If I had any say in the matter, books like this one would be mandatory reading material for new financial advisers and strongly recommended reading for investors as well.
I’ve been reading a lot about behavioral finance in the past few years. My role as a financial educator is essentially looking to influence behaviour change, so understanding desires and motivations is important. This book excited me.
When you read traditional economic theory, how the markets “should” work, all ideas are based on the idea that humans are rational decision makers. Its a nice idea. We can pat ourselves on the back and feel smart.
of course the reality is, humans don’t always make rational choices. Which is why so often we buy high and sell low as we enthusiastically follow the latest investing trend.
“We are often advised to use reason, not emotions, when we make investment decisions,” writes Statman. “But this advice is neither feasible nor smart.”
In short – we can’t fight who we are and how we are made. We have to understand it, and work with it.
“What Investors Really Want” provides a wealth of knowledge on the way we make investing decisions, and what we really want from our money. We don’t just want a safe secure retirement.
“We want to be number 1 and beat the market. We want to feel pride when our investments bring gains and avoid the regret that comes with losses. We want the status and esteem of hedge funds, the warm glow and virtue of socially responsible funds, and the patriotism of investing in our own country.”
These are truths I belive more advviers and investors ought to know and understand, to guide them in thier advice and thier decision making. Stop assuming every decision is going to be rational and practical. Remember the people and emotions behind the choice. Use emotion to influence the right choice.
Of course, it isn’t that easy or strait forward. Humans have emotion and reason and want to act on both, but they often are at odds with one another. And we must also account for error. If I mistakenly believe one investment is better than the other – whether due to my own misunderstanding of circumstances or an error in the information I have read, that error goes on to influence my reason and emotions. We can reduce error through financial literacy, but never eradicate it. “The benefits of financial literacy are limited by our ability to learn and to retain what we have learned.”
All in all, “What Investors Really Want” was an interesting and thought provoking book. It was not a particularly easy read. It presents a lot of ideas, sometimes conflicting. But there is no reason to have to sit and read it start to finish. Read a chapter at a time. Read only those that most interest you. Use it as a reference book. I highly recommend it to anyone looking for more insight into the decision making process of their clients of themselves. I’d love to see it ion the bookshelves of advisers everywhere.
