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Speaker 1: I PC. This is Masters in Business with Barry Riddholts
Speaker 1: on Bloomberg Radio. This week. On the podcast, I have
Speaker 1: an extra special guest. He is Professor Meyer Stateman of
Speaker 1: Santa Clara University, and really he completes our cycle of
Speaker 1: behavioral economists, beginning with Professor Schiller, going on to Sailor
Speaker 1: Ekonoman and now Stotman. We've essentially hit for the whole cycle. UM.
Speaker 1: He's written a number of books on behavioral economics. He's
Speaker 1: advised a number of financial institutions UM, both in real
Speaker 1: life and online versions. Uh. He is extremely knowledgeable about
Speaker 1: not just behavioral economics, but contextualizing the development of this
Speaker 1: field relative to finance over the years. And I really
Speaker 1: enjoyed the way he described first generation, second generation and
Speaker 1: in the not too distant future third generation behavioral economics,
Speaker 1: because it shows how our understanding of homo economists, of
Speaker 1: of humans as perfectly efficient, rational profit maximizers, how that
Speaker 1: model was so far off, how we began to recognize
Speaker 1: it being often And you'll hear in the podcast portion
Speaker 1: the discussion of how one of his first papers back
Speaker 1: in generated so much pushback. It was one of the
Speaker 1: first behavioral economics papers published in a major nal of finance.
Speaker 1: People threatened to never submit a paper again. And it's
Speaker 1: really fascinating how the world has caught up. It only
Speaker 1: took so you go back to what is it thirty years,
Speaker 1: thirty plus years before the world of finance has gotten
Speaker 1: up to academia. I found him to be charming and delightful,
Speaker 1: and I think you will as well. So, with no
Speaker 1: further ado, my conversation with Professor Meyer Stateman. This is
Speaker 1: Master's in Business with Barry Ridholts on Bloomberg Radio. I'm
Speaker 1: Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My extra special guest today is Professor Meyer Stateman. He
Speaker 1: is the Glenn Clinic Professor of Finance at Santa Clara University.
Speaker 1: If you follow behavioral finance. You should certainly be familiar
Speaker 1: with his work. His research has been published in the
Speaker 1: Journal of Finance, Review of Financial Studies. He's won numerous awards,
Speaker 1: Bill Sharp Best Paper Award, Bernstein Fabazzi, Jacob Leavy Outstanding
Speaker 1: Article Award, the Moscow It's Prize, the MacArthur Industry Pioneer Award,
Speaker 1: i am c A Journal Awards, and three Graham and
Speaker 1: Dot Awards. He is on the Wealth Front Investment Advisory Board,
Speaker 1: and he was named one of twenty five most influential
Speaker 1: people by Investment Advisor Meyer Stateman. Welcome to Bloomberg. Delighted
Speaker 1: to be with you, Barry So. By the way, that
Speaker 1: is really the short version of your curriculum, Vita. I
Speaker 1: could go on and on about um, lots and lots
Speaker 1: of stuff, but let's jump into it because you have
Speaker 1: such an interesting background and your work is so fascinating. Um,
Speaker 1: you were at the University of Jerusalem, and also at
Speaker 1: the University of Jerusalem were Danny Kahneman and Amos Tversky.
Speaker 1: Did your time their overlap at all with theirs? Death
Speaker 1: is a very interesting question. Yeah, it is the Hebrew
Speaker 1: University of Jerusalem and and and the Economics building where
Speaker 1: I studied is right next to the psychology building, and
Speaker 1: and during my studies I earned pocket money by walking
Speaker 1: over to the psychology department and serving as a guinea
Speaker 1: pig for experiments. It turns out that these were not
Speaker 1: by Karman and Trusting themselves. When I talked to them
Speaker 1: and identify them, it was others. But I had no
Speaker 1: idea of who they are, and I had no idea
Speaker 1: of their work. And and it can tell you that
Speaker 1: that while there were just feet separating the two buildings,
Speaker 1: the world that separated psychology and economics and finance was
Speaker 1: really very very tall, like some other wall I will
Speaker 1: not mention well. In the Undoing Project, which Michael Lewis
Speaker 1: just published last year, he said he spent a lot
Speaker 1: of times speaking to people at the university, and I
Speaker 1: guess later in their careers there were some really fascinating
Speaker 1: tales about about the two of them. I think your
Speaker 1: age difference you might have been sort of in between
Speaker 1: that just before they they became quite famous. Death is right. Yeah,
Speaker 1: I became aware of their work really at the very
Speaker 1: beginning of nine, when I came to Santa Clarian University
Speaker 1: and I met her cheffering and her cheffering now of
Speaker 1: his work, of their work through a Dick Taylor when
Speaker 1: they were both at Rochester, and from that it was
Speaker 1: off to the races, to say the least. So, so
Speaker 1: let's get into a little bit about um finance and psychology.
Speaker 1: You have an m b A. But you also have
Speaker 1: spent a lot of time in the world of psychology.
Speaker 1: How do you go from studying finance, how do you
Speaker 1: morph towards towards the psychology side of it? Well, I've
Speaker 1: always been interested in human behavior any any time when
Speaker 1: I think about my childhood, and then I thought that
Speaker 1: learning about economic behavior would tell me a whole lot.
Speaker 1: It did, And I always felt that there was something
Speaker 1: missing in those models, but I could not identify precisely what.
Speaker 1: And it was only kind of thing in hindsight that
Speaker 1: I can see how things come together. Uh. And it
Speaker 1: was of course the work of khanmon In firs Key
Speaker 1: that creative structure, and I could see the connection between
Speaker 1: what they were doing and what it is that I
Speaker 1: had in mind. So, so let's talk a little bit
Speaker 1: bit about where economics misses the human behavioral side. How
Speaker 1: did we ever begin with the assumption that humans or
Speaker 1: rational profit maximizing actors. If you spend any time with humans,
Speaker 1: it's pretty clear they're not especially rational. Well, that too
Speaker 1: is a very interesting question, because I wrote a paper
Speaker 1: that led me to go back to all the issues
Speaker 1: of the genre finance and the financial analysts, you know,
Speaker 1: And if you look at stuff that was written in
Speaker 1: it's very clear that people in finance knew about human behavior.
Speaker 1: For example, I saw an article that wrote about the
Speaker 1: reluctance of people to realize losses and how they they
Speaker 1: just hope against hope that it will come back, and
Speaker 1: and and that author tried to persuade them that tax
Speaker 1: considerations should drive them to realize their losses. Well, that
Speaker 1: was really lost once we got to Miller and Modigliani
Speaker 1: and the rational view of finance that fit in simple
Speaker 1: mathematical models. And then it became the models became sort
Speaker 1: of the jail of people, and and people were cut
Speaker 1: and quartered to fit into the models rather than the
Speaker 1: models expanding to fit what people really are. So that
Speaker 1: naturally leads to the question, um our markets really efficient?
Speaker 1: And is the efficient market hypothesis is it truly valid? Well,
Speaker 1: there's great confusion about this issue of market efficiency. Uh,
Speaker 1: there's a claim that behavior finance great contribution is to
Speaker 1: show that markets are not efficient. That I think is
Speaker 1: not so. There are two concepts, two notions of market
Speaker 1: efficiency there are that are regularly confused. One is the
Speaker 1: notion that efficient markets and markets were price equals value,
Speaker 1: and the other is the notion that markets are hard
Speaker 1: to beat. Now. Price equal value markets, for example, do
Speaker 1: not allow for bubbles because bubbles imply divergence of price
Speaker 1: from value. But knowing that you will have bubbles does
Speaker 1: not mean that you know when they occur when it
Speaker 1: is time to actually take advantage of them. Coming up,
Speaker 1: we continue our conversation with Professor Meyer Stateman discussing Finance
Speaker 1: for Normal People. I'm Barry Ritolts. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio. My special guest today is
Speaker 1: Professor Meyer Stateman. He teaches at Santa Clara University, focusing
Speaker 1: on finance and behavioral economics. UM, so let's talk about
Speaker 1: your most recent book, Finance for Normal People. I have
Speaker 1: to ask you about the title. How did that come about? Well,
Speaker 1: I've been speaking for a long time about people as normal.
Speaker 1: People like me, people like you, people like your listeners.
Speaker 1: The The history of the field is that we start
Speaker 1: with the standard rational people, people who are immune to
Speaker 1: cognitive errors, people who look only for risk and return
Speaker 1: when they choose products, financial products, financial services. Then we
Speaker 1: moved to the first generation of behavioral finance, where we
Speaker 1: declared people irrational. Uh, subject to all kinds of cognitive errors.
Speaker 1: They are overconfident, they are suffering from hindsight bias, and
Speaker 1: so on. Almost people are stupid. Uh. What I say
Speaker 1: is that I'm not stupid. You're not stupid. Your listeners
Speaker 1: are not stupid. We are normal. Sometimes we behave in
Speaker 1: foolish ways, but normal people have normal wants. And you
Speaker 1: can see that in ads or financial services companies. You
Speaker 1: see a grandfather and and and a grandchild. Uh, they
Speaker 1: are fishing together. Uh. This tells you what is the
Speaker 1: money for? You know, we we we talked about how
Speaker 1: you make the most money, But what is the money for.
Speaker 1: It is for the financial security of the grandfather. It
Speaker 1: is for the ability of that grandfather to help his
Speaker 1: grandchild and so on. So one of the things that
Speaker 1: people care about is financial security. Another thing they care
Speaker 1: about is family. And once you begin with what people want,
Speaker 1: then you can ask yourself. What kind of mistakes do
Speaker 1: people make on the way to what they want? And
Speaker 1: this is really where cognitive and emotional errors come in.
Speaker 1: So so what I'm hearing from you is that investors
Speaker 1: should be goal oriented, not merely money oriented. It and
Speaker 1: the money itself should serve a certain purpose. And that's
Speaker 1: what you're working towards, not just how could I maximize
Speaker 1: what my stock participation on my precisely precisely that the
Speaker 1: question is what is the peney for? Uh? And people
Speaker 1: don't stop and ask this question, you know. I I
Speaker 1: kind of joke about about an investor who comes to
Speaker 1: his advisor, UH in early two tho nine, and the
Speaker 1: advisor all shaking, of course, and the advisor says, what
Speaker 1: they're complaining about? I put you on the efficient frontier. Well,
Speaker 1: of course we know exactly what he is complaining about.
Speaker 1: He is complaining because he is no longer sure that
Speaker 1: he will be able to retire, He is not sure
Speaker 1: that he'll be able to help his grandkids as he
Speaker 1: promised himself to do. Uh. So we have to be
Speaker 1: begin with what it is that people want, what it
Speaker 1: is that normal people want? And this is why call
Speaker 1: the book Findance for normal people. So in the book
Speaker 1: you have a box and you have a list of
Speaker 1: common wants and desires. But that raises a question, can
Speaker 1: investors really get everything that they want? No, investors, we
Speaker 1: cannot get everything we want. We have of course trade offs.
Speaker 1: We can. We can give money to charity, uh, and
Speaker 1: that is going to feel good, and that is going
Speaker 1: to be consistent with our values, but it might if
Speaker 1: we give too much. Imperial our financial security and that
Speaker 1: is one thing that we want as well. And so
Speaker 1: you can see that there are many competing ones. And
Speaker 1: one of the things that we do in life, of
Speaker 1: course is balance them and ask ourselves what is most important.
Speaker 1: And that really matters also to people who are older
Speaker 1: people who ask themselves, of now what am I going
Speaker 1: to do with that money? We have used become used
Speaker 1: to saving. We are good at saving if we already
Speaker 1: have saved a good amount, but now we find that
Speaker 1: terrific difficult to spend. So what they're going to spend
Speaker 1: the money on? And and some people live as if
Speaker 1: they are poor when they have a ton of money
Speaker 1: because they've learned to save, but they've never learned to send.
Speaker 1: That raises an interesting question. We see this all the
Speaker 1: time in that people who who start out very risk
Speaker 1: embracing very aggressive they start businesses, they're entrepreneurs, they start companies,
Speaker 1: and they're used to taking a lot of risk, and
Speaker 1: suddenly they're sixty years old, they've sold their business, they're
Speaker 1: thinking about philanthropy, retirement, wealth, generational transfers, and you it's
Speaker 1: very challenging to get them to wreck nies. They shouldn't
Speaker 1: be taking as much risk. They should become a little
Speaker 1: more conservative because they've already they've already hit the jackpot.
Speaker 1: They don't need to to embrace more risk. And that's
Speaker 1: a really challenging transition. How do you get people to
Speaker 1: recognize that their needs and wants change over time. Well,
Speaker 1: I think that people need to be reflective, and people
Speaker 1: need to be helped in becoming reflectives. An advisor can
Speaker 1: help them do that. I mean, here, here's a personal story. Uh,
Speaker 1: my wife and I flew to Israel a few months ago.
Speaker 1: We bought coach tickets and we were on the weightlist
Speaker 1: for upgrade. It would have cost us six hundred dollars
Speaker 1: a piece each way to get us too from California
Speaker 1: to You should have spent the money so so we
Speaker 1: were not upgraded. Uh so we decided that we are
Speaker 1: old enough and well off enough to buy regular business
Speaker 1: class tickets, even though you know, I feel a bit
Speaker 1: like like a fold because it costs four or four
Speaker 1: five times flight. Who needs exactly? If you can afford
Speaker 1: it and your kids are taking care of and so on,
Speaker 1: what will you do with that money? So you have
Speaker 1: to figure out what matters to you. This is one example.
Speaker 1: In another example, we decided to buy a regular car
Speaker 1: and donate the savings relative to a prestige car to
Speaker 1: charity because it gives us more pleasure and they're going
Speaker 1: to feel awkward in one of those luxury cars. That's interesting.
Speaker 1: So really you're raising the point, how should investors and
Speaker 1: indeed families who are putting together a household budget, how
Speaker 1: should they prioritize their wants and needs exactly? And that
Speaker 1: is true for the saving stage, the working life, as
Speaker 1: well as the retires stage. Coming up, we continue our
Speaker 1: conversation with Professor Meyer Stateman of Santa Clara University discussing
Speaker 1: what investors really want. I'm Barry Ridhults. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. My special guest today
Speaker 1: is Meyer Stateman. He is the Glenn Clinic Professor of
Speaker 1: Finance at Santa Clara University. He is also the author
Speaker 1: of Finance for Normal People. His previous book, What Investors
Speaker 1: Really Want Know What Drives Investor behavior and makes Smarter
Speaker 1: financial Decisions is highly regarded and available on Amazon or
Speaker 1: your favorite book bookseller. Let's talk about what investors really want?
Speaker 1: You know. We briefly touched upon economic rationality um before,
Speaker 1: but that kind of demands that investors seek utilitarian benefits
Speaker 1: from investing. That doesn't really seem to be how people operate.
Speaker 1: We're not just measuring risk and putting it up against
Speaker 1: potential reward, are we? That is right. We we do
Speaker 1: look for utilitarian benefits. We do look to increase our
Speaker 1: wealth at the level of risk that is right for us.
Speaker 1: But we also look for expressive and emotional benefits. You know.
Speaker 1: I like to tell the story of a man who
Speaker 1: is considering whether to give his beloving a red rose
Speaker 1: or ten dollars, which is the price of that row.
Speaker 1: As well, A rational man would say, why not give
Speaker 1: her ten dollars? This way she can choose what she wants.
Speaker 1: A rational single man, a rational single married man knows
Speaker 1: better those who are still married. Yeah. So, so the
Speaker 1: idea is, and let's bring this back to investing. There
Speaker 1: are expressive and emotional benefits to what we do with
Speaker 1: our money that go over and above the mere utilitarian
Speaker 1: function of it. Is that a fair way to absolutely
Speaker 1: and so and so I think think about about donations
Speaker 1: to charity. When you donate to a charity, you give
Speaker 1: up utilitarian benefits of money that you just donated. But
Speaker 1: hopefully you get a sense that you are true to
Speaker 1: your value, that you have done good for people who
Speaker 1: don't have as much as you do, and that is
Speaker 1: sufficient compensation in expressive and emotional benefits for the utilitarian
Speaker 1: benefits that you lose. So let's let's again let's talk
Speaker 1: about some things. Um, the sort of emotional benefits investors get.
Speaker 1: A positive one you mentioned previously was security and the
Speaker 1: ability to help the next generation in their family as
Speaker 1: well as as well as philanthropy. But but I want
Speaker 1: to talk a little bit about what I like to
Speaker 1: call the cocktail party factor. And we see less of
Speaker 1: this today than perhaps we used to. If you remember
Speaker 1: in the ninety nineties, you couldn't go to a cocktail
Speaker 1: party or a barbecue or a dinner party where all
Speaker 1: the people outside of the industry, the finance industry, all
Speaker 1: they could talk about was their favorite stock, what they
Speaker 1: were buying, how much money they were going to make.
Speaker 1: We saw something similar in the two thousands with at
Speaker 1: least the first half with houses and this and that. So,
Speaker 1: what is the emotional benefit of being able to chat
Speaker 1: about your stock picking prowess, how great your hedge fund
Speaker 1: manager is, etcetera. What what is the value of that
Speaker 1: irrational or not to investors? Well, what is the value
Speaker 1: of solving puzzles? Uh? You know if if you fun
Speaker 1: entertainment exactly, and and so for for lots of people,
Speaker 1: it is fun entertainment and also demonstration of their ability
Speaker 1: off their smarts, and so I can pick stocks that
Speaker 1: are going to beat the markets. TIChE is that it is.
Speaker 1: It is a self satisfaction. It is an image of
Speaker 1: myself as a competent person and a demonstration to other
Speaker 1: people that I'm a competent person. And so I invest
Speaker 1: sometimes in individual stocks which I don't. But but but
Speaker 1: if that typical person you're talking about, uh, most likely
Speaker 1: tells others only of those stocks that went up, uh,
Speaker 1: not those that went down because he's trying to demonstrate
Speaker 1: competence to himself but also to other people. That selection
Speaker 1: selective retention. Uh, people only remember their winners, they don't
Speaker 1: remember their losers. Do that. Yeah, well they have not
Speaker 1: really lost anything because they have not realized that loss yet.
Speaker 1: So so let's talk a little bit about um some
Speaker 1: other ways this manifests itself. We see index funds gaining
Speaker 1: in popularity. Uh, that doesn't really give people much to
Speaker 1: talk about at at dinner parties. How does the rise
Speaker 1: of indexing chan enge investor behavior? Well, I think I
Speaker 1: think that finally people are getting the point that if
Speaker 1: you are a typical individual investor, markets are difficult to beat.
Speaker 1: Their hard to beat. Yes, hedge fund managers do beat them,
Speaker 1: but you do not. And so people are moving towards
Speaker 1: index funds and in in an odd way, Uh, they're
Speaker 1: getting the same kind of satisfaction of feeling clever, feeling
Speaker 1: smart by buying index funse. That is what I do.
Speaker 1: That is, I look at people who try to play
Speaker 1: the market, and I think about them as idiots, and
Speaker 1: I take pleasure and being smart enough not to waste
Speaker 1: my money on attempts to beat the market. Coming up,
Speaker 1: we continue our conversation with Professor Meyer Stateman of Santa
Speaker 1: Clara University discussing the details of behavioral finance. I'm Barry Ridholts.
Speaker 1: You're listening to Mass Teas in Business on Bloomberg Radio.
Speaker 1: My guest today is Professor Meyer Stateman of Santa Clara University,
Speaker 1: who is an expert in both finance and behavioral economics. Uh.
Speaker 1: Let's let's talk a little bit about something you alluded
Speaker 1: to earlier. First generation behavioral economics, second generation, third generation.
Speaker 1: So you started out saying first generation was the recognition
Speaker 1: that people aren't rational, and the second generation was, well,
Speaker 1: people make bad decisions, they make mistakes, but that doesn't
Speaker 1: mean they're stupid. That's just humans being humans. What is
Speaker 1: third generational? What I'm still I'm still in the second generation.
Speaker 1: In the first generation, Yeah, people are are irrational, people
Speaker 1: are idiots. Uh, but of course we are not idiots.
Speaker 1: There are things we want so so consider for example, trading.
Speaker 1: Trading has been attributed to a cognitive era. Why is
Speaker 1: it that people trade so much because they're overconfident in
Speaker 1: their abilities? Yes, that is true, but as we mentioned,
Speaker 1: it is also a matter of entertainment. Why is it
Speaker 1: that people play video games? For some people, trading is
Speaker 1: the equivalent of video games. But with money, there's there's
Speaker 1: I used to call it atari for money. You basically
Speaker 1: would sit at a screen lightswood flash, things would move,
Speaker 1: and you were trying to shoot the bad guys in
Speaker 1: order to make money. And it was absolutely an addictive
Speaker 1: adrenaline rush, as intense as any video game. Yeah, and
Speaker 1: if you do it, you know, with with a measure,
Speaker 1: just a little, you'll be fine. Think about buying a
Speaker 1: lottery ticket. You know, people who buy lottery tickets are
Speaker 1: derided as people who don't know math. But but you know,
Speaker 1: a lottery ticket costs a dollar or five and it
Speaker 1: gives as hope for the entire week before we find
Speaker 1: out that we lost again, and hope. Now, think about movies,
Speaker 1: you know, movies of fiction, and yet we pay real
Speaker 1: money for them. You're entertained for two hours. Buy a
Speaker 1: lottery ticket, you get to talk about here's what I
Speaker 1: would do with the hundred million dollars exactly, and and
Speaker 1: and so and so. The question really is not uh
Speaker 1: but mistakes. You have to begin with what it is
Speaker 1: that people want, and then ask yourself, how should you
Speaker 1: go towards what you want without making mistakes. And so
Speaker 1: buying one lottery ticket a week that's fine. Spending half
Speaker 1: your pay on lottery ticket, that's an error. That's a problem.
Speaker 1: That's a real problem. So you're drawing an interesting dividing
Speaker 1: line between the both emotional and utilitarian uses of either
Speaker 1: investing or money or what have you. And it sounds
Speaker 1: like you leave we run into trouble when we don't
Speaker 1: acknowledge or recognize the legitimate, expressive and emotional side of
Speaker 1: investing and not contain it. Don't try and completely shut
Speaker 1: it out, but you have to contain it in a
Speaker 1: dollar a week for a lottery ticket isn't the end
Speaker 1: of the world, precisely. And so think about socially responsible investing.
Speaker 1: If you if you invest in a way that's socially responsible,
Speaker 1: you may say, lose one percentage point of your return,
Speaker 1: it will give you expressive and emotional benefits. You have
Speaker 1: to ask yourself whether that one percent laws in utilitarian
Speaker 1: benefit UH is not too large relative to the benefits
Speaker 1: that you derive from it UH. And so all of
Speaker 1: those things have to be done in proportion, in in
Speaker 1: a in a good sense. The same applies to things
Speaker 1: hedge funds. You know, hedge funds are prestigious because not
Speaker 1: everyone is allowed to buy a hedge funds, so you
Speaker 1: can signal your wealth by doing so. But buying hedge
Speaker 1: funds for prestige and ending up losing money that is
Speaker 1: not really a very good way off achieving prestige. I'm
Speaker 1: gonna I'm gonna share a personal anecdote. There was a
Speaker 1: friend of the family who asked my opinion of a
Speaker 1: specific hedge fund manager who I personally um suggested he
Speaker 1: stay away from famous guy regard well regarded early in
Speaker 1: his career, not so much lately, And this person ignored
Speaker 1: the advice and spent the next five years gleefully. I
Speaker 1: can't describe it any way other way than bragging about
Speaker 1: how much money this fund manager was losing for him.
Speaker 1: And it took me a while to realize, Oh, he's
Speaker 1: not complaining, he's bragging. He is so much money. This
Speaker 1: guy could lose a millions and it doesn't affect them.
Speaker 1: And exactly what you're saying, it's not the dollar side
Speaker 1: of it, it's the prestigi and emotional side of it. Yeah. Well,
Speaker 1: one of one of the things that I discovered very
Speaker 1: soon after I came to the United States, is that
Speaker 1: people in the United States, like in Israel, are very
Speaker 1: interested in money, and very interested in in their own
Speaker 1: income but incomes of other people. But Americans are very
Speaker 1: secretive about that. The last question you would ask somebody
Speaker 1: here is how much money do you make? But people
Speaker 1: signal how much money they have in all kinds of ways,
Speaker 1: you know, dropping hands about their extra house and upstate
Speaker 1: New York or or or whatever, or through the cars
Speaker 1: they drive, or the vacations they take, or the stories
Speaker 1: they tell. And again, you know, if you do it
Speaker 1: in a way that is within reason, and you don't
Speaker 1: waste too much money doing so, fine, but be reasonable.
Speaker 1: Some people get into trouble putting up a good front,
Speaker 1: spending more than they can afford for show. And that's
Speaker 1: a problem that is exactly another a facet of it.
Speaker 1: So let's let's talk a little bit about um some
Speaker 1: of the things you've learned having studied behavioral finance for
Speaker 1: so long. First, once we become aware of our own
Speaker 1: behavioral foibles and cognitive areas, what can we do to
Speaker 1: overcome them? Or can we? We can? We can? The
Speaker 1: first thing is to stop and think now you don't
Speaker 1: have to do it, which is and every and every decision.
Speaker 1: You're at a restaurant and and there is fish, and
Speaker 1: there is beef, and there is chicken. What will you
Speaker 1: choose as well? I don't know. I feel like fish today.
Speaker 1: That debt is fine. But if you're going to buy
Speaker 1: a house, or if you're going to invest, you bet
Speaker 1: to pause and ask yourself whether you should not engage
Speaker 1: what we call system to the thinking system, uh, to
Speaker 1: consider your choices. UH. So, for example, for me, whenever
Speaker 1: somebody tells me about something that was absolutely clear in
Speaker 1: the past, you know nine eleven or or or the
Speaker 1: results of the recent election, I say, you know, my
Speaker 1: mind kind of rings and says hindsight. Check to see
Speaker 1: what people actually said before nine eleven or before the election,
Speaker 1: and you see that it's different. And so the first
Speaker 1: thing is to recognize the kinds of mistakes people make,
Speaker 1: whether it is hindsight or framing, and try to hold
Speaker 1: yourself two ways that will correct them. This the same
Speaker 1: thing applies to emotions. We can step bay back from
Speaker 1: our fears, from our anger. Count ten before you speak
Speaker 1: when you're angry, they say, uh. And so we can
Speaker 1: help ourselves do better in life. That makes a lot
Speaker 1: of sense. I'm I've noticed following this election in the
Speaker 1: United States a lot of I guess I would call
Speaker 1: it the narrative fallacy. People are creating these stories that
Speaker 1: pretty much describe the outcome as inevitable, when in reality,
Speaker 1: this was in a very close election and it could
Speaker 1: have just as easily gone one way or the other.
Speaker 1: And yet we've convinced ourselves this was the inevitable outcome
Speaker 1: and we knew it all along. That exactly is what
Speaker 1: hindsight is. And you have to be careful. So let's
Speaker 1: talk a little bit. Let's talk a little bit about
Speaker 1: um something you you had referenced in one of the
Speaker 1: book that the numbers are just astonishing. If we go
Speaker 1: back to the beginning of the Tao, if we look
Speaker 1: at eighteen nine on the Dow Jones industrials, the year
Speaker 1: the average was at forty one. Fast forward a century,
Speaker 1: and that hadn't grown fairly bust lye to over nine thousand.
Speaker 1: But that doesn't include reinvested dividends. Tell us what happens
Speaker 1: over that same period if you reinvest dividends, well, I'll
Speaker 1: tell you better. I'll update it to about today. So
Speaker 1: right now the Dow is at the around twenty thousand,
Speaker 1: from from forty one in eight exactly to twenty thousand.
Speaker 1: If you were counting dividends and their reinvestment, it would
Speaker 1: amount to two point three million. Wow, that's that's a
Speaker 1: lot of money. Why why do we not? Why can't
Speaker 1: we conceptualize exponential growth like that? Because we are really
Speaker 1: anchored to the level today. We've been speaking with Professor
Speaker 1: Meyer Stateman of Santa Clara University. If people want to
Speaker 1: find your work, the books are obviously available at um
Speaker 1: find bookstores everywhere. Where else can they find your writings? Oh,
Speaker 1: they can find a both books on Amazon. The second book,
Speaker 1: Finance for Normal People, will appear on May one, but
Speaker 1: you can pre order it. Uh. They can also look
Speaker 1: up my name and get to my website and see
Speaker 1: papers that I have written. If you enjoy this conversation,
Speaker 1: be sure and stick around for the podcast extras, where
Speaker 1: we keep the tape rolling and continue discussing all things
Speaker 1: behavioral finance. We love your comment, feedback and suggestions. Be
Speaker 1: sure to write to us at m IB podcast at
Speaker 1: Bloomberg dot net. Check out my daily column on Bloomberg
Speaker 1: view dot com or follow me on Twitter at rid Halts.
Speaker 1: I'm Barry rid Holts. You've been listening to Masters in
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Speaker 1: Welcome to the podcast, UM, Professor Statman, thank you so
Speaker 1: much for doing this and being so generous with your time.
Speaker 1: I find this endlessly fascinating and there's so many questions
Speaker 1: I haven't got to. I have to, uh, I have
Speaker 1: to follow up with you on starting with we really
Speaker 1: didn't talk about this. You're on the Wealthfront Investment Advisory Board.
Speaker 1: How did that come about and and what influence are
Speaker 1: you having over I don't I don't know if the
Speaker 1: term robo advisor is all that accurate. But software driven
Speaker 1: UM asset allocation models. Well, I was asked to join
Speaker 1: as an advisor to wealth Front because of my work
Speaker 1: in behavior finance. And of course, if you're going to
Speaker 1: do a platform, whether it is with the flesh and
Speaker 1: blood advisors or or it is with an automated system,
Speaker 1: you need to understand people. You need to understand what
Speaker 1: it is that they want, the kind of mistakes they make,
Speaker 1: and help them identify their ones, balance them and avoid mistakes.
Speaker 1: So speaking of mistakes, let's talk a little bit about
Speaker 1: Social Security and four oh one K, four one K
Speaker 1: and four h three being another tax deferred SARCEP other
Speaker 1: tax deferred retirement accounts have been pretty strongly criticized. Do
Speaker 1: you look at the returns since the early seventies, they
Speaker 1: haven't been great despite having one of the greatest ball
Speaker 1: markets of all time right in the middle. What's wrong
Speaker 1: with four oh one ks and and their ILK? What
Speaker 1: do we do wrong setting that up? Or is it
Speaker 1: just four one ks are fine? And it's the behavioral
Speaker 1: side that's the problem. It is not the behavioral side.
Speaker 1: It is how programs are structured. I, for example, like
Speaker 1: fellow academics, have been on a defined contribution plan for
Speaker 1: a three B plan since I first was teaching at
Speaker 1: the City University of New York in nineteen seventy five. Now,
Speaker 1: how does that differ from a traditional four ones as
Speaker 1: exactly four a one exactly like not a defined benefit.
Speaker 1: It's defined defined contribution. So I've never had defined benefit.
Speaker 1: I've never had a pension plan. And I can tell
Speaker 1: you without bragging, that I have a lot of money. Now,
Speaker 1: now let me guess you're you started early. Every time
Speaker 1: you gotta raise, you raised your No, okay, So here's
Speaker 1: the story. The story is that the City University of
Speaker 1: New York contributed I think in the twelve or fifteen
Speaker 1: percent into my measly salary at the time. I added
Speaker 1: to it. Same at Rutgers College and at Santa Clara
Speaker 1: University today, and that is common. The university contributes ten
Speaker 1: percent on top of my salary, no matching, no anything
Speaker 1: I can add to that, and I do, and I do.
Speaker 1: They contribute. There's that top out at I want to say,
Speaker 1: either eighteen or twenty four No real, it is without limit.
Speaker 1: So this is like a rough four oh three b.
Speaker 1: Is it pre tax or post tax? It is it
Speaker 1: is pre tax. The thing that thing. Here's the thing.
Speaker 1: There are two aspects to the move from from pension
Speaker 1: plans to define contribution. One has to do with who
Speaker 1: bears the risk, and so now it is the individual
Speaker 1: employee of the company. The other has to do with
Speaker 1: how much the employer contributes. Employers used to contribute to
Speaker 1: pension plans the equivalent of about eight per center, perhaps
Speaker 1: even ten percent. Now yeah, now, if you're lucky to
Speaker 1: contribute three percent, my office is a four percent match,
Speaker 1: that is, and and ask for a match and it
Speaker 1: tops out. That is the problem. The problem is not
Speaker 1: with the four one k. The problem is where the
Speaker 1: miserly corporations that contribute so little to it. Because employees
Speaker 1: in the early stages need the money, you know, for
Speaker 1: for for for diapers, and and for for rent and
Speaker 1: so on. It's very hard to save when you are young.
Speaker 1: So Santa Clara could do a ten percent. It's not
Speaker 1: even a match. It's a straight up ten percent. It
Speaker 1: is not just Santa Clara, it is Harvard. It is
Speaker 1: all private institutions do that. That's a nice that's a
Speaker 1: nice uh number. Well, that that is the way it
Speaker 1: should be. And that is a point that is not made. Uh.
Speaker 1: Instead we are pushing it to the employee ease and
Speaker 1: call them irresponsible and talk about how to nudge them.
Speaker 1: I say, I say enough of that. First of all,
Speaker 1: you don't need to nudge people, you need to shove
Speaker 1: them into So you and Dick Taylor disagree about this, I, well,
Speaker 1: I think that we differ in some way. Uh they
Speaker 1: really is the politics of it, it is it is
Speaker 1: very hard to have mandatory contributions given given the political situation.
Speaker 1: But but I think that that there's a need to
Speaker 1: have a system that is structured kind of like source security,
Speaker 1: not extending source of security, but mandatory like source security.
Speaker 1: And there's really a need for employers to step up
Speaker 1: and contribute a whole lot more two employees retirement accounts.
Speaker 1: M that's quite interesting. Um, wow, all right, I think
Speaker 1: that's quite fascinating. You know, the ail er nudge thesis
Speaker 1: is simply get people to pre first of all, make
Speaker 1: the four one K enrollment automatic, make the rise and contribution.
Speaker 1: Have people agreed to do that or opt out. So
Speaker 1: how you set the defaults make a big difference. But
Speaker 1: you're taking it a step further and saying employers need
Speaker 1: to really be part of this that. How do you
Speaker 1: persuade companies to do that? I mean, think about think
Speaker 1: about pensions. People did not have a choice. It was mandatory.
Speaker 1: In fact, people did not have a choice. Do you
Speaker 1: want a pension or do you want to get the
Speaker 1: money right now up front? Uh, it was done in
Speaker 1: a paternalistic way without nudging people and so on. How
Speaker 1: is it that we got ourselves into the nudging thing.
Speaker 1: We just moved really by accident, almost from pensions to
Speaker 1: defined contributions, and nobody asked should it be voluntary or
Speaker 1: should it be mandatory? Oh, I don't think it was
Speaker 1: an accident. I think it was a big money, say
Speaker 1: much less headache for the companies. And that's why they
Speaker 1: want the nature of it as being voluntary. That was
Speaker 1: something that could have been made one way or the other.
Speaker 1: It could have been made mandatory. So once we started
Speaker 1: giving up pensions, for one, every company with more than
Speaker 1: ex employees should offer a four oh one K and
Speaker 1: you know, whether you match or not, you should at
Speaker 1: least set it up and run it, and you should
Speaker 1: and you should not even have it as a matching thing.
Speaker 1: You should just have it as a straight contribution. That is,
Speaker 1: matching helps people like me and like you that there's
Speaker 1: people who have enough money to actually save and then
Speaker 1: they get the bonus. But the people who really need
Speaker 1: to save, the people who find it hardest, and many
Speaker 1: times they just forego the match because they don't have
Speaker 1: the money to make their own contributors. We see it
Speaker 1: all the time. Let's um, let's shift gears a little bit.
Speaker 1: I want to talk about the hard to beat mark
Speaker 1: it hypothesis, not necessarily the efficient market hypothesis. What is
Speaker 1: the hard to beat market hypothesis and what does that
Speaker 1: mean um for investors? Well, the hard to beat market
Speaker 1: hypothesis says that gaining consistent advantage in the market, gaining
Speaker 1: consistent above average return is very hard to do. Very
Speaker 1: hard does not mean impossible. Hedge fund managers do that,
Speaker 1: many active mutual fund managers do that, and so on.
Speaker 1: Insiders definitely do that. The question really is who can
Speaker 1: do that? We talked about them. Who cannot do that?
Speaker 1: The typical amateur individual investors cannot do that. In fact,
Speaker 1: the reason those professionals are able to beat the market
Speaker 1: is because they take money out of the pockets of
Speaker 1: the idiot individual investors who try to to compete against them,
Speaker 1: and so and so. It's not the question of whether
Speaker 1: the market is is efficient, and if it's not efficient,
Speaker 1: then anything goes and it's very easy to beat the market.
Speaker 1: You have to ask yourself what edge do you have.
Speaker 1: If you have an edge, by all means, trade on
Speaker 1: it and beat the market. But if not, just buy
Speaker 1: an index fund and forget it and be better off.
Speaker 1: So you you there's something in and I don't recall
Speaker 1: which of the books um you reference it. It might
Speaker 1: be the more recent one about investors who have weak
Speaker 1: self control and how they can manage their own um behavior.
Speaker 1: And one of the things you suggested is, hey, you
Speaker 1: could spend your dividends but never dip into capital. So
Speaker 1: so describe the sort of rules that makes sense for
Speaker 1: people who, under normal circumstances are perfectly rational. But hey,
Speaker 1: at the market drop and people start to freak out. Well,
Speaker 1: the distinction people make between income and capital is a
Speaker 1: very basic one, and and it is usually very helpful
Speaker 1: when you're saving. It is very helpful because it means
Speaker 1: this portion of the cake you can eat, but this
Speaker 1: portion you cannot touch. You cannot dip into capital. Uh.
Speaker 1: The problem with it is that people are trying to
Speaker 1: get yield. People are trying to get income because interest
Speaker 1: rates are low and dividend rates are low, and they
Speaker 1: get themselves into dividend capture funds for example, that waste
Speaker 1: their money. They create something they can call income by
Speaker 1: getting more dividends, or they get into junk bonds because
Speaker 1: they have more higher interest rate. But but they're oblivious
Speaker 1: to the kind of risk that taking when they do that,
Speaker 1: and they're oblivious that those high rates that are promised.
Speaker 1: I'm not realistic because of course this assumes that none
Speaker 1: of those companies will go bankrupt. So I recall something
Speaker 1: else you wrote, and I hope I'm not mangling this
Speaker 1: too badly. Someone is presented with the choice of owning
Speaker 1: either a stock or an index that pays a lot
Speaker 1: of dimonends and taking the dividends, or or just recognizing
Speaker 1: the difference in tax rates on dividends and long term
Speaker 1: capital gains and instead just shaving off the equivalent amount
Speaker 1: of stock selling it instead of of the dividend. Why
Speaker 1: do people have such a hard time doing the math
Speaker 1: on that and understanding, Hey, it's better under these circumstances
Speaker 1: and this tax differential to sell a little bit then
Speaker 1: hold onto it, take the dividend, and pay a higher tax. Well,
Speaker 1: that's difference between rational people and normal ones. Rational people
Speaker 1: say money is money, Uh, call it capital, call it dividends.
Speaker 1: If I don't get dividends, I can simply sell a
Speaker 1: few shares and get the equivalent of that. That is
Speaker 1: what Miller Modigliani show does. But but again for normal people,
Speaker 1: there's a problem of self control creates a need to
Speaker 1: have rules that will prevent you from spending too much.
Speaker 1: And one of those rules is spend dividends, but don't
Speaker 1: dip into capital. And that is very helpful during your
Speaker 1: working years. But then when you retire and you need
Speaker 1: to actually dip into capital, people find it really really difficult,
Speaker 1: and and they go in foolish ways to generate income,
Speaker 1: where in fact they should find the way themselves with
Speaker 1: an advisor to depend too capital, because after all, uh,
Speaker 1: people don't live forever. Sorry to break the news, So
Speaker 1: there was something, um interesting, I'm gonna I'm gonna do
Speaker 1: that again. Edit that out. Um, your own behavior. You
Speaker 1: mentioned you um tend to index, but as an investor,
Speaker 1: what else has changed in the way you interact with
Speaker 1: investing in markets based on studying investor behavior. Well, of
Speaker 1: course I've I've learned about markets and I've learned about myself.
Speaker 1: And I find that even today, when I begin an
Speaker 1: investments class and I asked people what it is that
Speaker 1: they expect to know by the time this course is done, Uh,
Speaker 1: somebody is going to say, I want to know how
Speaker 1: to pick the best stocks, and so I have to
Speaker 1: go and explain why that is not likely to be
Speaker 1: a good idea to try to do that unless they
Speaker 1: are going to be investment professionals. Uh. And so it
Speaker 1: is still hard for people to get. But by the
Speaker 1: time they're done with the course, and by the time
Speaker 1: they read not just my writings, but of course this
Speaker 1: is now widespread the Jack Bogel and and Worn Buffett
Speaker 1: and so on have said it. People are getting the point,
Speaker 1: and people in fact invest in index fund And sometimes
Speaker 1: I hear from students who took my class many years
Speaker 1: ago and right to say, thank you, that's that's wonderful.
Speaker 1: What what are the most challenging biases to overcome what
Speaker 1: cognitive errors present. The biggest problem, Oh, I think that framing,
Speaker 1: uh is a problem. That is, when we are faced
Speaker 1: with a problem, we simplify it by framing. And so
Speaker 1: they give an example, well, again dividends and and capital.
Speaker 1: You know, we frame it as being two separate money
Speaker 1: is as if they have different colors. But but money
Speaker 1: is fungible. A dollar is a dollar no matter what
Speaker 1: it comes exactly, and and so and so there's really
Speaker 1: a need to recognize that framing and frame it correctly
Speaker 1: as one part of money, and you have to find
Speaker 1: ways to dip into it in a responsible fashion. But
Speaker 1: but don't get confused as no, I cannot really dip
Speaker 1: into capital because it's a different color money. That's quite
Speaker 1: quite interesting. So we we've talked in general about um
Speaker 1: various cargnit veras we've talked about behavioral issues. How can
Speaker 1: people self identify their own blind spots? The classic Dunning
Speaker 1: Krueger um people who aren't especially talented have a blind
Speaker 1: spot for their own lack of talent in that given space.
Speaker 1: What can people do to not be as susceptible to
Speaker 1: their own cognitive deficits, to their own emotions and to
Speaker 1: their own second generation behavioral problems. Well, we need we
Speaker 1: need to know ourselves. And sometimes the way you see
Speaker 1: yourself when you shave is to use a mirror. And
Speaker 1: the way you see yourself in terms of investment is
Speaker 1: sometimes to read, uh, to speak with people who are
Speaker 1: knowledgeable in the field, knowledgeable I mean knowledgeable in say,
Speaker 1: those cognitive errors identifying wants and and this way you
Speaker 1: kind of change your way of thinking. Uh. And so
Speaker 1: you learn, you learn rules that are in fact useful. Again,
Speaker 1: you learn to step away from your emotions. For example,
Speaker 1: whether fear, uh, you're you're afraid, but then you say,
Speaker 1: well what can possibly happen? Uh? And and you can
Speaker 1: put it in perspective anger, a hope Uh. You know
Speaker 1: it is again something where where you cannot just just
Speaker 1: go buy hope and buy lottery ticket with with abandoned.
Speaker 1: So there was um, I'm paraphrasing this, And again I
Speaker 1: don't remember which of the two books this was from.
Speaker 1: There's discussion on how much money we need to be
Speaker 1: happy and what having more than enough money does to
Speaker 1: our psychology. Am I am I capturing that right? Well,
Speaker 1: one aspect of it of more than enough uh. For
Speaker 1: some people of course there's never enough. And and if
Speaker 1: you ask yourself, really, why is it that somebody who
Speaker 1: has two billion dollars strive so much to get three
Speaker 1: billion dollars? Uh, well, three is more than two exactly.
Speaker 1: Well but but but you know they they but that
Speaker 1: doesn't sound health standard. Well, the standard finance or the
Speaker 1: standard economics says, why do you say so that you
Speaker 1: can spend, so you can have a security, so you
Speaker 1: don't have to worry about health care costs? Exactly? But
Speaker 1: but then you see many people and not just the
Speaker 1: very wealthy, who have way way more then they need,
Speaker 1: say for retirement or even for their family, and and
Speaker 1: the next generation who still strive for more. And the
Speaker 1: answer is status, because because two billion dollars is a
Speaker 1: lot of money, but three billion dollars is more. And
Speaker 1: if you are in this company of people for whom
Speaker 1: money is in billions, it matters whether you have two
Speaker 1: or three. It matters whether the fellow who was below
Speaker 1: you with one and a half now exceeds you with three,
Speaker 1: because now your relative status goes down. And so one
Speaker 1: of the things that we want and we have recognize it,
Speaker 1: is social status. And social status is relative, which makes
Speaker 1: it really really hard. It means that that that we
Speaker 1: are competitive to the end. And so if you can
Speaker 1: just step back and say, hey, you know, you don't
Speaker 1: have as much as Warren Buffett, uh, but you have
Speaker 1: more than you need. The Leon Cooperman is a hedge
Speaker 1: fund manager and he's one of the people who signed
Speaker 1: the pledge to give away half his money in his lifetime.
Speaker 1: And he's worth several billion dollars. And he tells the
Speaker 1: story at when he signed the pledge, He's at a
Speaker 1: dinner with about eight people, and there's Bill Gates at
Speaker 1: the table and Warren Buffet at the table and a
Speaker 1: handful of other people and the check comes and they
Speaker 1: give it to him. And the reason why Warren Buffet
Speaker 1: and Bill Gates and the rest of the table gave
Speaker 1: the check to Cooperman is he was worth three billion dollars.
Speaker 1: He was the poorest man at the table. So the
Speaker 1: rule is the poorest guy has to pick up the check.
Speaker 1: And that's pretty you think about that, that's pretty hilarious.
Speaker 1: But even at that level of wealth, people are still
Speaker 1: measuring and comparing and and are aware. He he actually
Speaker 1: describes it as I was the piker at the table. Well,
Speaker 1: and you can see how people treat their wealth. You
Speaker 1: can see what Bill Gates is doing with his wealth,
Speaker 1: and Buffett as well, Buffett as well. And then you
Speaker 1: can see people who create those a generations, skipping trusts
Speaker 1: and so on and and and keep the money as
Speaker 1: if they can take it with them to the next world.
Speaker 1: Cooperman actually is driving an old car, and I for him.
Speaker 1: I yelled at him, and I said, listen, you don't
Speaker 1: have to go out and spend two hundred thousand dollars
Speaker 1: on some insane thing. But the new cars have bluetooth
Speaker 1: and safety things and better air bags. You don't need
Speaker 1: to be driving a fifteen year old Lexus. You could,
Speaker 1: you could, He goes, I feel like it's not my money.
Speaker 1: I'm spending money that will be better used for charitable purposes. Well,
Speaker 1: that is really a kind of you said the same time.
Speaker 1: That is right, you. We we develop habits, we develop
Speaker 1: an image of ourselves. I mean, you know, seeing myself
Speaker 1: in a Lamborghini. I can buy Lamborghini, but I'm going
Speaker 1: to feel ridiculous. You can get in low enough to
Speaker 1: get in the car such as that you know that
Speaker 1: that that is it just I just don't have enough
Speaker 1: hair for a Lamborghini. I've seen plenty of people without
Speaker 1: a lot of hair and Lamborghinis. I just don't see
Speaker 1: that being in the Santa Clara University Faculty parking lot.
Speaker 1: It would stand out a little bit that that is
Speaker 1: also true. And and you really it is an image
Speaker 1: that you have in your own eyes and in the
Speaker 1: eyes of others. And so yeah, I would be perceived
Speaker 1: a bragger if if I if I drove one. Now,
Speaker 1: if you were a hedge fund manager, the perception would
Speaker 1: be different. Your peer group might perceive it differently. It
Speaker 1: is true, and I'm happy I'm not in that company.
Speaker 1: So before we get to some of our favorite questions,
Speaker 1: I have a handful of things that that I want
Speaker 1: to go over that I think we skipped. There's a
Speaker 1: question I have on risk aversion that we didn't get to.
Speaker 1: And there was one other question. Um, well, we really
Speaker 1: talked about priorities. Do you do you look at smart
Speaker 1: beta at all? Have you have you researched much of that?
Speaker 1: Because because because we're now over half a billion I'm sorry,
Speaker 1: we're now over half a trillion dollars in smart Beta,
Speaker 1: how much of this is people just chasing the new thing,
Speaker 1: or is is this chasing factors that have worked in
Speaker 1: the past, or or is this something that's just a
Speaker 1: fad and it's going to fade one day. Well, here's
Speaker 1: an academic answer. Unfortunately, the the the question really is
Speaker 1: what does the extra return that you get with a
Speaker 1: smart beta represent. Is it representing beating the market or
Speaker 1: is it representing just a fair return on your money? Anything,
Speaker 1: You're assuming more risks, so therefore your potentially generating either
Speaker 1: risk or or it is. It is simply how returns
Speaker 1: are determined. And so if you have, for example, that
Speaker 1: returns are higher for value stocks and small cap stocks,
Speaker 1: it is not necessarily risk. It might be other preferences,
Speaker 1: but value. If so, if you tilt, if you tilt
Speaker 1: your portfolio towards value, towards small perhaps a low low beta,
Speaker 1: and so on, you get essentially your money's worth, you're
Speaker 1: not beating the market. And and does it really work,
Speaker 1: does it really add as much as it really stable?
Speaker 1: I don't know. I mean, I telled my portfolio towards
Speaker 1: value and small, so but I don't really go much
Speaker 1: beyond that. We do something very similar. The thing that
Speaker 1: I think a lot of people forget when they're looking
Speaker 1: at returns, they should really be looking at risk adjusted returns.
Speaker 1: So if you're gonna if you're gonna assume a little
Speaker 1: more risk and a little more volatility, let's say with
Speaker 1: smaller cap stocks, you should be compensated for that additional risk. Yes,
Speaker 1: But more than that, you have to be aware of
Speaker 1: the cost. Uh. That is, the people who promote those
Speaker 1: smart beta funds and so on, they take big chunks
Speaker 1: for themselves. Doesn't leave you anything that that's that's the
Speaker 1: general problem with the hard to beat market. That is,
Speaker 1: it's not that money managers don't beat the market, it
Speaker 1: is that they don't share it with their investors. Well,
Speaker 1: someone's got to keep those Lamborghini dealers happy, right. So
Speaker 1: so my last question before I get to the favorites.
Speaker 1: We briefly talked touched on risk aversion and loss of version.
Speaker 1: Is there really a big difference between the two? Well
Speaker 1: not really. In daily language, when we talk about risk,
Speaker 1: we really talk about laws. That is, we are not
Speaker 1: really talking about about gambles. Where where it is if
Speaker 1: you if you lose, you win just one hundred dollars
Speaker 1: and if you win, you win a thousand. Uh. It
Speaker 1: is always uh, you possibly can lose. You put in
Speaker 1: one hundred dollars, you might end up with zero, or
Speaker 1: you might end with two hundred dollars and so and
Speaker 1: so that is what loss of version. Actually, they really
Speaker 1: interesting distinction in my mind is between loss of version
Speaker 1: and short fall version. That is what's the difference. So
Speaker 1: so so think about think about the case where you
Speaker 1: bought a stock for one dollars and now it is
Speaker 1: trading at sixty. Well, the forty are lost. An economists
Speaker 1: will tell you the forty dollars are lost whether you
Speaker 1: realize the lass. But but your aspiration, but your reference
Speaker 1: point is the one hundred, and so you hate that shortfall.
Speaker 1: And so you are reluctant to realize the loss because
Speaker 1: you're still trying to get even. Uh. And we heard
Speaker 1: that countless times from investors. Dear God, just let me
Speaker 1: get back to break even, and I'll never buy another
Speaker 1: fill in the blank friend. So and so, when you
Speaker 1: think about ambition more generally, that is that is shortfall version.
Speaker 1: That is, I am now in a position where I
Speaker 1: make ten dollars an hour. My aspiration is to get
Speaker 1: a job that pays thirty dollars an hour. I am
Speaker 1: now in a short fall position. That gives me the
Speaker 1: ambition to go study, what do whatever is necessary to
Speaker 1: upgrade my skill sech that I can get more. Uh,
Speaker 1: and so that that really is so. So you can
Speaker 1: have five billion dollars. But but if your benchmark, if
Speaker 1: your inspiration is ten, you feel as if you are
Speaker 1: still a loser and you're trying to reach that aspiration. Huh,
Speaker 1: that's amazing. So let me jump into my favorite questions.
Speaker 1: In the last twenty or so minutes we have we
Speaker 1: have left UM. So we described discussed a little bit
Speaker 1: about your time UM at Hebrew University and in Rusal University. No,
Speaker 1: it's Hebrew Investigation. UM. Your undergraduates where you have an
Speaker 1: m b a. In finance. Yeah, what what did you
Speaker 1: study undergraduate? Well, and the righteous studies in Israel are
Speaker 1: different from from the United States, uh, in that you
Speaker 1: begin with majors, and so my majors were economics and statistics,
Speaker 1: and so it was very much a finance oriented Well
Speaker 1: it was. It was an economics and statistics and then
Speaker 1: and then I continued on for an n b A.
Speaker 1: Immediately after I got my undergraduate degree. Uh. And they're
Speaker 1: my focus was on finance. And when you come to
Speaker 1: the United States, you go to Columbia, you get a PhD.
Speaker 1: Is that where psychology started to come into this? So
Speaker 1: I I had, like all PhD students, I had some
Speaker 1: smattering of psychology there. But but that's not really where
Speaker 1: where it came from. What what the experience in New
Speaker 1: York and the experience of living in the United States,
Speaker 1: of course stayed with me. One of the things that
Speaker 1: I years later in my studies is is the time
Speaker 1: of the energy crisis UH seventy three seventy four, when
Speaker 1: conn Edison eliminated its dividends and and the the annual
Speaker 1: meeting was raucous and people wanted to hang the chairman.
Speaker 1: So Professor statmon tell Us, who were some of your
Speaker 1: early mentors, Well, I was fortunate to have very many,
Speaker 1: and I tried to reciprocate now by mentoring my students
Speaker 1: and my younger colleagues. It goes back. I can think
Speaker 1: of of high school where my English teacher said, I
Speaker 1: can see you doing a master's degree. Well, you know
Speaker 1: when we are in high school, just just the sense
Speaker 1: that that the grown up is is saying that you
Speaker 1: can set your sights high it's really very QUI care
Speaker 1: exactly and and you know, I think of Peter Burn's uh,
Speaker 1: Peter Bernstein. I got to know because I sent him
Speaker 1: some some paper and he and he took to the
Speaker 1: ideas of behavior of finesse right away. I mean, it
Speaker 1: was right in him. And it was his book on
Speaker 1: Risk against the Gods is just spectacle, is spectacular. And
Speaker 1: I have I have his book on gold literally on
Speaker 1: my desk. It's two or three back in the queue,
Speaker 1: but it's it's on my list. So you know how
Speaker 1: fortunate I am that that's amazing as as a mentor,
Speaker 1: and so he opened he opened many doors for me,
Speaker 1: and he encouraged me to do that work. Uh and
Speaker 1: and in between so you met him just merely by
Speaker 1: sending him a paper I sent him, Yeah, I sent
Speaker 1: him a paper very very early nineteen eighty probably, uh,
Speaker 1: a simple paper about betas and and so on and
Speaker 1: and and he accepted it for the John Portfolio Management.
Speaker 1: He was he was editing that at the time. And
Speaker 1: and then I sent him some more and we got
Speaker 1: it too into a correspondence. And he's he was always
Speaker 1: interested in ideas. That the last thing that matters to
Speaker 1: him a status. You know, you're you're a full professor
Speaker 1: or or assistant. He just he just thrilled two new ideas,
Speaker 1: and so and so and and he was always innovative,
Speaker 1: and so it was. It was really quite quite a pleasure,
Speaker 1: uh and and very very beneficial. So so he recommended
Speaker 1: me for a particular award. He put me on on
Speaker 1: some board of a money management company, and and so on.
Speaker 1: And he was he was a very tough mentor. That
Speaker 1: that is really he would uh sometimes I would get
Speaker 1: I would get comments on on papers that really uh
Speaker 1: didn't make me cry, but but surely surely we were
Speaker 1: were painful, but of course these were comments that helped
Speaker 1: me do better. He is a meticulous writer. Everything I've
Speaker 1: ever read of his, every page is just filled with
Speaker 1: not only deep research, but you could see the structure
Speaker 1: of the structure of the book, the structure of the chapter,
Speaker 1: the way he puts paragraphs together. So much thought and
Speaker 1: consideration goes into it. He's just a wonderful writer. So
Speaker 1: if he likes your writing, that that says a lot. Well. Yeah,
Speaker 1: as I said, he was a tough mentor, but that
Speaker 1: a very very good one and a very kind one overall.
Speaker 1: That that is even even when he was tough uh
Speaker 1: and and I had I had many others who are
Speaker 1: kind to me at Columbia, and and any stand out
Speaker 1: who do you want to mention at Columbia. At Columbia,
Speaker 1: you know two professors who actually left not long after
Speaker 1: I came, but but helped me even after they left.
Speaker 1: Richard Rippy uh and Jerry SCHNEI have been exceedingly helpful
Speaker 1: to me at a time when I really needed most.
Speaker 1: And it was quite a pleasure to send them um
Speaker 1: my book uh and and add an inscription that that
Speaker 1: really thanks them for for their help when I needed
Speaker 1: it most. So, so let's talk about investors who influenced
Speaker 1: your approach to investing and what other investors affected how
Speaker 1: you looked at the world of behavior. Well, you know,
Speaker 1: I mean, you can think of of Peter Bernstein as
Speaker 1: an investor, but but I have not really followed a
Speaker 1: particular investor. I like the insights of Warren Buffett. Warren Buffett,
Speaker 1: I think is very good at recognizing precisely the difference
Speaker 1: between markets were price equals value and markets that are
Speaker 1: hard to beat and and so and so. He says, yes,
Speaker 1: markets are such that prices deviate from value. But when
Speaker 1: it comes to individual investors, you say, invest in index
Speaker 1: funds because markets are hard to beat. And so that
Speaker 1: these kinds of insights really stayed with me. And now
Speaker 1: let's talk a little bit about about books. I referenced
Speaker 1: Peter Bernstein's Against the Gods The Untold Story of Risk.
Speaker 1: Tell us about some books that have been either influential
Speaker 1: to you or that you've just enjoyed or or what
Speaker 1: have you. Well, on the on the just enjoyed or
Speaker 1: touching a book, a book in Hebrew that just was translated.
Speaker 1: It's called Judah, and it's about the story of Judah.
Speaker 1: Is scary it and it kind of twists the story
Speaker 1: where by Judah becomes becomes the the the hero of
Speaker 1: the story under Jesus of course, uh. And it is
Speaker 1: said in Jerusalem, Jerusalem that I know, and so it
Speaker 1: was very very touching to me. On on the nonfiction,
Speaker 1: of course, I read recently the Undoing Projects by Michael
Speaker 1: Lewis that we just talked about, and and one of
Speaker 1: the things that really struck me there was one how Calman.
Speaker 1: At first you were laughing as they did. And when
Speaker 1: I think of my work with her, chafferd my good
Speaker 1: friend and colleague. We did the same thing. You know
Speaker 1: that the people really wondered why is that we love
Speaker 1: so much? But but that is one. The other thing
Speaker 1: that struck me is the struggle for status. I mean
Speaker 1: between the two of them, between the two of them
Speaker 1: ultimately ultimately broke them up. And so if you needed
Speaker 1: some piece of evidence of how important social status is
Speaker 1: to us, you have that. And it's kind of this.
Speaker 1: This part of it, of course, is a sad story.
Speaker 1: I knew just a bit about it, but not but
Speaker 1: not much. Uh, And that exposed it. And I look
Speaker 1: at them and I say, they are There are people
Speaker 1: like me and you. There are normal people. And and
Speaker 1: when one feels that he is treated unfairly, and and
Speaker 1: and there are want of fairness is another thing. We
Speaker 1: want one response in ways that that really terminates a
Speaker 1: good friendship. That's fascinating. Any other books you want to reference,
Speaker 1: It doesn't even have to be financed related. Oh I don't.
Speaker 1: I don't find myself reading too many books. What are
Speaker 1: you reading right now? What's the most recent book you
Speaker 1: read other than undoing projects? Well, I'm beginning to read
Speaker 1: the book in Hebrew again about that that relates to
Speaker 1: kind of the political situation that they sort of back
Speaker 1: and forth between between Israelis and Palestinians. That goes nowhere,
Speaker 1: and it kind of makes a story of their about
Speaker 1: how how Palestinians arranged for a demonstration. Israelis have a
Speaker 1: rule book is how to disperse the demonstration, and so
Speaker 1: and and so it kind of goes one step here
Speaker 1: and one step. They're wasting time and energy and lives
Speaker 1: and getting exactly what um or the author I don't remember, Okay,
Speaker 1: emailed me. I'll add it to the list. Um let's
Speaker 1: keep going down our our favorite questions. So, since you
Speaker 1: joined the world of academia and since you've started studying
Speaker 1: finance and behavior, what's the single most significant change that
Speaker 1: you've you've become aware of? Well, in in finance, I
Speaker 1: think I think that it's not just because I'm biased,
Speaker 1: was behavioral finance, but but one of the things that
Speaker 1: that has changed really is the reception of not just
Speaker 1: behavioral finnance, but but generally looking at individuals, looking at people,
Speaker 1: I'm asking how is it that that they behave? When
Speaker 1: her schefferd and I in fact wrote the very first
Speaker 1: paper that was published in in a in a top
Speaker 1: academic journal, journal Financial Economics. Uh and it was published
Speaker 1: in nine and it has to do with this issue
Speaker 1: of dividends. There was there was almost a riot there
Speaker 1: at Rochester uh and and people and we heard later
Speaker 1: that that that people uh said that they will never
Speaker 1: ever send another paper to this journal if they published
Speaker 1: this one. Uh and And Merton Miller two years later
Speaker 1: wrote a paper essentially attacking our paper exactly exactly when
Speaker 1: when Merton Miller does that today, you know, it's not
Speaker 1: that the work is how harmed, not at all that
Speaker 1: there's really no exciting work, informative work, but you don't
Speaker 1: really have the kind of struggle that we had at
Speaker 1: the time in the al the eighties. So Merton Miller
Speaker 1: attacked your paper made it more well known by the attack.
Speaker 1: Have you ever heard the phrase the Streisan effect? So
Speaker 1: this is an interesting little bit of internet lore. Barbara Streisan,
Speaker 1: the famous Center has this beautiful California ocean front home
Speaker 1: on the top of a cliff. Some company does all
Speaker 1: these aerial footage and they sell the footage to things
Speaker 1: like Google Maps and to real estate companies because they
Speaker 1: want to you know, it's a it's a useful tool
Speaker 1: if you're if if you're doing construction, if you're looking
Speaker 1: at environmental impact. There's a ton of uses for it. So,
Speaker 1: but theoretically these one thousand foot flyovers violate people's privacy.
Speaker 1: It turns out it doesn't. But Barbara streisand sued the
Speaker 1: company because they violated her privacy. All the documents that
Speaker 1: no one have you know, it's one house of a
Speaker 1: million along the coast, no one would have known it's hers.
Speaker 1: But as part of the litigation, the specific house, the location,
Speaker 1: the address, all this stuff becomes public and since then,
Speaker 1: um people have taken the attempt to suppress something and
Speaker 1: accidentally making it more broadly distributed. Is the strides and effect?
Speaker 1: Merton Miller did that for you in part. Yeah, he
Speaker 1: did that. Yeah, it is. It is really nice to
Speaker 1: sort of struggle against something. If something is is fully accepted,
Speaker 1: it is no longer that's exactly that's exactly right. What
Speaker 1: about UM so you mentioned that that was one of
Speaker 1: the changes that took place a little more acceptance of
Speaker 1: behavioral finance. What do you see as the next shifts
Speaker 1: in the future. Well, I think I think that that
Speaker 1: it is about creating a structure for behavioral finance. Really
Speaker 1: central to my second book, UH, is to dispel the
Speaker 1: notion that behavior finance is is kind of a set
Speaker 1: of interesting stories about people who behave and in ways
Speaker 1: that are not entirely rational, and so on. But people say,
Speaker 1: where is your portfolio theory, where's your answer pricing theory,
Speaker 1: where's your market deficiency theory? And my answer is that
Speaker 1: is that we have all of that, and that is
Speaker 1: what I tried to show that that is, you have
Speaker 1: rational people, we have normal people. You have a standard
Speaker 1: mean variance portfolio theory, we have a behavior portfolio theory,
Speaker 1: and so on. And uh, just just to add Harry Markowitz,
Speaker 1: uh is modern portfolio your portfolio theory. He is also
Speaker 1: a great fan of behavior portfolio theory. Uh. Harry Marcos
Speaker 1: really knows investors and he knows behavior. Uh. And he
Speaker 1: think of himself with a good amount of justification as
Speaker 1: being one of the fathers of behavior. Sure, if you
Speaker 1: think about modern portfolio theory there it's certainly he is
Speaker 1: an intellectual father of the of the study. Right. Well,
Speaker 1: But but more than that, you know that there's one
Speaker 1: one of the central things about me in variance portfolio
Speaker 1: theory is that you have to look at your portfolio
Speaker 1: as a whole, meaning the combination of stocks, bonds, and
Speaker 1: other non concided as I I I liken it to
Speaker 1: looking at a food from the perspective of the stomach,
Speaker 1: where it's all mixed together. It's not it's not starch, protein, vegetables.
Speaker 1: That's interesting. But but uh, he understands that that you
Speaker 1: have to begin with people's goals. UH, so you have
Speaker 1: this kind of goal based planning. And so he and
Speaker 1: I and two of our colleagues wrote the paper together
Speaker 1: Marcos Marco Witz. What year was? What was published in
Speaker 1: two thousand ten, and and we developed a a uh
Speaker 1: a mental accounting portfolio theory where where people keep their
Speaker 1: money in separate pockets, separate goals UH, for example retirement
Speaker 1: and college education and bequest UH and they optimize each
Speaker 1: of them by the rules of mean variance and then
Speaker 1: put it together. And so we show some some interesting
Speaker 1: theoretical results. But the most interesting part really is to say, yeah,
Speaker 1: normal people think this way. They don't think about money
Speaker 1: as being kind of generic. They think about it money
Speaker 1: that I need for this goal of that goal. Portfolio
Speaker 1: optimization with mental accounts exactly fun with Google. Uh and
Speaker 1: and um oh that's quite that's quite fascinating. And I'll
Speaker 1: have to take a look. There is a non technical
Speaker 1: version of that in the ce J S t o R.
Speaker 1: It's uh, the Journal of Financial and Quantitative Debt one.
Speaker 1: But but the other one is in in the Journal
Speaker 1: of Wealth Management. Okay, I will, I will, I will
Speaker 1: make I'll add that link for when we uh, let's
Speaker 1: see Journal of Wealth Management. See if they instantly called
Speaker 1: that portfolios for people who want to restore goals or
Speaker 1: something when here here's how someone else described it, when
Speaker 1: behavioral portfolio theory meets Markowitz. That that's interesting, all right,
Speaker 1: So I will find all those links and make sure
Speaker 1: they're included. I'm down to my last three questions. So
Speaker 1: what do you do to relax or keep mentally fit
Speaker 1: outside of the office? Oh? You know, I I exercise. No,
Speaker 1: what do you do? What do you do to exercise? Oh?
Speaker 1: You know, I have equipment a treadmill and a bike
Speaker 1: and one of those whatever that that that helps kind
Speaker 1: of the equivalent of lifting weights and and what else
Speaker 1: do I do? You know? Mentally? Of course, my my
Speaker 1: my work, and and and politics and and the like,
Speaker 1: of course, keep me, keep me alive. But you know,
Speaker 1: around the houses, it is odd. I I kind of
Speaker 1: take delight in doing projects like like building, uh and
Speaker 1: enclosure for for for storage, and and and and so on.
Speaker 1: And so I have to ask you a political question
Speaker 1: because uh, this has been a very political era. But
Speaker 1: I can't help but notice that the way Americans argue
Speaker 1: over politics is very different the way Europeans or Israeli
Speaker 1: argue over You know, israelis canna have a political argument, debate,
Speaker 1: discussion and then say let's go to launch and it's
Speaker 1: forgotten Americans. It goes into two camps and neither side.
Speaker 1: Here's what the other side says. What do you attribute
Speaker 1: those differences to you? You've seen both countries long enough.
Speaker 1: Culture is very is very different. That That is one
Speaker 1: of the things that struck me when I came to
Speaker 1: the United States. In in Israel, Uh, if people agree
Speaker 1: with you, they are quiet. But if they disagree, you
Speaker 1: will hear them. In the United States is the opposite. Uh,
Speaker 1: you will know that they disagree with you if they
Speaker 1: are quiet, rather than telling you that they agree and
Speaker 1: and so and so, they they they are very Americans.
Speaker 1: We are very debate argument of verse and land. Well, no, no,
Speaker 1: but I think that it's actually good. It's it's kind
Speaker 1: of it. It's a politeness, it is a civility. And
Speaker 1: so before before I tell you my political take, I
Speaker 1: try to probe what yours is to see, and if
Speaker 1: it is very different from mine, I just termine the
Speaker 1: discussion and move on to talk about sports. What's the
Speaker 1: old expression, never talk about politics, religion or um. I
Speaker 1: don't remember what the third one is sex, religion or sex,
Speaker 1: don't talk about that. That's the money. UM. People here
Speaker 1: talk about money. I don't think, not about income. They
Speaker 1: talk about and they talk about spending, and they talk
Speaker 1: about houses and cars, but it's never income. And our
Speaker 1: favorite two questions. If one of your students or another
Speaker 1: millennial were to come up to you and ask for
Speaker 1: your advice, telling you they were interested, UM in going
Speaker 1: into the field of either finance or behavioral economics, what
Speaker 1: sort of advice would you know? I I coordinate internships
Speaker 1: of finance majors, and and what I tell them, I
Speaker 1: use the word serendipity that is fined by accident. Uh.
Speaker 1: You have to figure out not just the world around you,
Speaker 1: You have to figure out yourself what what works for you?
Speaker 1: And and you do that by kind of keeping your
Speaker 1: eyes open and keeping to this idea of serendipity. Figure out,
Speaker 1: you know, ask yourself, would you want a job along
Speaker 1: the lines of this internship or is that definitely one
Speaker 1: that you would not want? Uh? And so and so
Speaker 1: continue on in in that way. And so I tell
Speaker 1: them you want to go into finance and to behavioral finance.
Speaker 1: If you want to go to the academic side, ask
Speaker 1: yourself whether you delight in new ideas if you don't,
Speaker 1: and and willing to work. Of course, if you don't
Speaker 1: delight in new ideas, you know you may as well
Speaker 1: go to engineering. Um, I think there might be some
Speaker 1: new ideas and engineering, but but who knows. And our
Speaker 1: final question, what is it that you know about investing
Speaker 1: in human behavior today that you wish you knew thirty
Speaker 1: years ago when you were first started. Well, you know,
Speaker 1: my answer might might surprise you, but the answer is nothing.
Speaker 1: That is that is, I really enjoyed the journey as
Speaker 1: much as I enjoy the destination, and I continue on
Speaker 1: that journey. And so all I need is kind of
Speaker 1: like like when you drive a car and you don't
Speaker 1: really need the headlights to show you anymore than than
Speaker 1: a distance uh that is out there. Uh. And as
Speaker 1: you move, you know, the lights move with you and
Speaker 1: you see the next part of the road. You don't
Speaker 1: need the navigation system. You just need to You might
Speaker 1: you might need the navigation I sadly do. But but
Speaker 1: but I think that joy, the joy of discovery, is
Speaker 1: really uh too much to give up, uh to know
Speaker 1: that that is. I don't know that I would have
Speaker 1: wanted five years ago or thirty years ago to know
Speaker 1: exactly where my life is going to take me. I think,
Speaker 1: I think that it is a nice thing when discover
Speaker 1: things along the way, and you explore things and you
Speaker 1: enjoy them. We have been speaking with Professor Meyer Statman
Speaker 1: of Sata Clara University. If you enjoyed this conversation, be
Speaker 1: sure and check up an Inch or down an Inch
Speaker 1: on Apple iTunes and you could see the other hundred
Speaker 1: and thirty or so such conversations we've had previously. Thank
Speaker 1: you so much, professor, for being so generous with your time.
Speaker 1: I would be remiss if I did not thank Taylor Riggs,
Speaker 1: my booker, Michael bat Nick, our head of Research Medina
Speaker 1: Parwana are recording engineer. We love your comment, feedback and
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. I'm Barry Ridholtz. You've been listening to Masters
Speaker 1: in Business on Bloomberg Radio. Our world is always moving,
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