Table Of Contenti
ADVANCED PRAISE FOR
FINANCE FOR NORMAL PEOPLE
“Finance for Normal People shows that self-knowledge is the most valuable
investment skill of all. Meir Statman—one of the founders of Behavioral
Finance—uses fascinating new research about market imperfections and
the psychology of decision-making to navigate normal people through the
complexities of investing. The evidence is compelling and the writing is
lucid” —William N. Goetzmann, Edwin J. Beineke Professor of Finance
and Management Studies, Yale School of Management
“Meir Statman has pioneered the integration of behavioral research with
financial analysis. Finance for Normal People makes the insights of behav-
ioral finance available to the ordinary investors, helping them to under-
stand markets—and themselves.” —Baruch Fischhoff, Howard Heinz
University Professor, Carnegie Mellon University, and co-author of Risk—A
Very Short Introduction
“Standard finance theory assumes that investors and traders are rational
super- computers, able to take into account all available information and
process it logically. But, investors are normal, with normal wants and nor-
mal susceptibility to cognitive and emotional errors. Professor Statman
has written an excellent guide to how finance actually works in prac-
tice— not just in theory. Yet, despite Statman’s real- world approach, his
book remains rigorous and evidenced by the very best research.” — Alex
Edmans, Professor of Finance at London Business School
“Behavioral finance pioneer Meir Statman describes normal people who care
about investment profits but also about how investments make them look
and feel. Normal people strive to reach many investment goals— retire-
ment, education, travel— taking different risks for different goals. Discover
how stocks may be mispriced, but the index hard to beat. Learn how to
create a portfolio that meets your goals.” —T errance Odean, Rudd Family
Foundation Professor of Finance, Haas School of Business, University of
California, Berkeley
“Insights into goals- based wealth management are some of the many
insights in Meir Statman’s superb book. Normal investors want financial
benefits from their investment but they also want expressive and emo-
tional benefits on the way to their life goals. This book should be on the
must- read list of investors and financial advisers alike.” — Jean Brunel,
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editor of the Journal of Wealth Management and author of Goals- Based
Wealth Management
“Finance for Normal People is a tour de force. Literally covering the field of
Behavioral Finance from A to Z, this is a user friendly book that should be
read and on the shelf of every serious financial advisor/manager and all
serious investors.” — Harold Evensky, Chairman at Evensky & Katz and
Professor of Practice, Department of Personal Financial Planning, Texas
Tech University
“A pioneer of behavioral finance, professor Statman is offering us a won-
derful book which explores how people actually make financial decisions,
what are the salient features of financial markets, and how people could
improve their financial decision making.” —Gur Huberman, Robert
G. Kirby Professor of Behavioral Finance, Graduate School of Business,
Columbia University
iii
Finance for
Normal People
How Investors and Markets Behave
Meir Statman
1
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1
Oxford University Press is a department of the University of Oxford. It furthers
the University’s objective of excellence in research, scholarship, and education
by publishing worldwide. Oxford is a registered trade mark of Oxford University
Press in the UK and certain other countries.
Published in the United States of America by Oxford University Press
198 Madison Avenue, New York, NY 10016, United States of America.
© Meir Statman 2017
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
by law, by license, or under terms agreed with the appropriate reproduction
rights organization. Inquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above.
You must not circulate this work in any other form
and you must impose this same condition on any acquirer.
Library of Congress Cataloging- in- Publication Data
Names: Statman, Meir, author.
Title: Finance for normal people : how investors and markets behave / Meir Statman.
Description: New York City : Oxford University Press, 2017.
Identifiers: LCCN 2016041676 | ISBN 9780190626471 (hardback)
Subjects: LCSH: Finance, Personal. | BISAC: BUSINESS & ECONOMICS / Budgeting. |
PSYCHOLOGY / Applied Psychology.
Classification: LCC HG179 .S8117 2017 | DDC 332.024—dc23
LC record available at https://lccn.loc.gov/2016041676
9 8 7 6 5 4 3 2 1
Printed by Edwards Brothers Malloy, United States of America
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To Navah
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CONTENTS
Introduction: What is Behavioral Finance? 1
PART ONE: Behavioral People Are Normal People
1. Normal People 9
2. Wants for Utilitarian, Expressive, and Emotional Benefits 17
3. Cognitive Shortcuts and Errors 39
4. Emotional Shortcuts and Errors 71
5. Correcting Cognitive and Emotional Errors 93
6. Experienced Happiness, Life Evaluation, and Choices: Expected-Utility
Theory and Prospect Theory 115
7. Behavioral Finance Puzzles: The Dividend Puzzle, the Disposition
Puzzle, and the Puzzles of Dollar-Cost Averaging and Time
Diversification 135
PART TWO: Behavioral Finance in Portfolios, Life Cycles,
Asset Prices, and Market Efficiency
8. Behavioral Portfolios 175
9. Behavioral Life Cycle of Saving and Spending 219
10. Behavioral Asset Pricing 253
11. Behavioral Efficient Markets 287
12. Lessons of Behavioral Finance 337
Notes 345
References 389
Author Index 431
Subject Index 445
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Finance for Normal People
