Meir Statman: A Renegade in Personal Finance

Welcome to Take the Long View with Matt Hall. This award-winning podcast reframes the way you think about your money, emotion, and time. The goal: helping you put the odds of long-term success on your side. A legendary thinker, author, consultant in the world of behavioral finance, our guest today is Meir Statman, the Glenn Klimick Professor of Finance at Santa Clara University. Mayer's research focuses on how investors and managers make financial decisions and how these decisions are reflected in financial markets. His work has been published everywhere, including the Journal of Finance, Financial Analysts Journal, the Journal of Portfolio Management, the Wall Street Journal for that matter, and many other publications. Mayer has also received numerous awards for his research, including 3 Graham and Dodd Awards and the Matthew MacArthur Industry Pioneer Award. Meyer has written several books, including Finance for Normal People and his most recent, Behavioral Finance: The Second Generation. Dr. Statman earned his PhD from Columbia and his BA and MBA from the Hebrew University of Jerusalem. Meyer, welcome to Take the Long View.

I'm delighted to be with you, Matt.

Oh, good. Well, I want to start in a place that is a little bit unusual, but for me, it was like the perfect combination of all these things I love coming together. One day I was reading the Wall Street Journal and I saw a picture of Roger Federer in the paper, and it was connected to an article or a write-up that you did that was titled "Investors Still Believe They Can Beat the Stock Market." And I was excited because I was familiar with your work. I knew what you would be talking about. You had a great tennis icon hero of mine in the image, and there was an entire page dedicated to dealing with some reader pushback about an article you had written on diversification. And one of the first topics you covered is this idea that average is for losers, and most people who are picking stocks think that they are above average. You remember what you said about that?

Oh, I remember that people begin by framing trading wrong. So, before overconfidence, we usually talk about investors who are making mistakes by being overconfident. But before overconfidence comes framing, that is, people don't understand the nature of the game. And this is where the Roger Federer analogy comes in. That is, people think of trading as the equivalent of playing tennis against the training wall. That's easy. Even I can do that. You can position yourself just right to return the ball. But of course, trading might well be with an insider on the other side of the trade, other side of the trading net, or somebody who does not even have inside information, just knows this company and industry much better than you are. And so, When people frame it wrong, they think, well, you know, there's an idiot just like me on the other side of the net, if anything, or there is just a wall. And here comes the overconfidence where they think, well, I'm actually above average, so I must be the winner. And then they find that in fact, it is Roger Federer on the other side of the net, and they are more likely to lose. Than to win.

Yeah. Other readers in that same article said, okay, fine, diversification sounds good, but reward requires risk. You can't make any money with this sort of a boring diversified approach.

Oh, you can make a lot of money. I am among many investors who made a lot of money just by diversifying and holding for many years. And that really is the notion of what risk is and what risk is rewarded. And we talk about risk that is rewarded, which is undiversifiable risk. That is, even if you diversify to the total stock market fund, the stock market as a whole might be going down. But if you just hold a handful of stocks, that is risk that is not rewarded. And that is really extra risk that you are taking. It might be fun to do. But that is generally a losing game.

Well, what do you say to the person who says, I will just pick the stocks of the good companies, Mehr? You know, diversification means I'm going to have to buy a lot of lousy companies. I'm just going to buy the stocks of the good ones.

Well, this is sort of another, another mistake. You know, think about automobiles. Is a Lexus A better car than a Toyota? Sure. You know, I drive a Toyota, but I readily admit that Lexus is a better automobile and it is more prestigious too. But a Lexus, of course, costs many thousands more than an equivalent Toyota. And so we ask two things when we buy a car. One, is this car better? Second, Is the difference in price justified by differences in quality? And here, different people will reach different conclusions. Somehow, when it comes to stocks, people don't ask that second question. They say, this is a good company, so I'm going to buy the stock. Well, how much is the stock? What's the ratio between the stock price and the return, or rather the earnings of that company. So if anything, there is evidence that it is the less than admired companies that give you higher returns because people shun them, meaning that their prices tend to be relatively low relative to their quality, and surprises might well be on the upside rather than the downside.

Yeah. You know, Meir, I mentioned to you that I heard you give a talk many years ago, and there's one expression you had that I cannot get out of my head, but I don't know what lesson or story it's connected to. You told a story that had a line in it about asking an Orthodox Jew to eat bacon or pork. But what lesson was that idea connected to?

Well, this has to do with what was called socially responsible investing and what we know now as ESG. And the point had to do with the typical advice that financial advisors and other investment professionals give to investors. You know, if you don't like pollution, then why don't you invest in all stocks, including those of oil companies and companies that pollute the environment and are disagreeable in other ways, and then use the extra money that you're making to support your causes? Well, you know, the analogy I provide to make the point is that one that you mentioned, that is, of course, If you go to an Orthodox Jew and say, you know, pork costs less than kosher beef, it tastes pretty good, why don't you eat pork and donate the savings to your synagogue? Well, everybody understands that that is stupid. And what I say is that for people who, for example, are very concerned about climate change, telling them to hold fossil fuel companies in their portfolios and then donate to campaigns against fossil fuels makes no sense whatsoever. And so it is really impossible to do what Standard Finance does, which is to separate the financials from what we want, from our values, And there's just a need to incorporate the two of them when you speak with investors and when you design portfolios.

So ESG investing is getting easier to execute and cheaper, but is it really making an impact?

The problem with ESG today is that people think that it does what it does not do. That is, selling off an oil company stock does not prevent that oil company from digging, mining, extracting more oil. What it does is simply somebody else who does not care about the environment, say, buys the stock, and so you don't really affect the company's actions, which is what you want to do. You might be true to your values, which is fine. You know, an Orthodox Jew does not think that by avoiding pork, he or she is improving the world. They just want to be true to their values. Somehow, lots of socially responsible ESG investors think that they are improving the world by divesting stocks, for example, And they do not. In fact, oil companies have plenty of cash. They don't need cash from the market. And so you do absolutely nothing by divesting from them. And so if you want to do good for the world, there are ways of doing that. That is, buy an electric car, lobby legislators for regulations that make it hard for all companies to operate, and so on. But these, of course, take effort and cost. And lots of people who are into ESG today, as in the past, they like to be true to their values, but they don't want to give a penny of return. And that, I think, is a bit much. You know, when you donate $100 to a charity, you can take a $100 deduction and depending on your tax bracket, you're going to save some on your taxes. But you know that some of that money is going to come out of your pocket and you still feel that that is fine because you get the satisfaction of doing some good for others. Somehow that logic does not seem to apply to lots of ESG investors.

You grew up in Israel, right?

That is right.

How would you describe the differences between how people view and communicate about money in Israel versus in the United States?

Ah, that is actually a very interesting question. One aspect of it has to do with the notion that I describe as giving with a warm hand rather than with a cold one. Now, of course, cultures in the US vary greatly, and I don't want to overgeneralize. But I think that there are many American parents who have the sense that if they give money to their kids, for example, when they complete college and they want to get married, and they want to buy a house, that giving them money is going to spoil them, is going to kill any ambition in them. And that I find not just stupid, but heartless and really counterproductive. What parents can do, of course, is help people find their ambition, find their vocation. But you're not going to do that by depriving them of resources that they need when they are in their 20s and beginning. So in Israel, and it is still the case, even though I was married more than 50 years ago, when my parents came to meet Nava's parents, my wife's parents, what they did before we were married, of course, after dinner, they sent us to take a walk and they sat down to business. And the business meant one is going to make an offer of how much they're going to give to the young couple. And then the other one offers what they can. And Nava's mom said to her dad, "Whatever Meir's parents offer, we are going to match," even though they had less money. You know, and so with this money and a bit more, we bought an apartment and we were on our way. Young people need money when they are in their 20s, not when they are in their 60s and their parents die in their 90s. And so it really— I find it sad that people insist on keeping all of that money and making their kids wait until they die. Not right and pretty sad.

What do you think, um, in the U.S. could be done to help us be more transparent and open about issues related to money?

I wrote about this issue in the Wall Street Journal some years back. And the responses were really touching. And people really opened their eyes and they saw some of it. And so this does not happen to everyone. I get a lot of pushback when I talk about those issues. But I think that speaking about it and getting people to understand that there are other ways of doing it, that they have to give money, that it's a good idea to give money to kids when they need it, not when the parents die. But then, of course, there are people who are not persuaded for whatever reason. You know, they say, what if I live to be 150 and I need all of that money for medical services? And I say, you know, There is time to die, and it is likely to be before 150. And from what I've seen about people who are very, very old, I don't know how I would feel when I'm in my 90s, but from what I've seen, there are things worse than death.

Yeah. You know, I've heard you say, or talk about anyway, buying lottery tickets and how conventional wisdom is that buying a lottery ticket is only something a foolish person would do. But you have a slightly different take.

I do. Yeah. Now, I, you know, I, for fun, when I was a student in Jerusalem, I did buy some lottery tickets with friends. But I don't. But if you think about it, you can see why it is that people buy lottery tickets. And in fact, this is how I illustrate the difference between standard finance and the first generation of behavioral finance and the second generation of behavioral finance. So in standard finance, people are rational, and rational people do not invest in a losing investment. That, that is a lottery ticket. Of course, the expected money that you're going to get is at best half what you put in. And of course, it has volatility, you know, and volatility supposedly is risk. In the first generation, we said, so why do people buy lottery tickets? Because they don't know math and statistics. They think that the odds are better than they are. And I say, listen, imagine that you face somebody who is about to buy a lottery ticket and you say, you know, your 'Assessment of odds is entirely wrong. The odds are not 1 in 100 million, it is 1 in 200 million.' Will that person now say, 'Whoa, now that I know that, I'm not going to buy the ticket'? Of course not. That is, a lottery ticket provides utilitarian, but more important, expressive and emotional benefits. That is, A lottery ticket gives you the emotional benefits of dreaming for the entire week what you're going to do with the many millions you're going to win. That fiction is very valuable. That is the fiction that we see in the movies and we pay money for movies. With a lottery ticket, you are a player, you know, you express yourself as a player. And of course, there's a possibility that you will be the winner. And so there are possibly utilitarian benefits. And so, you know, for many of us, a better lottery ticket or a better risk that we can take is, for example, as I did, immigrating to another country, coming from Israel to the United States. It is moving to another profession, moving to another state, acquiring education, of course, and so on. But there's nothing wrong with buying a lottery ticket for $5. It's less than a movie ticket and gives you a way to dream for more than an hour and a half that you dream in the movie theater.

Okay, speaking of small odds, I've mentioned on this podcast before that there's a 60 Minutes episode where they interview a Vegas casino owner. And the interviewer says to the casino owner, "Over long periods of time, have you ever seen anyone walk away a winner?" He said, "Nope. I'm the only winner over the long term." And I think the casino structure, when you walk in, there are lights and bells and whistles. It feels to me like all of that is to— provide a distraction from the math. And sometimes I feel that same way about apps like Robinhood, for example, that the gamification of investing is to distract you from the reality of investing. What do you think about that comparison?

Well, I think that it is true. It's not a matter of distracting. It is a matter of the enjoyment that you derive being around other people sitting at those slot machines scenes, having those sounds and light and so on. Again, the movie analogy applies. And some people, of course, overestimate their odds. But that is fine. But, you know, think about buying a lottery ticket. You don't have gamification here. You're standing in line at the 7-Eleven, possibly a long line. To buy their tickets. So it is not just that emotional benefit of the lights and sounds. It is really that hope that maybe, maybe that is going to be your break. And some people do win. It is not just the owners of casinos. It is some people win millions, and they don't take it in quarters and put it back in slot machines. You know, they now live happily ever after. And that is what most people dream of. And some people can get to good amounts of money just being professionals, or entrepreneurs, and other people might be already retired, you know, they're not going to start a new company now, but they still would like to pay off the mortgage of their son or daughter. And a lottery ticket is the only way that they can hope to get there.

Mayer, what's the best example from your own life where you took a very long view and it paid off, where patience and discipline and a broader perspective really paid off for you?

You know, I don't know if I thought about it in terms of a long view. That is, when I started, say, teaching at the City University of New York on Staten Island while I was a student at Columbia. I didn't really think about retirement, surely not explicitly. But the college established for me a 403 plan and they put some money in it. And I know that I added money to it. So, I was thinking about the future, of course. And those few thousands really grew to hundreds of thousands. And so, For me, you know, I always say we don't have an attitude towards risk. We have aspirations. So I left Israel because the job I had after completing my studies at the Hebrew University was very boring after a short period. It was not that I like the risk of moving to another country. It is that I hated the job that I had. And so I made that jump. That was, in a way, you can think about it as a lottery ticket. I bought it because I aspired to more fulfilling life, not to make a lot of money, but just to have a vocation. And it turned out to be a good lottery ticket. I ended up both finding a vocation and getting reasonably wealthy. And so when I look back, I can see that is the long run, that is, here is what I've done. And so what is really important, and that is what I emphasize to my students when I send them into internships, is serendipity. That is, start someplace, keep your eyes open, figure out the world. Most important, figure out yourself, what you are good at, what really wakes you up in the morning to begin your work and just zig and zag to get there and change as you are, even when you are in your 50s, 60s, 70s, and 80s.

Yeah, you know, you touched on having the university set aside money for you. In the old days, companies provided a pension, and today the individual is responsible for creating his or her own pension. You think this is right?

Well, there are all kinds of arguments and benefits and so on, but whatever we say, the world of defined benefits, the world of pensions is gone. And so we have to live in the world we are. That is, if you come to work at Santa Clara University, you cannot ask for a pension. The university will help you establish a 403 plan. They will put some money in, you'll put some money in, and that really is now your responsibility. And the world of pension is gone. And so, the issue now is how do you make the best of what you have? And there are ways to do that. You know, there are in fact ways to invest wisely, to save wisely, and end up with more than enough such that you can retire comfortably and help your family and help the community.

Many of the clients that my firm works with, they've been disciplined savers their entire lives. They trained themselves to sacrifice and save and create that sort of indestructible pension for themselves. And then they have a hard time spending. After developing a habit of saving, what are your thoughts about how you can allow yourself to spend?

It is almost a eureka moment when you just look at your portfolio and you realize that you are an accidental wealthy man. And there are many people like that. I am one. Of many. And so, I know it is hard because saving is a habit and it's a wonderful habit. This really is how most people get wealthy, not from choosing a particular stock or starting a company. And it's very hard to give it up, especially since there is a moral sense about savings. Saving is good. Spending is evil. And you look at it and you say, this is crazy. So I talked earlier about giving with a warm hand, that is, use your money to give to your family, to your children, to causes that matter to you if you have enough to do that. And, you know, you have to just think about it. So, you know, the story I tell is about a flying to Israel on United Airlines. And we were on the waitlist for upgrade to business class. And we were not upgraded. And we caught ourselves thinking, this is crazy. We are sufficiently old and we are sufficiently well-off to buy business class tickets. And if the person right next to us eating the same meal was just upgraded from Coach and pay just a fraction of what we did. So what? And so I got a lot of responses where I, in fact, in my writing, kind of help them find that moment where they catch themselves and say, hey, now it is time to switch from saving is good to spending, not wasting money, but spending on those things that matter to us.

Couple more questions, Mayor. I look at the list of bestselling nonfiction books, and there's always a book at the top, it seems, over the last few years, this book called Atomic Habits by James Clear. And it connects in some ways in my mind to behavior and to behavioral finance in that I always wonder if knowledge and awareness is really enough to change behavior. I worked on a project with a mutual fund company at one point, and their assets dropped in a big way when the markets went down. They had direct relationships with the end investors. There were no advisors or anyone helping them. And they had the best intentions and great content to help create awareness and try to encourage patience and discipline and sort of an immunity to short-term market swings. But it didn't really change the investor behavior. My question to you is, what are the habits or what are the tips and tricks that you have found that really do impact investor behavior?

You know, I'm not a trainer, I'm a teacher. And so I get through to my students by teaching them the facts. And I try to do it in a way that is vivid, in a way that connects, as we all do. So generally, I am successful to some extent with most of my students, but not always. For example, I just wrote again about this issue of giving with a warm hand. And I got pushback again. You know, some people just say things like, well, I like living in misery. That is joy for me. And I say, if that's what you like, what can I do? You know, there's only so much a teacher can do. But often I do find that I change people's minds. And if they remember to thank me for it or not, that is not very important. If they in fact get to improve their lives.

Mm-hmm. Okay. Last question. You know, many advisors or wealth managers, especially the ones who have a similar investment philosophy to my own firm, have in some way, shape, or form accepted that markets are relatively efficient or efficient enough that they're hard to beat. And I like the way you talk about market efficiency. Could you say a few words about your take?

I think that it is important to distinguish two notions of market efficiency that are generally confused. One is really the original and the correct notion of market efficiency, which is that in an efficient market, price is always equal to value. You can take price as being a good measure of the value of a stock or a company. There is another one that says that price regularly deviates from value. So we have, for example, bubbles where price exceeds value by some margin, but we don't know when that bubble occurs, when it matters, that is when we can take advantage of it. We all see that in hindsight. And so my sense is that price deviates from value, and so the market is not efficient this way. But the reason I invest exclusively in index funds that are low cost and very well diversified is because I don't know when the price is too high or too low. And I don't sell when the market goes down and I don't pile on when it goes up. And somehow, and I guess you have to live to be 74 to fully see that it works pretty well.

I don't know if you're familiar with this line, but there's a line in a country music song that says, I was country before country was cool. And I think that relates to you in a way because you were behavioral finance before behavioral finance was cool. Now it doesn't seem to me to be a renegade feel. Does that mean that when you have students, that the students are smarter, that this is easier? And then my final piece of this question is, is it less fun now because it's easier and less sort of railed against?

Yeah, that also is a very good question. Yes, I think that in the early days when I did behavioral finance before I knew I knew that there is such a thing as behavioral finance. I was just driven to do that in the same way that I was driven to leave my boring job and come for a PhD program in the United States. And of course, I got a lot of pushback at that time. One of my colleagues spoke with the dean and said that Statman is teaching his students stuff that is not in the mainstream of finance, that I am corrupting their minds. So that, of course, kind of scary when a dean takes you to lunch to tell you that you are doing something terrible. So I think that I am good, quite frankly, in moving ahead of the frontier. And so I moved from that first generation of behavioral finance to the second. Now I am working, writing a book about well-being beyond financial. Well-being because, of course, yes, money, you can count it, but there are always people richer than you. So what is money for? Money is for well-being and well-being is about family. It is about health. It is about work that is more than a source of earnings. It is about being true to values. And so on. And so, I see behavioral finance sort of expanding to say, what is it that people want? What is it that makes people happy, enjoy well-being? What is it that makes societies happy? And this really is where I am pushing now. Fortunately for me, as it was In the early days, when I go there, people think that that is a dead end, and it turns out that it is a highway. And I am pleased that they are not crowding into my field so I can have that field to myself before it has a name. Hmm.

I like that. Okay. So when is your next book coming out, or where can people who are listening to this podcast keep up with you and what you're putting out there in the world?

So the next book is going to be about well-being beyond financial well-being. But meanwhile, if you just put in my name and then Behavioral Finance: The Second Generation, what you will get is a link to the CFA Institute Research Foundation. And the nice thing about it is that you can download that book for free. And that, you know, we are all into money. So getting something for free is nice. And this is written for professionals. But it is actually written in a way that is very easy for the typical investor who knows a bit about finance to read and enjoy and perhaps benefit.

Perfect. Last thing, what book on behavioral finance that is not your own do you recommend to others?

You stump me. None of them. Yeah, I think that there are many, many books that are fun. Predictably Irrational surely is one that people already know, so they don't need my recommendation. But what I suggest regular investors can do that as well as professionals and teachers Go to a website that is called SSRN.com and register, probably costs a bit but not much, and you will see abstracts of articles on behavioral finance and capital markets and market efficiency. And you'll be able to click on these and read the abstract. And if you want, download the paper itself, that is much better than waiting for me or anyone else to really distill all of those into a book.

Well, thank you, Amir, for taking the time to be on the podcast, and thank you for your work and contribution to helping us know and understand ourselves better. And I also love that you're still doing it and, you know, haven't taken your foot off the gas at all, it doesn't seem.

Thank you, Matt. Matt, it was wonderful to speak with you, and I hope with your listeners as well.

What's something you're proud to spend money on that others may disagree with? Please note the information shared in this podcast is not intended as advice. The intent is to share meaningful experiences. I am likely not your advisor, nor wealth manager, nor financial planner, and my opinions are my own and not necessarily shared by Hill Investment Group. Investing involves risk. Consult a professional before implementing an investment strategy. Thank you.