:20:46,880
Speaker 1: of it. It's a politeness, it is a civility. And

1199
01:20:47,080 --> 01:20:52,600
Speaker 1: so before before I tell you my political take, I

1200
01:20:52,720 --> 01:20:56,599
Speaker 1: try to probe what yours is to see, and if

1201
01:20:56,640 --> 01:21:00,240
Speaker 1: it is very different from mine, I just termine the

1202
01:21:00,280 --> 01:21:03,160
Speaker 1: discussion and move on to talk about sports. What's the

1203
01:21:03,200 --> 01:21:07,920
Speaker 1: old expression, never talk about politics, religion or um. I

1204
01:21:07,960 --> 01:21:12,160
Speaker 1: don't remember what the third one is sex, religion or sex,

1205
01:21:12,280 --> 01:21:16,800
Speaker 1: don't talk about that. That's the money. UM. People here

1206
01:21:16,840 --> 01:21:19,320
Speaker 1: talk about money. I don't think, not about income. They

1207
01:21:19,400 --> 01:21:22,240
Speaker 1: talk about and they talk about spending, and they talk

1208
01:21:22,280 --> 01:21:25,200
Speaker 1: about houses and cars, but it's never income. And our

1209
01:21:25,280 --> 01:21:28,559
Speaker 1: favorite two questions. If one of your students or another

1210
01:21:28,680 --> 01:21:31,000
Speaker 1: millennial were to come up to you and ask for

1211
01:21:31,600 --> 01:21:35,679
Speaker 1: your advice, telling you they were interested, UM in going

1212
01:21:35,760 --> 01:21:39,960
Speaker 1: into the field of either finance or behavioral economics, what

1213
01:21:40,120 --> 01:21:43,280
Speaker 1: sort of advice would you know? I I coordinate internships

1214
01:21:43,439 --> 01:21:46,280
Speaker 1: of finance majors, and and what I tell them, I

1215
01:21:46,400 --> 01:21:50,840
Speaker 1: use the word serendipity that is fined by accident. Uh.

1216
01:21:51,240 --> 01:21:55,040
Speaker 1: You have to figure out not just the world around you,

1217
01:21:55,120 --> 01:21:57,920
Speaker 1: You have to figure out yourself what what works for you?

1218
01:22:00,240 --> 01:22:03,080
Speaker 1: And and you do that by kind of keeping your

1219
01:22:03,160 --> 01:22:07,599
Speaker 1: eyes open and keeping to this idea of serendipity. Figure out,

1220
01:22:07,720 --> 01:22:11,439
Speaker 1: you know, ask yourself, would you want a job along

1221
01:22:11,479 --> 01:22:14,760
Speaker 1: the lines of this internship or is that definitely one

1222
01:22:14,880 --> 01:22:17,760
Speaker 1: that you would not want? Uh? And so and so

1223
01:22:17,920 --> 01:22:21,400
Speaker 1: continue on in in that way. And so I tell

1224
01:22:21,479 --> 01:22:25,320
Speaker 1: them you want to go into finance and to behavioral finance.

1225
01:22:25,360 --> 01:22:28,400
Speaker 1: If you want to go to the academic side, ask

1226
01:22:28,479 --> 01:22:33,479
Speaker 1: yourself whether you delight in new ideas if you don't,

1227
01:22:33,880 --> 01:22:36,400
Speaker 1: and and willing to work. Of course, if you don't

1228
01:22:36,439 --> 01:22:39,120
Speaker 1: delight in new ideas, you know you may as well

1229
01:22:39,200 --> 01:22:43,000
Speaker 1: go to engineering. Um, I think there might be some

1230
01:22:43,120 --> 01:22:45,960
Speaker 1: new ideas and engineering, but but who knows. And our

1231
01:22:46,040 --> 01:22:49,600
Speaker 1: final question, what is it that you know about investing

1232
01:22:49,680 --> 01:22:53,840
Speaker 1: in human behavior today that you wish you knew thirty

1233
01:22:53,960 --> 01:22:57,880
Speaker 1: years ago when you were first started. Well, you know,

1234
01:22:58,479 --> 01:23:01,240
Speaker 1: my answer might might surprise you, but the answer is nothing.

1235
01:23:01,520 --> 01:23:05,920
Speaker 1: That is that is, I really enjoyed the journey as

1236
01:23:06,080 --> 01:23:09,760
Speaker 1: much as I enjoy the destination, and I continue on

1237
01:23:10,000 --> 01:23:12,519
Speaker 1: that journey. And so all I need is kind of

1238
01:23:12,640 --> 01:23:15,760
Speaker 1: like like when you drive a car and you don't

1239
01:23:15,800 --> 01:23:19,920
Speaker 1: really need the headlights to show you anymore than than

1240
01:23:20,479 --> 01:23:24,880
Speaker 1: a distance uh that is out there. Uh. And as

1241
01:23:24,960 --> 01:23:28,120
Speaker 1: you move, you know, the lights move with you and

1242
01:23:28,240 --> 01:23:31,040
Speaker 1: you see the next part of the road. You don't

1243
01:23:31,040 --> 01:23:34,040
Speaker 1: need the navigation system. You just need to You might

1244
01:23:34,200 --> 01:23:37,080
Speaker 1: you might need the navigation I sadly do. But but

1245
01:23:37,400 --> 01:23:42,560
Speaker 1: but I think that joy, the joy of discovery, is

1246
01:23:42,680 --> 01:23:47,240
Speaker 1: really uh too much to give up, uh to know

1247
01:23:47,520 --> 01:23:50,000
Speaker 1: that that is. I don't know that I would have

1248
01:23:50,120 --> 01:23:53,720
Speaker 1: wanted five years ago or thirty years ago to know

1249
01:23:53,960 --> 01:23:56,920
Speaker 1: exactly where my life is going to take me. I think,

1250
01:23:56,920 --> 01:24:00,519
Speaker 1: I think that it is a nice thing when discover

1251
01:24:00,680 --> 01:24:04,120
Speaker 1: things along the way, and you explore things and you

1252
01:24:04,320 --> 01:24:08,160
Speaker 1: enjoy them. We have been speaking with Professor Meyer Statman

1253
01:24:08,280 --> 01:24:12,320
Speaker 1: of Sata Clara University. If you enjoyed this conversation, be

1254
01:24:12,400 --> 01:24:14,320
Speaker 1: sure and check up an Inch or down an Inch

1255
01:24:14,400 --> 01:24:16,559
Speaker 1: on Apple iTunes and you could see the other hundred

1256
01:24:16,600 --> 01:24:21,559
Speaker 1: and thirty or so such conversations we've had previously. Thank

1257
01:24:21,640 --> 01:24:24,240
Speaker 1: you so much, professor, for being so generous with your time.

1258
01:24:24,680 --> 01:24:28,280
Speaker 1: I would be remiss if I did not thank Taylor Riggs,

1259
01:24:29,000 --> 01:24:33,799
Speaker 1: my booker, Michael bat Nick, our head of Research Medina

1260
01:24:33,920 --> 01:24:38,680
Speaker 1: Parwana are recording engineer. We love your comment, feedback and

1261
01:24:38,920 --> 01:24:44,320
Speaker 1: suggestions right to us at m IB podcast at Bloomberg

1262
01:24:44,439 --> 01:24:49,040
Speaker 1: dot net. I'm Barry Ridholtz. You've been listening to Masters

1263
01:24:49,080 --> 01:24:53,920
Speaker 1: in Business on Bloomberg Radio. Our world is always moving,

1264
01:24:54,200 --> 01:24:56,759
Speaker 1: so with Merrill Lanch, you can get access to financial

1265
01:24:56,800 --> 01:25:00,559
Speaker 1: guidance online, in person or through the app. Visit mL

1266
01:25:00,640 --> 01:25:03,040
Speaker 1: dot com and learn more about Merrill Lynch. An affiliate

1267
01:25:03,080 --> 01:25:05,800
Speaker 1: of Bank of America. Merrill Lynch makes available products and

1268
01:25:05,840 --> 01:25:08,880
Speaker 1: services offered by Merrill Lynch. Pierce, Fenner and Smith, Incorporated,

1269
01:25:09,200 --> 01:25:11,320
Speaker 1: a Registered Broker Dealer member s I p C