Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara. His research focuses on behavioral finance as he attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets.
Professor Statman’s research has been published in numerous academic and professional journals and has won many awards. His first book, “What Investors Really Want,” was published in 2011. His latest book, “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance,” is the topic of our discussion in this podcast.
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This podcast is hosted by Rick Ferri, CFA, a long-time Boglehead and investment adviser. The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads’ have held national conferences in major cities nationwide. There are also many Local Chapters in the US and even a few Foreign Chapters that meet regularly. New Chapters are being added regularly. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax deductible donation to the Bogle Center is appreciated.
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Transcript
00:00:10 Rick Ferri
Welcome everyone to Bogleheads® on Investing, episode number 76. Today our special guest is Meir Statman, a professor of finance at Santa Clara University. He focuses on behavioral finance and attempts to understand how investors make decisions. He’s the author of two books: “What Investors Really Want” and the recently released “A Wealth of Well-being.”
00:00:31 Rick Ferri
Hi everyone, my name is Rick Ferri, and I am the host of Bogleheads® on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net, where you will find a treasure trove of information, including transcripts of these podcasts.
Today, our special guest is Professor Meir Statman. He is a professor of finance at Santa Clara University, and his research focuses on behavioral finance as he attempts to understand how investors make financial decisions and how these decisions are reflected in the financial markets. Professor Statman’s research has been published in numerous academic and professional journals and has won many awards. His first book, published in 2011, was titled “What Investors Really Want,” and his recent book, “A Wealth of Well-being: A Holistic Approach to Behavioral Finance,” digs into the third generation of behavioral finance, which widens the lens and brings in many other aspects of life when making financial decisions that may not lead to more money but lead us to what Professor Statman calls a portfolio of well-being.
So without further ado, let me introduce Professor Meir Statman. Welcome to the Bogleheads® on Investing podcast.
00:02:13 Meir Statman
Well, I’m delighted to be with you, Rick.
00:02:16 Rick Ferri
I’ve been following your work for many years. You’ve written a couple of fine books. The latest one will be the topic of our discussion in a few minutes, but before we get to that, you have a very interesting upbringing, and before I even get to you, could you tell me about your parents?
00:02:38 Meir Statman
Well, my parents were teenagers in Poland in 1939 when the Nazis invaded, and they were on the eastern part of Poland. And so, refugees, Jewish refugees that were escaping the atrocities would stop by, and so they understood that they better go, or bad things would happen. And so, they crossed the River Bug, traveled, and lived in Siberia, and then down to Uzbekistan, which is where they met and got married.
I was born in a displaced persons camp, which is a polite word for a refugee camp, in 1947, and we came to Israel in 1949. The funny thing is that there were so many families who were identically situated that it seems like it’s just a normal thing.
00:03:41 Rick Ferri
Your upbringing was in Israel when the country was being formed.
00:03:45 Meir Statman
Indeed. And of course, when you are a child, you know just one environment, and that is your particular neighborhood and your particular country. And so, in the 1950s, as I was growing up, there was rationing. Food was rationed, so you had to have a coupon in addition to money, and so my dad was managing grocery stores, and so we had a bit of better access to food. It is a childhood like any childhood; it has its own peculiarities.
00:04:28 Rick Ferri
So then you ended up going to Hebrew University and getting your undergraduate degree.
00:04:35 Meir Statman
Indeed, yeah, my undergraduate degree, and then I continued immediately, in fact, combined with an MBA. So that was the late ’60s, and I was in the building that housed the economics department. And so, I studied economics, statistics, and then finance. In the building right next to me was the psychology department, and I would go there from time to time to earn pocket money by participating in experiments, and I just found out later that Kahneman and Tversky were doing their revolutionary work right then, but I never heard their names from my professors. I had no idea what they were doing, which tells you about how standard economics and standard finance in particular were at the time. Narrow. Proud of being narrow.
00:05:39 Rick Ferri
So then you decided to come here to the US and go to Columbia University to get your PhD.
00:05:47 Meir Statman
That is right. Yeah, I had a boring job as a financial analyst, and so I took that leap. But by then, I was married. In fact, we were expecting a baby, but I never really thought about it in units of risk, I just felt compelled to move on.
00:06:09 Rick Ferri
You’ve had a wonderful career. Before we get to your books, I want to talk about the generations of behavioral finance. You talk about the beginning of it all being standard finance, where there was this idea that, well, people were rational, and everything they did was very computer-like—immune to emotion. Everybody did math perfectly, and no one made mistakes. This was the thinking of standard finance before we actually get into the first generation of behavioral finance. So, talk about that way of thinking.
00:06:40 Meir Statman
At the beginning of the 1980s, I became familiar with the work of Kahneman and Tversky. My colleague, Hersh Shefrin, did some work that had to do with mental accounting and self-control with Dick Thaler. And so we kind of got together, and as we were speaking about self-control and mental accounting, I remembered my experience in New York in 1973/74, soon after we arrived, where the energy crisis came, and Con Edison, the utility company of New York, had to pay more for the oil they were buying, and they could not raise their rates fast enough because as they are regulated, and so they had to cut the dividend. The shareholder meeting was really raucous, and some people rushed to the stage trying to do harm to the chairman.
00:07:39 Rick Ferri
Really.
00:07:39 Meir Statman
And so later on, I got a transcript of that meeting, and it was absolutely fascinating. You know, so Miller and Modigliani, part of rational finance, standard finance, said that if you don’t get a dividend from the company, you create a homemade dividend by selling a few shares. That did not occur to anyone because they were keeping income separate from capital, and they would not dip into capital, because selling shares to create those homemade dividends was verboten because it was dipping into capital, you know, those kinds of experiences.
00:08:24 Rick Ferri
Models. I mean, they’re just mathematical models. Everybody followed and everybody said, well, this is the way finance works.
00:08:31 Meir Statman
Yeah, but the problem with any science comes when you have theory and then when you have observations, and they don’t match. And so, natural tendency in finance to dismiss the evidence. My natural evidence is to dismiss the theory.
00:08:48 Rick Ferri:
So, your evidence there was these people are rushing the stage because they’re upset, and this then becomes a kind of representation of the first generation of behavioral finance, where you say people are irrational, bumbling behavior, and so forth, with cognitive and emotional issues. And so, you call it the first generation of behavioral finance.
00:09:12 Meir Statman:
That is right. The idea was that he said, “Here is rational behavior: you should dip into capital. Here is actual behavior: people don’t dip into capital.” So, they are not maximizing wealth. Now, the goal in standard finance is to maximize wealth. The goal described in the first generation of behavioral finance was also to maximize wealth but saying that people make mistakes because they are irrational. For example, they don’t dip into capital, they trade too much, and they think they know the future because they know the past. And there’s a whole array of cognitive errors that I’m sure your listeners and you know very well.
00:09:56 Rick Ferri:
Most of the stuff that we hear about, you know, in the media, is about this first generation of behavioral finance. We don’t really hear about the second generation of it, and then the third generation, which is what your book is about. So now that we’re through all these cognitive errors and emotions of the first generation of behavioral plans, you talk in your book about the second generation of behavioral finance. And here it’s like, hey, people are irrational, they are emotional, they are normal. That’s how people are.
And there are other reasons why people do what they do with their money besides just making more money out of it. Talk about the movement from the first generation, just focusing on irrationality, to realizing, no, actually, people are being rational.
00:10:43 Meir Statman:
Well, people are normal. The world is normal, neither rational nor irrational. People are normal. Just look at other products and services and ask yourself what it is that people want. Watches are a nice example. A $50 watch by Skagen is going to show you precise time, a $10,000 watch by Patek Philippe will also show you the right time. So why do people buy those luxury watches? To say that they are irrational is too simplistic. It is perfectly normal because people care about utilitarian benefits—showing the right time—but there are also expressive and emotional benefits. It’s about saying, “I am a wealthy man, wealthy enough to afford this watch. It is beautiful.”
00:11:34 Rick Ferri:
Yes.
00:11:50 Meir Statman:
It gives me a sense of pride that I can do that, and then I was thinking, why is it that we think about financial securities and financial services as different from other products and services? And I said, they’re really not different. That’s the title of the book I wrote, presenting, “What Investors Really Want.”
00:12:16 Rick Ferri:
I just held up your book. This is where this book came from, published in 2011. It came from this idea of the second generation of behavioral finance, where you say, what is it that investors really want? And yes, they do want money, but they also want other things.
00:12:34 Meir Statman:
Yes, again, it is really important to me. I use myself as a laboratory, and I look at experiences and they tell me things. I remember speaking before a presentation in Montreal years ago with an investor friend from the Hebrew University. I said something about mutual funds, and he said, “I am into hedge funds.” So, what did he just tell me? He told me that he is a wealthy man. He didn’t brag, you know, he didn’t want to send the signal, and he did.
To me, it’s kind of funny, but it’s really an important observation that people think about securities as they think about watches and restaurant meals and all other things. And so I said, well, let’s look at those other things. People hate regret, so they hold on to their losers because selling a loser, making a paper loss real, makes them feel the pain of regret.
00:13:48 Rick Ferri:
It makes you a loser.
00:13:50 Meir Statman:
Exactly, yeah. “How stupid was I?” You know, you have to see that. I know I am actually taking a lot of risks in the sense that I’m buying index funds that go up and down by many thousands each day, but I’m very sensitive to regret. So, when I lose money, I get annoyed.
00:14:18 Rick Ferri:
So interesting that you talk about index funds because, in the sense of utilitarian, emotional, and expressive, there is definitely a utilitarian benefit to index funds. You get your fair share of market return, which we know from many studies going back decades is better than what most people get when they try to outperform the market by using active management or trying to pick stocks themselves.
But it does not provide an expressive benefit. You’re going to be the most boring person at a cocktail party by saying, “Oh yes, I own the total stock market index fund.” It’s a very utilitarian product, but it’s not very emotional or expressive. Now, it may be expressive to people who really understand investing and say, “Yeah, you’re smart to buy index funds,” but unless they know that, typical people at a party may not know that. So yes, it makes you feel better because of the utilitarian benefit of index funds, but it doesn’t give you that emotional and expressive benefit.
00:15:29 Meir Statman:
That is right. You actually said it along the way. It actually brings me expressive and emotional benefits knowing that I am smart, that this is really the right thing to do and this is what I teach my students and they come at it from the perspective that you have to analyze the stocks that you are analyzing and so on.
I say, “Always in every trade, there is an idiot. And if you don’t know who it is, you are in trouble.” I use the analogy of tennis that has been used before, but in a different way. I say people trade thinking that they are playing tennis against a practice wall. That is easy, and I say wait a minute. There’s a fellow at the other side of the net, and he is possibly an insider, possibly a professional tennis player in the analogy. Don’t do that, just stand there.
00:16:29 Rick Ferri:
But this is not where it ends. You have continued with your thinking and research, and you’ve advanced to a third generation where people are still normal, but this idea of normal is explicit in describing life well-being. Here’s where you’re bringing the idea of well-being into the equation.
00:16:59 Meir Statman:
My goal, which was not something that I followed exactly, but at least in hindsight, I can see I’m trying to expand the circle of finance. Cognitive errors still are there and it makes sense to avoid them. People view investment with those utilitarian, expressive, and emotional benefits. But then you ask, what is it all about? And it is about well-being. Money is a way station for well-being.
We need financial well-being for life well-being, but it is not enough. Everybody knows that. But there is a lot of literature by sociologists and psychologists and economists about well-being that is not known to people in finance. So, what I did was to say, here are the domains of well-being, and here are some stories that illustrate those dry academic studies. Just think about society, which is one of the domains. Right now, half the country is happy, and half the country is sad after the election. So, we should really expand that circle of finance to include all of it.
00:18:14 Rick Ferri:
So you wrote a book. The latest book is called “A Wealth of Well-being: A Holistic Approach to Behavioral Finance,” which penetrates into a different level, that third generation. I spent a lot of time reading it. I have to say there were some moments when I’m reading it and I’m saying, “Oh, you can’t say that, you’re not allowed to say that.” It’s true, but you’re not allowed to say it.
That’s how a lot of this book was, and we’re going to go through some of those things. Just for the listeners’ sake, you may not agree with everything that Meir brings out in his book, but you have to agree that it’s true, or it’s true for a lot of people. It may not be true for you, but it’s true for a lot of people. It really makes you scratch your head and go, “Wow, he’s actually saying things that are taboo.” You’re not supposed to talk about it. It’s all part of this idea of well-being, and you talk about well-being as having three types: experienced well-being, evaluative well-being, and then meaning. Experienced well-being. What is that?
00:19:26 Meir Statman:
Experienced well-being is the emotions that you have in the moment. Are you happy, sad, bored, or frustrated? It is important even in the long term or in the aggregate because if you’re anxious because your income is low, and you know that the car is on its last legs, if it breaks down, you won’t be able to get to work and then you’ll lose your job. This really causes anxiety continuously, not just at one moment. The same with sadness, occasional sadness is okay, but continuous sadness becomes depression and becomes something much more serious.
This is experienced well-being. Evaluative well-being is about a question as simple as, “How do you rank your own life?” If you were to rank it from zero, the worst possible life, to ten, the best possible life, are you a six, a seven, an eight, or a nine? For that, you have to think not just about how you feel at this moment, but where are you? How are you doing relative to ten years ago? How are you doing relative to your comparison group, your coworkers, and so on?
And meaning kind of goes beyond that. To answer questions such as, “Do you agree when I say my life has meaning? I know why I was put on this earth.” That also is part of that sense of well-being. You can see that they are not the same and there are sometimes conflicts between them. You can enjoy experienced well-being when you are young, using drugs, having many women, but later on, you find yourself old and with no one to help you. You can enjoy one kind and then suffer in the other.
00:21:45 Rick Ferri:
So we’re going to go through the book. It’s full of information. You really have to go back and sometimes reread parts to really comprehend. This is way beyond a happiness book. There are a lot of happiness books out there, and this incorporates happiness, but it’s much deeper than that, and it has to do with finance and how money intertwines with the different well-being aspects we’re trying to achieve.
You start out at the beginning of the book talking about four kinds of capital: financial, social, cultural, and personal. We know what financial capital is, but when you talk about capital in terms of social, cultural, and personal, how do you use the word capital in those contexts?
00:22:39 Meir Statman:
Financial capital is straightforward. We’re talking about wealth and income, and this is known to all the people who know their finances. The notion is that the more money you have in income or wealth, the higher your well-being, as simple as that. But social capital deals with the circle of friends. Do you have many close friends, or do you have some close friends but many distant ones who will still help you? For example, a classmate from college might be a CEO right now, and if you’ve lost your job, you can say, “Hey, buddy, I’ve lost my job. Do you have any leads for me?”
You can see in different strata of society there are different kinds of social capital. Among the poor, it might be, “Hey, I need to go to the doctor. I cannot afford an Uber. Can you give me a ride?” These are the kinds of things they have. People in the working class usually have a narrower set of friends, but deeper friends. The elite have some close friends but many contacts that can help them in many ways.
Cultural capital has to do with just knowing what is okay and what is not. It’s about knowing what is okay to say and what is not. Coming from Israel with one culture to the United States with another, of course, I was on my toes knowing that I’m in a different culture. Can you speak about baseball? Can you speak about opera? All of these are part of cultural capital.
Personal Capital involves character. Are you conscientious? Do you find saving easy or difficult? Are you tall? Are you handsome? Tall men who are handsome find it advantageous in work situations, at interviews, and with women. It’s about gender; it has to do with race and all the other factors that make you a person or nationality. Just being an American is advantageous relative to many other countries. You are going to visit a country in Europe, you don’t need a visa, whereas someone from another country might.
00:25:20 Rick Ferri:
It’s interesting that we talk about capital in that way outside of money. You discuss it involving your friends, social capital, and what they can help you with. Cultural capital—I was in the Marine Corps, so immediately when I talk to someone from the Marine Corps, we have a connection. They may not be a friend, but we were associated in that way.
And then personal aspects such as nationality and all that, these are all capital in a way. Since you’re a behavioral finance person, it’s not just about money; it’s about total human capital. Your ideas on investing sometimes suggest doing things that may not benefit us financially, but they do make sense if they fall under cultural, social, or personal capital. Is that the idea?
00:26:15 Meir Statman:
Yeah, that is the general idea. You can also see when you say “risk,” you say, “What is your risk tolerance?” Immediately people think about those investment questionnaires and where you’re going to be put on the main variance efficient frontier. But in fact, the risks that can bring the most rewards are career risks.
For me, it was coming from Israel to study for the PhD, not knowing what comes next. Will I complete my PhD? Will I get the job? I took that risk, and it worked well. Now I invest in a kind of modest-risk, well-diversified portfolio of index funds. We have to broaden the notion of what returns are and what risk is. You have utilitarian returns, expressive returns, emotional returns, and then the kinds of risks I just talked about. It applies to many domains.
The biggest risk in life isn’t on the stock market. If you want real risk, get married and have children. People laugh because the point is obvious, yet when we talk about risks, somehow we shun that aside instead of realizing it really belongs in the center.
00:27:45 Rick Ferri:
I didn’t think about how finance expands into all these other areas, but you explain it in your book. Financial capital has an interesting spot. It’s important for income and wealth, but it feeds into these other types of capital. You can afford education if you have money. You can afford to live in a neighborhood with better schools. You could pay people to cut your lawn instead of doing it yourself.
But interestingly, financial capital has negatives. There’s a downside to trying to get more money and growing your wealth. It involves keeping up with the Joneses and stress that takes away from well-being. Explain that concept.
00:28:38 Meir Statman:
We care about our own income and wealth, how we are doing personally and how we are doing relative to our comparison group: neighbors if you associate with them, but more importantly, coworkers and family. They become your comparison group. People care about how they’re doing, but they also care, sometimes even more, about how they’re doing relative to their comparison group.
If Mr. Jones got a $100,000 bonus and Mr. James got $200,000, the first feels miserable because he got just $100,000. We say, “Hey, buddy, $100,000 is pretty good money,” but their comparison is with someone else, they aspire to that, and if they don’t have it, they feel frustrated. In the book, I talk about studies of very wealthy families in New York and Manhattan. A woman with a family income of $2,000,000 a year and wealth many times that thinks she’s about average because they know people with chauffeurs and private planes. You just have to chuckle at that. Just being upgraded to business class is something to be grateful for.
00:31:09 Rick Ferri
You know, I speak with a lot of people in California working in the tech industry. In their early 40s, sometimes with net worths of 5, 6, 7 million and a 2 million home, they feel poor compared to those around them. I say, “If you were anywhere else, you’d be wealthy.”
00:31:19 Meir Statman
As we age, the nice thing about aging, you learn to just shrug and say “so Joe has more money than me, big deal”. Really knowing what enough is, as Bogle says, that is true. And as you age it is easier to do that. When you’re young, it is good to have aspirations. You strive to get good grades. This is why you strive to rise at work. But when you are getting to be beyond middle age, all of those things, if you’re lucky, you stop searching for more money.
00:31:40 Rick Ferri
It is something that I think that you acquire as you age more, at least I know I have because I know you’ve used yourself as an example here.
00:31:50 Meir Statman
I think so. I think that that competitive spirit of earlier years were where it was really make you perhaps even mad that somebody else won a lottery or somebody else got a promotion. Now you say good for him. I’m doing just fine. Be happy with what you have.
00:32:12 Rick Ferri
You did point this out in your book that as people accumulate a lot of wealth, their other spheres go down, in other words, instead of relying on family to do things for you, you can now go out and buy that. Instead of family helping you raise your children well, you can just take them to daycare. It narrows your other types of well-being that you have around family and social.
00:32:43 Meir Statman
Well, yes. So, you can see that when I got married, there was 22. Now that my bride was 21. And my parents and others parents got together to decide how much each pair of parents is going to contribute to the young couple to get them going to get the down payment on a house. Well, it was not easy to get bank loans at that time for things like that. And credit cards really did not exist, and my parents had a bit more than others parents.
But her parents borrowed some money because they wanted to match what my.
Her parents offered they borrowed some of that money from relatives, zero interest and they paid it back when they could. For that, you have to have social capital that is more than I’ll just charge it on my card.
And so you can see that if I need to go someplace and my car is broken, well, I just order an Uber, but somebody who has less money finds Uber pretty expensive, and so they’re going to wait until their neighbor is going in the same direction and get a ride from that person. Well, if you’re going to do that, then you better maintain good relations with that neighbor.
00:34:07 Rick Ferri
Right, exactly.
00:34:08 Meir Statman
You can see how those things that have to do with money and status affect things that have to do with, say, friendship. What do you do if you are a young person and a good friend from college is now getting married and she is going to have her wedding in Hawaii and she invites you.
You might not have the money for airfare and hotel in addition to a gift. Some brides accept this and grooms accept this, and some see that as betrayal of friendship, so you can see how money, even when it comes to friendship, can create those kinds of frictions.
00:34:48 Rick Ferri
The next part that you talked about is saving and spending. You talk about a life balance between spending now and saving yet you constantly saying in the book that it is really hard to find this balance because it requires a whole set of tools, mental accounting, self-control and that is very hard.
So, you know a lot of people say just find a balance in life, Meir and you’ll be happy. Everything will be good. But what you’re saying is hey, finding a balance is not easy.
00:35:17 Meir Statman
It is not easy, and it is good that we have some institutional arrangements that make it a bit easier. God knows, just imagine that we didn’t have Social Security. Think about the people say, just give me my Social Security money and I’ll invest it the way I want. I do better than the bureaucracy. Well, suppose that you put it in Bitcoin and it goes down. Now you are living in the street. What then? And so, it is good that we have the government do Social Security. It’s good that corporations offer 401(k).Finding the balance is indeed difficult and many times we make mistakes in our early years by spending too much.
And in our later years, and that is really one that that strikes me, people find it difficult to spend. People have plenty of wealth, but they have gotten used to the notion that saving is not just for the future. Saving makes them feel good now. Saving makes them feel virtuous. When I wrote about it some years ago in the Wall Street Journal, I got so many touching responses of people telling me, one you are describing me, second now that I read that I went out and I bought myself some fancy golf clubs or HiFi speakers or whatever it is knowing that that I can afford it.
00:36:47 Rick Ferri
You wrote if it makes you happy. If it truly makes you happy, you should buy it as long as you can afford it. I do want to say one thing though. Again, this is controversial. You are not a big fan of the FIRE movement. Financial independence. Retire early. You say, no, in a way, pushing the wrong idea.
00:37:05 Meir Statman
Well, this idea of retirement is Nirvana sounds really ridiculous to me. That is, I’m 77 and I’m still working. Do I have to? No. Financially I can retire, but teaching and scholarship is my vocation. So, it provides meaning to my life that I will not yet just from having leisure.
And so, it really makes no sense to kind of divide the life into those two parts. One you work like a horse with overtime, with God knows what else, spend close to nothing, and then you have the riches of free time forever. It does not work. And more than that, it really is quite risky because you don’t know what will happen.
You know, you retire at 40. You think that you have $1M or $2M or $3M and that is going to last you, but the market is not cooperating and so on. You might find yourself in a situation that is really hard and so just balance is that just be reasonable. You don’t have to work yourself to death. There is such a thing as family and leisure and all of that, but don’t divide your life into those two compartments and remember that retirement can be pretty boring.
00:38:31 Rick Ferri
You also talk a lot about overdoing it where you can become a miser and becoming a miser is not good. It actually lowers your well-being even though you have more money, more wealth, it actually lowers your well-being.
00:38:47 Meir Statman
That’s what I found from this letter. When you give permission to spend and you say, hey, you know you can spend without trouble. It really is going to enhance your well-being or if you don’t want to spend it in yourself, how about spending it on your kids, on your grandkids, on the community? If you have this extra money, there are people who are poor in your neighborhood, close or far.
Won’t you get some higher well-being if instead of being the richest man in the cemetery, you get to share your wealth while you are alive. You can say in a way that they are self-explanatory. They are common sense, but many people don’t have that common sense. When I had an example in one of my articles in the Wall Street Journal about buying lattes at Starbucks. And yes, of course, if you save it and you invest it, you’re going to have so much more when you’re 65.
And I say well, you spend that same amount on diapers for your baby and surely you’re not going to have your baby at 65. So, there are some things where you have to ask yourself, how much is it worth now and how much will it be later? And I’m not suggesting that people spend a lot of time thinking about it, but you have to develop something like an intuition about it that is going to guide you, right? My mom would say spend money, but don’t waste it.
00:40:20 Rick Ferri
Yeah, and this is all into the realm of well-being, how we feel, who we are and being a miser. Well, you never spend money, and you don’t give money to your children who need it because you don’t want to spoil them. I hear that all the time. It’s like I don’t see how. If your children are in their mid-30s and they’ll say they’re married, struggling at work and you know, maybe not having kids yet because they, you know, they need to work. And yet some people still won’t help their kids. They say, Oh, well, I want to ruin them. It’s an interesting mindset that some parents have.
00:40:56 Meir Statman
I think it’s really part of cultural capital, as I said that that is in in Israel, my parents and her parents gave us money when we needed it with a warm hand. How people grow to be reasonable or spendthrifts we don’t really precisely know.
00:41:19 Rick Ferri
There’s a chapter you have on investing, and I think we’re in line with the Bogleheads® idea of don’t try to think that just because you have a PhD in molecular biology that you can go out and pick stocks, just use index funds.
You have your own three fund portfolio, we have something in the Bogleheads® that’s called the three-fund portfolio, and you have your own which is a world equity fund, total bond market index fund, and a money market fund, which is really a simple portfolio. We actually call that a two-fund portfolio because we leave the money market emergency money out. But it’s interesting that that’s the same concept that you came to in all of your work.
00:42:03 Meir Statman
Yeah, keep it simple, stupid is still a good mantra for investments. The total stock market fund has more than 3,000 stocks. If you ask me what are their names, you know, I might know two or three dozen. Do I know their financials? Of course not. You know, I just, I just buy and invest in my portfolio. And I assume that that eventually it is going to do well.
I have to really get out of the minds of my students that doing analysis of stocks is going to get them extra. I always ask you know, who is the idiot on the other side of the trade? That is as much as you know, being an engineer working in biotechnology. There are people who, one, have inside information and even if they don’t have inside information, they know this company and industry inside out. This is their day job. Yeah. Why do you think that you’re going to be able to beat them? So whenever I feel like trading, I ask myself this question and then I sit tight.
00:43:14 Rick Ferri
One more thing about investing before we move on because I don’t want to dwell on investing that much. I want to get to all these other things is that you talk about asset allocation and as you get older and you realize you have more money than you need, that this idea of reducing your exposure to equity may not be what you want to do because you have more money than you’re going to need. So, you’re going to be now saving for your children or charity, and therefore, you know, maintaining that higher equity allocation gives you satisfaction gives you more well-being.
00:43:52 Meir Statman
It makes a lot of sense. Yeah, I like to say that you want two things in life. One is not to be poor and the other is to be rich. And so, roughly speaking, you can say that bonds are for not being poor and stocks are for being rich. So ask yourself, what if the stock market goes down by 50% or 60% or 70%? Will you still be okay? And the answer is yes. Then you can have a portfolio that is still allocated mostly to stocks and then leave it again for family, for charity, for all good things.
00:44:33 Rick Ferri
Well, now we’re going to get into some, really interesting stuff. So, we went through the finance stuff, the saving, investing, and financial. Now we’re going to get into some parts of the book that, wow, can you really say that?
It has to do with dating and marriage and widowhood and divorce. Parents, children, elderly, parents, grandparents, siblings, all the family stuff. And so, we’re going to start out with dating and marriage. You find that there is a strong link between marriage and well-being. We can all agree on that, but I want to get to the controversial stuff.
Here’s what you said. Marriage enhances well-being more for men than women, because women have the household chores to do and they have childbearing duties, while men benefit from the social support of women. You’re not supposed to say this, Meir. That that we get more out of it in a way than women do. So, our well-being, men’s well-being, is benefited more than women’s well-being from marriage.
00:45:41 Meir Statman
Yeah. Well, I think some of it has to do with housework and even in couples that they profess equality, that tends to fall on women more than men. But also, perhaps even more important, women have more friends, more social capital than men. When women are widowed, they usually have some circle of friends that is going to be there to support them.
When men find themselves in that situation, once their wife died, they realized that the only social contact they had was through their wives and now they feel entirely lost and so you can see how that social capital really matters and why it is important for men to develop friendships that are reasonably deep such that you find yourself in a situation where you’re not entirely alone.
So, I tell a story about the man who lost his wife and he was reluctant to accept invitations to go to dinner with friends who were in his situation, and eventually he did, and now he is kind of in a community of people like him, they have dinner together and they can lean on each other, if not financially, surely emotionally.
00:47:10 Rick Ferri
I just think this is a great example of social capital because it’s true. I see it. I live in an over 55 community and the whole purpose of the over 55 community is sort of to bring people together. Men can go play golf or play pickleball or whatever, and they develop their own groups, their own social groups. And I think it is helpful when somebody in our group wife passes away, they have the social network in these over 55 communities that you may not have in other places.
When I was reading that, it just became very clear to me that, Gee, I’m living in a place like this where we’re kind of practicing that.
00:47:48 Rick Ferri
Let me move on to divorce. So sometimes things don’t work out. What you say is that a lot of times divorce occurs because there wasn’t well-being before people got married. In other words, marriage doesn’t solve that. If your well-being is low before you get married, the higher probability that you’re going to get divorced. Can you explain how all that works?
00:48:11 Meir Statman
Yeah. So, people who have higher well-being are more likely to attract a mate. They’re more optimistic, for example, they smile more. You see that in marriage. Now, of course, there are going to be bumps in every marriage, but being dour and sour is not really a good recipe. But it is important to know that sometimes it is two good people, two people who can enjoy high well-being. They’re just not matched right.
And so divorce, even with kids, might be a better solution than just living there together for the sake of the kids. You know, the kids get the point in many cases, if it was obvious that parents don’t get along when they divorce. Kids, in fact, are relieved that they don’t have to witness that stress every day and they can go to the home of mother, and home of father and have a better time than when they are together.
And so there are really many stories and they go in different directions and people have different views as to what to do. For some people it is you are married, you have kids, it is better to stay together if they are minors. Other people say no it just does not make sense for us. We can go our separate ways. Take care of our kids, both financially and emotionally, and go on with our lives.
And so, I think that what will happen to readers of the book is that they’re going to see themselves in some of the stories and some of the stories will strike them as being strange. But that’s good because it kind of prompts thinking and you know that you’re not alone, and perhaps once you reflect on it, I believe that people can change, you know, keep people can improve their well-being.
00:50:13 Rick Ferri
That’s exactly what happened to me as I was reading through the book, there were some things that just turned me the wrong way, and I said I don’t believe that that’s not what I would do. But then there were some things, well, that’s me, you know, and what you do in the book though is you say, no, it’s not like I’m right in that other person is wrong. That’s not what it is.
What enhances my well-being and what enhances that other person’s well-being and what and why enhance somebody else’s well-being can be completely different than what enhances my well-being. But we try to keep everybody within our own belief system and the book really opens that up in many different ways.
So, it’s much more than a finance book, but it does all relate to finance. As you were saying, you know, if you have one person in a relationship who’s a spendthrift or worse, they hide spending and hide debt from the other spouse. I mean, this is going to eventually blow up. So really interesting observations that you put way beyond basic behavioral finance that would read about, you know, we have a lot of parental advice in the book, a lot of it has to do with what we call helicopter parents; they want their children to be involved in all these things and don’t realize that that actually takes away from the child’s well-being. You wrote that they feel much more stressed with the extracurricular activities that they’re involved in than they do just with their schoolwork.
And how trying to help your child can actually be hurting your child because you’re putting too much stress on them. I mean, that portion wasn’t about finance, but I found it all very interesting. And it all does fall together with your well-being, your child’s well-being, your family well-being. And you said this portfolio of well-being, which of course includes your children’s well-being.
00:51:59 Meir Statman
Many things, many things that surprised me that I found fascinating, and I think that readers will find them fascinating as well. That is, why is it that there is this big fascination now with getting the kids into an Ivy League college? I’ve lived in this country for 50 years. It is not like that. I studied at Columbia, but it was not because of its prestige. It’s because they offered me the financial aid that was necessary.
So, what is going on? Economists try to figure it out. Sociologists try to figure it out. I kind of bring it together to make sense of it, and perhaps people can get kind of advice from that. I have many neighbors. It seems like all my neighbors are from India, highly educated people, many of them engineers. And they come from a culture where graduating from a top university is a big thing. In the US it is a thing, and it is big, but it’s not as big.
You can do well even if you graduate from a second or third level college. Just understanding that and then presenting it. I talked about it with those neighbors and they began to understand how this country is different.
00:53:27 Rick Ferri
You talk about how in the US it’s where you go to college that matters, whereas in Canada it’s what you study in college that matters. A little different culture.
00:53:38 Meir Statman
Exactly. So, in some cultures, I know a colleague of mine who was originally from Korea and his wife is from Sweden. In Korea it is really very important where you graduate from. In Sweden it is not. When you put those cultures side by side you say, why are they different and make some judgment as to which of them is better. Which of them enhances well-being better than the other?
00:54:06 Rick Ferri
Doesn’t mean that you’re going to have more well-being as a student graduating from one of those prestigious universities and then going and getting a job that that job is going to give you any more satisfaction or any more well-being than if you didn’t take that path. And with that, that’s what I found very interesting about a lot of the research that you’re doing.
And then if you get into elderly parents as well and the sandwich generation. And that grandparents, because I am one, I have 8 grandkids. We love being a grandparent, but to have the grandchildren come and live with us and for us to raise them actually probably for us would diminish our well-being as opposed to just seeing the grandkids and taking care of them once in a while, which would increase our well-being.
But then you have a situation with money where maybe you have a divorced daughter who ends up moving in with you with the child. The divorced daughter has to go to work, and you end up taking care of the child. It does tie into money in many ways. It would diminish our well-being, but it’s not something we would admit. It’s not going to say to your daughter. Well, yeah, I’ll take care of your kid and take care of you. But I don’t want to. It’s true. But people normally wouldn’t say it.
00:55:18 Meir Statman
I wouldn’t say it to my daughter. Yeah, I would. I would do it. And I would at least pretend that I’m cheerful about it. That is important. But of course, it does make a difference. Having a disabled child, it reduces the well-being of their parents. These are facts. And sometimes when you say that to people, they kind of feel like you are hurting their feelings.
00:55:44 Rick Ferri
You’re judging them.
00:55:45 Meir Statman
Judging them. Except when I say, well, I have a disabled daughter. So, I’m speaking from where you are. I’m not trying to be condescending to you. To the contrary, I’m trying to be empathetic to you and say I know how you feel. I am in your shoes. And here’s how we manage. We take from domains that are plentiful, like having another daughter who loves her older sister and supports her, and having that increase the well-being of all of us.
00:56:19 Rick Ferri
You have a chapter on health. People who have more money generally have more health because they can afford it. They can afford to go to a doctor if they’re not feeling well. You know they can afford to spend the time playing pickleball rather than working three jobs. They can afford a personal trainer, so their health is better. So. you know, money and health are related and it’s all related to well-being.
And of course, you have a long chapter on work and this is a really interesting chapter. If you’re thinking that getting the next promotion is going to make you feel better, you should read this chapter because it may be the opposite. It’s such a fascinating book to get into religion and society and nationalities, cultures, just things that we could talk about for days.
00:57:06 Meir Statman
I look at well-being as a portfolio of those domains. There is money of course at the base of it, but there’s family and work and religion and society and all of that, and people allocate more of their well-being to one over the others. And some domains have bumps them, a kid that is disabled or a kid that does not do what parents would have hoped, work that is not satisfying, and so on.
And I think that life for being is the art of the portfolio, that is, you know that you’re going to have some stocks that are going to be dogs, but that’s why you diversify because you don’t know it ahead of time. And the same applies here. These are the things that come out of my life, and when I speak to others, their experiences are similar.
00:58:01 Rick Ferri
We run out of time, but I want to thank you so much for being a guest on Bogleheads® on Investing today.
00:58:08 Meir Statman
Well, thank you, Rick, and I hope that people who listen will enjoy.
00:58:13 Rick Ferri
This concludes this episode of Bogleheads® on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit boglecenter.net, Bogleheads.org, the Bogleheads® Wiki, Bogleheads® Twitter, the Bogleheads® YouTube channel, Bogleheads® Facebook, Bogleheads® Reddit, join one of your local Bogleheads® chapters and get others to join. Thanks for listening.
