Behavioral Finance Panel
Meir Statman
Terry Odean
Allan Roth
Please write down a number between 0 and 100 (inclusive) such that your guess will be as close as possible to 2/3 of the average guess. For example, suppose five people enter and their guesses are 50, 40, 30, 20, and 10. Then the average guess would be 30, two thirds of which is 20, so the person guessing 20 would win.
Please write down a number between 0 and 100 (inclusive) such that your guess will be as close as possible to 2/3 of the average guess. For example, suppose five people enter and their guesses are 50, 40, 30, 20, and 10. Then the average guess would be 30, two thirds of which is 20, so the person guessing 20 would win.
Substitution
“When faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.”
Daniel Kahneman
Considers all facts Limited attention
Correct beliefs Biased beliefs
Emotionless Emotional
�Econs vs Humans
When All Traders Are Above Average�(i.e., overconfident) Odean, 1998, Journal of Finance
Trade more.
Earn less.
Underdiversify.
Increase market volatility.
And passive will outperform active investing.
"Overall, men claim more ability than do women, but this difference emerges most strongly on … masculine task[s].”
Deaux and Ferris (1977)
Disposition Effect in Taiwan�Barber, Lee, Liu, Odean, 2007, European Financial Management
bit.ly/odeanvideos
odean@berkeley.edu
Finance for Normal People:
How Investors and Markets Behave
Meir Statman
Glenn Klimek Professor of Finance
Santa Clara University
Normal Wants
Utilitarian, Expressive, and Emotional Benefits
The difference between:
1. Giving a rose to a woman you court
2. Giving her $10, the price of a rose
Normal Wants
We want to nurture our children
Utilitarian benefits
What does it do for my pocketbook?
I have money to support my children
Expressive benefits
What does it say about me?
I am a responsible parent
Emotional benefits
How does it make me feel?
I am proud to support my children
Normal Wants
We want to stay true to our values
Utilitarian benefits
I’ll get high returns
Expressive benefits
I am socially responsible
Emotional benefits
I have peace of mind because my finances are true to my values
Normal Wants
We want high social status
Hedge funds
Hedge-fund money can put you into exhilarating conversations about the virtues of Gulfstreams versus Falcons
Utilitarian benefits
I will have high returns with low risk
Expressive benefits
I have high social status
Emotional benefit
I feel proud as a member of an exclusive club
Normal Wants
Why do people with billions want more billions?
Meir Statman painted
“Many Colors in Straight Lines”
$50 canvas and $20 paint
Kenneth Griffin of Citadel bought
Jasper Jones’ “False Start”
for $80 million
We want great beauty, high status, and proper respect
Normal Wants
We want to make sense of the world
What makes stocks go up and down?
Utilitarian benefits
By solving the puzzle I can make money
Expressive benefits
I am smart
Emotional benefits
I feel proud and accomplished
Normal Wants
We want to play and win
Benefits of “active” investing
Utilitarian benefits
It provides high returns
Expressive benefits
I am much smarter than mediocre
index fund investors
Emotional benefits
I love the exhilaration of playing and winning
Why do we behave as we do?�Rational, Irrational, and Normal Behavior�
1st Gen Behavioral Finance
Because we are irrational
Our wants are the wants of the rational people of standard finance
We fall victim to cognitive and emotional errors on our way to our rational wants
2nd Gen Behavioral Finance
Because we are normal
Our wants are the wants of normal people
We fall victim to cognitive and emotional errors on our way to our normal wants
Rational, Irrational, and Normal People �
2nd Generation Behavioral Finance
People are normal
Normal people buy lottery tickets because they want:
The expressive benefits of being “players” with a chance of winning
The emotional benefits of hope of winning
The utilitarian benefits of the miniscule chance of winning
Normal people are sometimes misled by cognitive and emotional errors
Behavioral Market Efficiency
Yes, markets are crazy, but this does not make you a psychiatrist
Why do so many investors believe that markets are easy to beat?
Normal Investors
The “Market-Sum” Game
Fat and lean returns in a pot of stew
Normal Investors�Amateur investors have only widely-available information�
Why do amateur investors play the market-sum game?��
3. Wants for expressive and emotional benefits
Meir Statman
Contact Information
Meir Statman
Glenn Klimek Professor of Finance,
Santa Clara University
500 El Camino Real, Santa Clara, CA 95053, USA
Tel 408 554 4147
mstatman@scu.edu
http://www.scu.edu/business/finance/faculty/statman.cfm
What Investors really Want, McGraw-Hill, 2011
Finance for Normal People: How Investors and Markets Behave
Oxford University Press, 2017
Survey Link - Laura to include later :)
(Leave this as your last slide)