Behavioral Finance: The Second Generation

248 Pages Posted: 7 Aug 2020

See all articles by Meir Statman

Meir Statman

Santa Clara University - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2, 2019

Abstract

Behavioral finance presented in this book is the second-generation of behavioral finance. The first generation, starting in the early 1980s, largely accepted standard finance’s notion of people’s wants as “rational” wants—restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational”—succumbing to cognitive and emotional errors and misled on their way to their rational wants. The second generation describes people as normal. It begins by acknowledging the full range of people’s normal wants and their benefits—utilitarian, expressive, and emotional—distinguishes normal wants from errors, and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People’s normal wants include financial security, nurturing children and families, gaining high social status, and staying true to values. People’s normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing, and market efficiency.

Suggested Citation

Statman, Meir, Behavioral Finance: The Second Generation (December 2, 2019). CFA Institute Research Foundation Publications, December 2019, ISBN 978-1-944960-85-8 , Available at SSRN: https://ssrn.com/abstract=3668963 or http://dx.doi.org/10.2139/ssrn.3668963

Meir Statman (Contact Author)

Santa Clara University - Department of Finance ( email )

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