Title: "What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions"
Author: Meir Statman
Publisher: McGraw-Hill, 2011
Those deconstructing the Great Recession from the standpoint of "how did we get here?" in service of the aim of avoiding a repeat have astutely honed in on the role of flawed decision-making on the part of consumers in at least partially causing the crisis.
From buying too much house, too soon, with too little down and on screwy loan terms, to floating an unaffordable household lifestyle on credit cards, poor decision-making can — and indeed has — made and broken our household finances and our national economy.
As with weight loss, I’ve found that with personal finances, people tend to know what they should be doing, but often find their decisions and actions to be in opposition with these shoulds.
In an effort to both illuminate why people do the financial things they do — especially the "bad" things — and help us all make better financial decisions going forward, behavioral economist and finance professor Meir Statman has written "What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions."
In doing so, Statman has crafted an intelligent, nuanced, educational and possibly life-changing book for those who considers themselves a student of personal finance or, well, themselves and why they do the things they do.
These insights are particularly tailored in this book to understanding our behavior in the realm of money matters, but they certainly hold promise for human behavior in the financially tangential areas of our lives, ranging from how we interact with our families to how we care for ourselves (or fail to do so, as the case may be).
The book is organized from very basic premises, each chapter explicating one foundational statement of what investors (for which you could accurately substitute consumers, or human beings, for that matter) want, need, think or feel, in terms of motivations for their financial decisions and behavior.
These chapter subjects/premises are so basic as to seem borderline obvious, but Statman uses each one as a springboard to a detailed, interesting, data-backed, yet not overly academic exploration of each topic.
Each of these chapters masterfully interweaves narrative stories (about everyone from the former owners of the $100 million lost to Nigerian e-mail scams every year, to Bernie Madoff, Leona Helmsley, Bill Gates and Meg Whitman) with the results of scientific studies into the fallacies, feelings and flawed approaches that threaten to foul up even the smartest investors’ finances.
Statman reviews our basest human desires with a financial slant. He declares, then documents, that "we want profits higher than risks," which causes us to fall for too-good-to-be-true investments and/or scams.
Our thoughts and emotions also drive our investment decision-making, but because they are often erroneous and misleading, can also drive us down the path to investment perdition. The desire to play and win the game (i.e., by scoring investments that are much more profitable than they are risky) makes us feel alive, but also sets us up for failure.
Statman explains that our hard-earned money is spent less easily than our windfalls, but that we still struggle with finding the self-control that gives rise to the appropriate balance between spending and saving.
Most of us, according to Statman, crave to be rich, to have high status and respect, to live in alignment with our values and to live in a world that is basically fair. We want better lives for our kids, and we seek out "information, protection, and advice from financial advisers, the Internet, the government, and other investors."
On the other hand, we will do almost anything to avoid poverty, losses and taxes. Statman also explores the roles our "personalities, life experiences, and cultures" play in locating us each individually on the spectrum between hope and fear.
This book is delightful. Read it, and you will learn many, many things you didn’t know before about how your thoughts, feelings, and basic wants and needs may be waylaying you on your pursuit of prosperity. And you will be entertained the entire way through in a smart-funny, and occasionally ha-ha funny, way.
Once you’re done, forever after, you won’t be able to think fallacious financial thoughts or make avoidable money mistakes without thinking back to the anecdotes, examples and studies cited by Statman throughout "What Investors Really Want."
If everyone reads this book, we might avoid another decision-precipitated recession. Everyone won’t, but you should; that way you can at least optimize the financial decisions that get made in your own household.