Advice for Investors — A Q&A with Meir Statman
We recently sat down with Meir Statman to talk about the role our emotions play in how we make decisions and how
that information can affect investors. Meir, a behavioral finance expert, is the Glenn Klimek Professor of Finance
at Santa Clara University and a member of the Loring Ward Investment Committee. His research has been
published in the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, the Journal
of Financial and Quantitative Analysis, the Financial Analysts Journal, the Journal of Portfolio Management,
and many other journals. Meir received his Ph.D. from Columbia University and his B.A. and M.B.A. from the
Hebrew University of Jerusalem.
What is behavioral finance?
Behavioral Finance is the study of the behavior of normal
investors, people like me, people like you. We are normal
smart most of the time but sometimes we are normal stupid.
It is also about how our behavior is reflected in financial markets
and about how to improve the behavior of investors. Once
we understand the cognitive errors that befall us, once we
understand the emotions that are natural to us, we can counter
them where they lead us astray. And this is one of the joys
of being on the committee at Loring Ward because I get to
participate in this great enterprise of trying to help investors
do the right thing.
What is the most significant change you’ve seen
in the area of finance that impacted the way that
What I see is the move from what we know as defined benefits
(pension plans) to defined contributions. It used to be that
people did not have to worry about retirement. They got a job
that had a pension attached to it and they knew that someday
they were going to get a portion of their pay throughout their
lives. That is gone. That has been replaced by 401(k)s and
IRAs. This means that people must know more about finance
In your opinion, how can investors use behavioral
finance to have a better investment experience?
Investors who know their cognitive errors and emotions can
create defenses against them when they lead them the wrong
way. For example, why do people trade so much when the
facts show that people who trade the most lose the most? It’s
because people think of trading like playing tennis against
a training wall. But tennis is not played against a wall; it is
played against an opponent on the other side. And in trading, that opponent might be Warren Buffet. Once investors
realize that they have to ask themselves, “Who’s the idiot on
the other side of the trade?” they might conclude that they
are the idiot and stop trading.
If we can get people to pause, to learn about themselves, and
learn to avoid the mistakes, we can do better. Our own retirement, helping our children, contributing to charity…all of these
are more important than wasting our money on trading.
How should “normal” investors invest their money?
Well, before they get to invest their money they have to make
their money. Next we can create systems that will help us
save. For example, if money goes straight from our paycheck
into a 401(k) we don’t have to think about whether we want
to save it or spend it. Once we have saved, then the question