Finance for normal people : how investors and markets behave PDF
Preview Finance for normal people : how investors and markets behave
i ADVANCED PRAISE FOR FINANCE FOR NORMAL PEOPLE “Finance for Normal People shows that self-knowledge is the most valuable investment skill of all. Meir Statman—one of the founders of Behavioral Finance—uses fascinating new research about market imperfections and the psychology of decision-making to navigate normal people through the complexities of investing. The evidence is compelling and the writing is lucid” —William N. Goetzmann, Edwin J. Beineke Professor of Finance and Management Studies, Yale School of Management “Meir Statman has pioneered the integration of behavioral research with financial analysis. Finance for Normal People makes the insights of behav- ioral finance available to the ordinary investors, helping them to under- stand markets—and themselves.” —Baruch Fischhoff, Howard Heinz University Professor, Carnegie Mellon University, and co-author of Risk—A Very Short Introduction “Standard finance theory assumes that investors and traders are rational super- computers, able to take into account all available information and process it logically. But, investors are normal, with normal wants and nor- mal susceptibility to cognitive and emotional errors. Professor Statman has written an excellent guide to how finance actually works in prac- tice— not just in theory. Yet, despite Statman’s real- world approach, his book remains rigorous and evidenced by the very best research.” — Alex Edmans, Professor of Finance at London Business School “Behavioral finance pioneer Meir Statman describes normal people who care about investment profits but also about how investments make them look and feel. Normal people strive to reach many investment goals— retire- ment, education, travel— taking different risks for different goals. Discover how stocks may be mispriced, but the index hard to beat. Learn how to create a portfolio that meets your goals.” —T errance Odean, Rudd Family Foundation Professor of Finance, Haas School of Business, University of California, Berkeley “Insights into goals- based wealth management are some of the many insights in Meir Statman’s superb book. Normal investors want financial benefits from their investment but they also want expressive and emo- tional benefits on the way to their life goals. This book should be on the must- read list of investors and financial advisers alike.” — Jean Brunel, ii editor of the Journal of Wealth Management and author of Goals- Based Wealth Management “Finance for Normal People is a tour de force. Literally covering the field of Behavioral Finance from A to Z, this is a user friendly book that should be read and on the shelf of every serious financial advisor/manager and all serious investors.” — Harold Evensky, Chairman at Evensky & Katz and Professor of Practice, Department of Personal Financial Planning, Texas Tech University “A pioneer of behavioral finance, professor Statman is offering us a won- derful book which explores how people actually make financial decisions, what are the salient features of financial markets, and how people could improve their financial decision making.” —Gur Huberman, Robert G. Kirby Professor of Behavioral Finance, Graduate School of Business, Columbia University iii Finance for Normal People How Investors and Markets Behave Meir Statman 1 iv 1 Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and certain other countries. Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America. © Meir Statman 2017 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by license, or under terms agreed with the appropriate reproduction rights organization. Inquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above. You must not circulate this work in any other form and you must impose this same condition on any acquirer. Library of Congress Cataloging- in- Publication Data Names: Statman, Meir, author. Title: Finance for normal people : how investors and markets behave / Meir Statman. Description: New York City : Oxford University Press, 2017. Identifiers: LCCN 2016041676 | ISBN 9780190626471 (hardback) Subjects: LCSH: Finance, Personal. | BISAC: BUSINESS & ECONOMICS / Budgeting. | PSYCHOLOGY / Applied Psychology. Classification: LCC HG179 .S8117 2017 | DDC 332.024—dc23 LC record available at https://lccn.loc.gov/2016041676 9 8 7 6 5 4 3 2 1 Printed by Edwards Brothers Malloy, United States of America v To Navah vi vii CONTENTS Introduction: What is Behavioral Finance? 1 PART ONE: Behavioral People Are Normal People 1. Normal People 9 2. Wants for Utilitarian, Expressive, and Emotional Benefits 17 3. Cognitive Shortcuts and Errors 39 4. Emotional Shortcuts and Errors 71 5. Correcting Cognitive and Emotional Errors 93 6. Experienced Happiness, Life Evaluation, and Choices: Expected-Utility Theory and Prospect Theory 115 7. Behavioral Finance Puzzles: The Dividend Puzzle, the Disposition Puzzle, and the Puzzles of Dollar-Cost Averaging and Time Diversification 135 PART TWO: Behavioral Finance in Portfolios, Life Cycles, Asset Prices, and Market Efficiency 8. Behavioral Portfolios 175 9. Behavioral Life Cycle of Saving and Spending 219 10. Behavioral Asset Pricing 253 11. Behavioral Efficient Markets 287 12. Lessons of Behavioral Finance 337 Notes 345 References 389 Author Index 431 Subject Index 445 viii ix Finance for Normal People
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