17 Pages Posted: 19 Jan 2011 Last revised: 8 Mar 2011
Date Written: January 18, 2011
This is the introduction to the book, “What Investors Really Want.” The book centers on behavioral finance, drawing from research in finance, psychology and marketing, and combining systematic studies with anecdotes and recent events.
The book presents the cognitive errors that bedevil investors, such as framing and hindsight errors, and the emotions which mislead them, such as fear, exuberance, and unrealistic optimism. Yet the book goes much further in describing investors as “normal,” neither rational nor irrational. We are “normal smart” at times and “normal stupid” at other times. We commit cognitive errors and are misled by emotions on our way to what we want.
We want three kinds of benefits in all products and services, whether watches, restaurant meals, or investments. High returns and low risks are the utilitarian benefit of investments, as calories are the utilitarian benefits of restaurant meals and time-telling is the utilitarian benefit of watches. But we also want expressive and emotional benefits, such as the ambiance of a restaurant, the prestige of an expensive watch, or the hope of winning with a well-chosen stock. Moreover, we want to feel pride when our investments bring gains and avoid the regret that comes with losses. We want the status of hedge funds and the warm glow of socially responsible funds.
You might wish to consider the book for courses in finance. Students will recognize themselves in the book and it will help them make better decisions.
Keywords: behavioral finance, cognitive errors, investments, framing, emotions, hindsight bias, confirmation bias
JEL Classification: G00
Suggested Citation: Suggested Citation
Statman, Meir, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions (January 18, 2011). SCU Leavey School of Business Research Paper No. 11-03. Available at SSRN: https://ssrn.com/abstract=1743173 or http://dx.doi.org/10.2139/ssrn.1743173
By Andrew Lo