Behavioral Finance Panel with Professors Meir Statman (Santa Clara University) and Terry Odean (Berkeley) at NGPF Summit
Imagine facing a room full of 100+ educators from 30 states across the country. We can be a pretty tough audience, but we were putty in the hands of some true masters at the NGPF 2018 Summit in San Francisco in mid-March.
The first panel we attended was on Behavioral Finance. Leading the intros and discussion was Allan Roth Founder of Wealth Logic, LLC. (Ever read How a Second Grader Beats Wall Street? I did and really enjoyed it, so I was already psyched.)
Here's a link to their presentations which will be helpful as they each took 10 minutes at the outset to walk through.
First up was Terrance Odean, Rudd Family Foundation Professor of Finance, Haas School of Business, University of California, Berkeley. Terry warmed us up by playing a game (with a cash prize!), demonstrating some Game Theory. Terry then walked us through the evolution of behavioral economics and some of his research. “Economics is based on the flawed belief that everyone is hyper-rational when it comes to money.” We aren’t, which explains why economic models that were developed with these principles tend not to work very well. Behavioral economics and finance try to explain how humans actually make these financial decisions.
His key findings: Overconfidence leads to more trading and worse outcomes than passive investing, and men trade more actively than women (hence, women are better investors!) He also did research on the disposition effect, finding that people sell winners too quickly and hold onto losers too long to put off the bad feeling of losing. He now spends a lot of time teaching personal finance and has created 50 videos on the subject.
Meir Statman, Glenn Klimek Professor of Finance, Leavey School of Business, Santa Clara University was up next. He is the author of Finance for Normal People (which has teacher and student guides available.) His premise is that when we buy anything, we consider three types of benefits—utilitarian, expressive, and emotional. He opened with the example of deciding between giving his wife a red rose for Valentine’s Day, or $10 (the cost of the rose). The $10 would be the rational gift (she could invest the money to help pay for a nursing home) but the rose conveys emotion (and is obviously the better choice in this instance.)
The consensus was that “Meir was on fire,” throwing memorable lessons and one-liners our way. Here are a just a few of them:
Meir drew an analogy between doing crossword puzzles (“isn’t that stupid? If you wait a week you get the solution!”) and charting stocks (“must be fun because they’re not really making money at it.”)
“The more you try to beat the market, the more the market beats you!”
“Rational people don’t buy lottery tickets, but normal people do….We buy lottery tickets not because we don’t know the odds, but because for a whole week we get to plan what we would do with all the money!”
“In every trade there is an idiot, and if you don’t know who it is, you are in trouble.”
Who knew that learning about Behavioral Finance would be so much fun! Listen for yourself.