Wednesday, 15 December 2010

Book Review: What Investors Really Want by Meir Statman

Thought-provoking but at times a dull read. Full of insights but ultimately confusing. That's what my emotion and my logic give me after reading this excellent book.

Thought-Provoking and Full of Insights: When I read finance books I take notes of interesting points and I highlight ideas that can serve me for my own life or for my blogging. This book gave me about twice the usual number of notes and a large number of potential blog post subjects. For example, on page 95 Statman tells us that people typically spend more than the amount of the gift card they have received but less than the cash when they receive cash as a gift ... ergo, suggestion to promote frugality in these frugal times - for Christmas, give cash, not a gift card ... but, people who receive gift cards also tend to buy luxury products they really enjoy that they would not otherwise buy, whereas a cash gift gets spent on mundane items, which means that you might want to give a gift card after all depending on your motives! (oh well, there goes one blog post). The book was also the source for my recent Holiday Financial Tip: Eat Turkey Dinner post. Believe it or not, I also found in the book the simple but true root cause explanation ;-) of the whole credit crunch mess and will be posting soon on that.

There is much serious and substantial topic matter, covering the gamut from the conflict between the hope for riches to the fear of poverty, to the desire to avoid taxes, to the effects of status-seeking. The book is dense with ideas. Indeed, in pure factual terms, it is essentially an extended popularized annotated bibliography of behavioral finance research compiled by an authority in the field (Statman is Professor of Finance at Santa Clara University and has produced many well-regarded papers). As a well-organized - by chapter subject theme (table of contents here on the book's blog site) - comprehensive and documented - 31 pages of fine print footnotes - collection of the state of the art knowledge in this subject area, Statman's book is well worth the price on that basis alone.

Apart from the multitude of small insights that the book recounts and relays from other sources, the book's main insight is that people invest for more than the utilitarian or profit-making value. They also seek a payoff in emotional terms to make themselves feel better, and for expressive benefits to exhibit their own values, tastes and status to themselves and to society. Instead of portraying behavioural finance as a negative series of biases and errors contrary to rational behaviour, Statman says that much, though not all of it, actually is a positive feature of investing. There isn't always only one answer or one best outcome - maximum profit - for all investors. However, I suspect that his suggestion that it is good to invest for fun and status - "we should enjoy all the benefits of investments - utilitarian, expressive, and emotional" (p.241) - would quickly take a back seat to utilitarian money if losses began to accumulate.

Dull: I believe it's mostly due to the nature of the book as a collection of very disparate ideas, since the writing style is simple, direct, informal and understandable, but I needed to force myself along through the pages. The book is not a gripping tale with flow that pulls the reader through. However, the frequent nuggets of gold make the effort worthwhile. It reminded me of my experience in a former business life of attending business conferences - most talks are a waste of time but one or two good ideas or contacts - make the cost and effort of attending worth it. This book has more than one or two good ideas.

Confusing: The deluge of motives and forces that Statman describes chapter after chapter eventually becomes overwhelming. Two or more interpretations may be possible for any action or situation. What makes it worse is Statman's admission in the final chapter: "It is often hard to distinguish facts from from cognitive errors and even harder to distinguish cognitive errors from wants or expressive and emotional benefits." (p.237) On the next page, I believe Statman is right when he says "I see no benefit in cognitive errors that mislead us into sacrificing utilitarian benefits for no benefits at all." How do we differentiate the errors from the expressive and emotional benefits and what should we do?

The answer to this last question is not be found in the book. His effort is a descriptive tome. To be fair, Statman evidently did not aim to answer the question so he cannot really be faulted for the missing piece.

Maybe we are meant to read it all, digest it and fabricate our own answers. I believe, however, that what many, if not most, investors really want and need is a prescriptive book that incorporates all the lessons and observations to tell people what to do. Hopefully, someone will write it soon. Statman would have the perfect follow-on title - What Investors Really Need, subtitled Apply (instead of the present book's "Want" and "Learn") the Lessons of Behavioral Finance.

Nevertheless, this is a fine and useful book for the individual investor to spur self-analysis and self-knowledge of his/her own personal finance and investment emotional and expressive drivers.

My rating: 4 out of 5 stars.


My Own Advisor said...

Thanks for sharing.

If most investors are waiting for the financial independence recipe, it will be a long time coming.

To use an analogy, so many ingredients and cooking temperatures can get you to an equally rewarding delicious dish, if done properly. Cooking just like personal finance is an art and a science.

My Own Advisor

CanadianInvestor said...

FC, great analogy. There are good cooks/chefs who really don't need a book to guide them to create consistently delicious food out of the strangest combinations of ingredients (like my wife!) and then there are the rest (like me!) who need and can do well with a recipe book. Why not the same with investing and personal finances?

ericjackson said...

I am a small scale investor who is preferring savings on share investments.
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