Every profession has its superstars. And outside a given profession, you wouldn’t know those people if you saw them in the grocery store.
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Meir Statman is an excellent example of just such a superstar. If you met him in person and had a chat , you’d find him to be a kind, unassuming man with an interesting Europeanesk accent. But if you see him at a financial planning or academic conference, it’s probably because he’s a keynote speaker.
Many people assume financial planning is all about crunching numbers and knowing boring details about the Internal Revenue Code. While those skills are part of the financial planning profession, the best planners also pay attention to behavioral finance. Why do people do the things they do and don’t do with money? And how can the planner motivate them to do better things and stop doing financially destructive things?
Statman has written several books that don’t require an academic grounding in finance to be readable. “Finance for Normal People” is one . In addition to giving excellent summaries and examples of pertinent academic theories in layman terms, he gives insight on current issues for normal people.
For several years, financial pundits have been saying the stock market is at its top and due a correction. That same refrain is now being sung about the real estate market. As Statman says, “Knowledge that bubbles exist does not necessarily imply that investors can identify them as they occur and exploit them for abnormal returns.” The average person monitoring their investment portfolio often either improperly reacts to market corrections, manages their investments without preparation for a down market or tries to time the market for their benefit, none of which is effective.
For people who invest in individual stocks, as opposed to mutual funds or exchange traded funds, there will inevitably be stock purchases that are losers. Statman points out that as human beings, “We procrastinate in the realization of losses because the emotional pain of regret when we realize a loss is searing.” Stock pickers generally feel they have some uncommon insight, that their research is solid, and they’re smart enough to pick good stocks. In fact, taking losses on individual stocks early is generally more effective than waiting to sell in hopes of a comeback.
An important concept in this book is in regard to income groups. The author identifies these groups as the wealthy, the steady middle, the precarious middle and the poor. The financial planning profession in general pays attention primarily to the first group, has some specialists who work with the middle two groups, and turns to government programs and charities to help the fourth. A mistake for both professionals and consumers is to assume that effective strategies for one income group will work for all.
If you’d like some insights from a behavioral finance superstar, they’re available for the reading.
