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Transcription of interview with Meir Statman on January 28, 2013.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Meir Statman is a professor of finance at the school of business in the Santa Clara
University.
He is also a visiting professor at Tilburg University in the Netherlands.
He is the author of the book called What Investors Really Want.
Douglas Goldstein, financial planner & investment advisor, interviewed Statman on Arutz Sheva
Radio.
Douglas Goldstein: I understand your book which is called What Drives Investor Behavior
is now being published in Hebrew.
Meir Statman: In English, itís actually called What Investors Really Want and in Hebrew itís
called [inaudible 00:01:09].
It is a book that I helped translate.
I didnít translate, Michael Tabor did, but it was a delight to go back and help translate
it into Hebrew which is of course my original language.
Douglas Goldstein: In your book What Investors Really Want which was really written in the
United States and now itís translated into Hebrew.
Do you think itís the same things on both sides of the ocean?
Meir Statman: People are people and so in most ways, we are the same and that is we
are normal, neither rational nor irrational.
We want pretty much the same thing.
We want not to be poor, we want a chance to be rich, we want to support our families,
we want to leave some money for our kids, we want to play the stock market and win.
All of that is common to all people everywhere but of course there are differences that have
to do with culture, that have to do with a level of development say of the stock market.
I think that people in the United States for example think of the stock market as being
something that is useful, letís say retirement planning and they are less focused on making
money and beating the market than Israelis but perhaps Iím wrong.
Douglas Goldstein: There was a different personality between American investors and Israeli investors.
Is that something that an Israeli who now reads your book in translation would be able
to relate to?
Meir Statman: Thereís actually a chapter that speaks about cultural differences, that
speaks to those issues perhaps more directly but generally, the issues that face investors
in the United States are those that face people or investors everywhere and so people have
gone to relate to that.
People know what regret is when you invest and find out that you lost money rather than
make money.
People know what fear is when you invest and you lose and you decide that that is too scary
and youíll never ever touch stocks again.
People make the same kinds of mistakes thinking for example that because they can see how
things turned out in hindsight then they now had the power of prophecy in foresight.
All of these things are the same and so if Israeli readers read the book and they donít
see themselves in it, then I failed, but I think they will be able to find themselves
in it.
If they have a decent sense of humor, that will tucker themselves as a tucker at myself
when I do stock that is not always smart.
Douglas Goldstein: One of my experiences as a financial advisor, Iím just watching what
goes on is sometimes I think that people donít have enough fear.
After the Bernard Madoff scandal that blew up a couple of years ago and wiped out tens
of billions of dollars of wealth, I would have thought that people would finally say
ìI got it.
Iím not going to fall for this sort of scams.î Theyíd be afraid and yet they still continue
to fall for them.
How do you explain that?
Meir Statman: I think that people follow their intuition and their intuition says that they
can tell the difference between honest people and dishonest ones.
The dishonest ones take advantage of precisely that.
People somehow have not learned the lesson taught by their mother that if it sounds too
good to be true, it probably is not true.
They donít ask themselves the person who recommended Madoff or John or whoever it is
what does he or she know about them.
You know he is my buddy from my work in this office but he is no financial expert, he would
not be able to tell whatís in the books if he had access to them.
That is the problem we always have and hind sighted come of looks like everyone could
have told that Madoff is a crook, but it was not as clear in foresight and so what we need
to do is ask ourselves what it is that we know and how reliable is the information that
we have and then figure out that if it sounds too good to be true, it probably is not true.
So when you give up on finding gems, youíre going to miss on some true gems but youíre
going to also avoid a lot of coal.
Douglas Goldstein: If people could just step back and look at the information maybe theyíd
be able to make better decisions, but isnít there a study in the world of the behavioral
finance that shows that even when people do have a lot of information, they still make
bad decisions specifically studies related to someone who has the benefit of getting
a lot of news may actually underperform when he trades his account compared to someone
who doesnít read as much news.
Meir Statman: Thereís a difference between information and wisdom which is how we process
information.
If you have information and you process it wrong for example thinking that information
gives you the power to beat the market, youíre going to fall for it again and again but I
know from my experience and I imagine that the same is true for you that you could use
knowledge for the better and so I ask myself every time, Iím tempted to buy a stock because
Iíve heard something good about it, to sell because Iíve heard something bad about it.
I ask myself who is the idiot on the other side of this.
If people did just that which is not that difficult to do, they would say, ìWait a
minute, it might well be that the person on the other side has inside information, what
do I know that other people donít and so I donít trade.î I already have installed
in my brain a hindsight detection and so whenever I think that I knew in 2007 what is coming
in 2008, I remind myself, but in fact I didnít and I remind myself that there are many experts
who said that the stock market is going to go down, down, down in 2009 and it actually
went up.
There is a way for us to actually learn, we are intelligent beings, we learned many things
including that the earth is round.
I donít know that there is any reason why we canít be equally learned in finance.
Douglas Goldstein: In the world of modern technology, thereís so much information floating
around.
If you have to advice someone the best way to use that technology or to channel it to
make it work for him, what would you suggest?
Meir Statman: I would suggest basically paying no attention to it.
Investors should not buy individual stocks.
They should buy well-diversified mutual funds with no cost index funds that are very good
investment.
The wisdom is about ignoring information that is misleading rather than taking advantage
of it and if people did that they would do better.
Iím no genius, Iíve learned certain things and Iím an optimist, but it is because of
scene that people can be educated and of course Iím an educator which of course makes me
an optimist by nature.
Douglas Goldstein: It seems like the proof is in the pudding that people really canít
be educated and especially the type of wisdom that youíre describing.
For example, our parentsí generation was good savers.
They put aside money, maybe they give some charity but they took care of themselves whereas
today the average American once hit retirement has something like less than $10,000 in savings.
The wisdom is out there, we all know what to do, why donít people do that?
Meir Statman: Because it is not easy, thatís the fact that we can learn.
It doesnít mean that learning is easy.
In parentís generation, many parents had pension plans.
They didnít really have to make decisions about saving.
This was done for them and in fact, they couldnít touch the money before retirement.
Today, when it is a natural of working money in even if an employer matches that, when
you are in your 20s and 30s, itís very hard for you to see yourself in your 60s and 70s
and so people find it difficult to do.
So one idea that appeals to me is to make such savings mandatory and in this sense,
Israel is the head of the United States in having to find contribution plans but people,
both employers and employee are mandated to put the money in and cannot touch it before
retirement age.
There are remedies.
Sometimes, the remedy is to teach people to behave better and sometimes it is to force
them to behave better
Douglas Goldstein: There was a study that was done where they gave half a population
of people who were saving for retirement, the statement of the retirement plan and it
had a photograph of the client and then the other half got a picture a computer morphed
picture of the same person looking 40 years older and it turned out that the people who
saw themselves literally saw a photograph of themselves being much older were much more
likely to properly invest to save more and to properly invest for the future.
Meir Statman: The difference between the two groups is statistically significant but I
donít know that it is very different.
Think of smokers who see those disgusting pictures of people who have diseases that
are obvious on their faces and dying and so on, it still doesnít affect their behavior.
Sometimes what you need to do is do something that is more coercive which is to force people
to save rather than [imagine] them to save by pictures of them as they are older.
Douglas Goldstein: How can
people follow your work?
Meir Statman: One way of course is to get hold of my book which is now in both English
and Hebrew.
There is a website where they can get access to my writings.
The best way to actually get that is to put my name in Google, the first thing that should
come up is my website and I would welcome people visiting it and downloading articles
that they find interesting.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article.
While it is believed to be current and accurate, divergence from the original is to be expected.
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sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News.
Readers should consult with a professional financial advisor before making any financial
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