I recently had the opportunity to read “What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions
Investing for status
One of the primary themes behind the book is the idea that investments don’t just give the investor monetary returns, but they also return expressive and emotive benefits. This is manifested by the idea that most people are naturally driven to rise near the top of their “pack”; regardless of how wealthy we are in absolute terms, we naturally want to compete with our peers and to have equal or better status than them. We therefore are not content with an average return but want to push our returns to be higher than average, but at the same time we want our risk to be lower than average.
There are many different ways that investors seek status; some do it by investing in hedge funds, others do it by picking stocks. It is our desire to avoid the rags of poverty and seek riches for ourselves and our family that motivates us to keep looking for winners, even when the preponderance of evidence shows that this may be a losing game for many of us.
Why do we invest?
As investors, most of us want to see our money grow and reduce our debt, but as people, we also have many other goals beyond that. We invest our money not just to see numbers grow in a bank statement, but ultimately to have the ability to use that money to help us achieve our goals. To get there, we need to balance the need to spend now versus the need to spend in the future, and we also need to balance our desire to spend on ourselves versus the desire to help out our children and give them a good future, without spoiling them.
Paternalism versus libertarianism
Mr. Statman also covers the differences between paternalistic approaches and libertarian approaches to government that affect the way we invest and live our lives. We want to protect people from going into excessive credit card debt, but at the same time we want people to have the freedom to spend money as they wish. We want to ensure we are taken care of in old age, but at the same time we don’t want to have to sacrifice in the moment. Meir has noted that this tug of war between paternalistic and libertarian ideas results in scenarios such as governments that simultaneously offers both social security and lotteries.
I do agree that there are ways that we can help to protect people from making costly individual mistakes without removing individual freedom, by enforcing fair laws that protect people from those who would try to scam them, and by having a government that refrains from manipulating interest rates and taking other actions that make debt and leverage appear more attractive than they truly are.
Making smarter financial decisions
I enjoyed reading this book, and I appreciated the way that it helped me discover some of my own biases as well as motivations toward investing. Today I believe that a “lazy” system of investing will help most people achieve their financial goals, although it is not as “trendy” as other methods of investing may be.
I personally like to invest some money into precious metals, and while it’s quite possible that I might not do as well as the indexes over the long run, I am keeping my nest egg safe by only investing a small portion of my overall portfolio. This helps me achieve the emotional and expressive benefits of putting my money into something that I believe in, as well as maintaining the utilitarian benefits of going with index investing for the long term. You can read more about a friend of mine who is achieving both utilitarian and expressive benefits by heading over to Beating The Index.
The true profit in life is the satisfaction we achieve from reaching our desired ends, and it’s not just about numbers. What is “rational” for one person might not be “rational” for another. Just as they say beauty is in the eye of the beholder, so value is subjective, and what is wrong for me might be right for somebody else.
If you would like to read more, you can purchase “What Investors Really Want
So, reader, as an investor, what it is that you really want? What goals are you striving toward, and what would fulfill your own expressive and emotive desires in life?
I will be picking two commentators at random and giving away two free copies of the book, so be sure to leave a comment! 🙂The giveaway is now complete; thanks for your participation, everyone!
Dear Kevin,
Thank you for your kind review of my book. I am delighted that you have enjoyed reading the book and hope that your readers would enjoy it as well.
Meir
Thanks for stopping by, it’s nice when an author takes the time to do that. I appreciate it! 🙂
Thanks for the concise review Kevin, I still have to read the book myself as it is next in line on my reading list. Hopefully I’ll get to it soon!
Get to it! 😉
Thanks for the review. If I don’t win, I will have to check out the book next time I’m at Barnes and Nobel.
I’ll leave the giveaway open for a week or two so if there aren’t a flood of commentators then you have a good chance. 😉
Most people simply want enough money to live comfortably once they retire. I’m not that passive. I want to replace my current income with passive income before I’m old a decrepid!
I aim to at least get my wife out of her job within the next 5 years. Then, within the next 10 years, I would like to replace my income at my current job and pursue an aspiration that I’m starting to love – online income.
That’s a pretty admirable goal and I’m sure she’ll appreciate it. I sure wouldn’t mind being comfortable in retirement, but I want to be comfortable earlier if I can help it. 😉
So what does the author advocate, a paternalistic or libertarian approach?
Our goals vary with different parts of our investment portfolio: capital preservation (cash, land, real estate), value preservation (precious metals), passive income (dividends), and speculation (mining and resource companies)
The author did not really do much advocating as the book is mainly descriptive rather than prescriptive, but I got the impression he leaned a bit toward the paternalistic side. Because I personally have libertarian leanings, a few sentences did read somewhat oddly for me but I can see where he’s coming from, and otherwise the book was a good read.
I think Wall Street often looks over the top of what Main Street really wants in their investment portfolios. Catchy names, hedge fund strategies, and “efficient frontier” garbage isn’t what investors want.
Investors want security, safety and they want to look down at one-page plan point to where they are and then point secondly to where they will eventually find themselves. I think there’s still plenty room in the financial planning space for very hands-on, interpersonal financial planning services, assuming that the people already in this space haven’t ruined it for the good brokers.
I agree. People generally want freedom from poverty while also having enough wealth accumulation to live a decent style in retirement. They don’t want or need to know the technicals so long as they are getting a good return and are not getting ripped off in fees and charges.
It sounds like a great book Kevin–at least it seems to fit with my personal philosophy.
Sadly, many of the people who walk the walk, when it comes to investing rationally, will capitulate when the markets take a long term bath. I read one of the Amazon reviews of this book, suggesting that it’s for “Amateurs”
I highly doubt it. For the vast majority of informed investors, the fact that they’re “informed” with their fingers on the economy, on trends etc, is going to be their biggest, long term albatross. When the experts are calling for everyone to run to bomb shelters, that’s what they’ll do.
If I could recall Benjamin Graham’s old quote (in French) then I would. Somebody bilingual help me out with this. I’ll take a stab at it and somebody can correct me:
Plus ca change, plus ca la meme chose
Sorry for butchering that one, my bilingual friends. I hope it says, The more things change, the more they stay the same.
When referring to human psychology and money, messages like the one in this book will never be “just for amateurs.”
Definitely, I think psychology plays a much bigger role than most people realize. Standard human behavior helps us in many aspects of our lives, but we’re just not as efficiently geared for thinking long-term and taking the proper actions for long-term success. I think it can be learned and managed, though — personality and emotions can be hard to change and the degree of change may have limits, but they’re not immutable.
Nice review Kevin.
I enjoyed reading that, the “emotional and expressive benefits of putting my money into something that I believe in”. Psychology and more importantly, being emotionally detached from your investments are SO important for success. I’ve learned that but it doesn’t mean I’ve mastered it! I just try to keep on improving my EI when it comes to personal finance, week by week and month by month.
Cheers,
Mark
What I like about asset allocation and index investing is that it is very straightforward — out of balance? buy and sell. The key is to do it based on the mechanics and not your emotions. That said, emotions shouldn’t be discarded entirely. A lot of people would do well to heed that feeling of unease when they feel like they are about to be taken by the financial advisor pushing 2.50% MER funds onto them!
I’m definitely not investing for status. I invest, with the help of a financial advisor, in order to live and retire comfortably, without having to worry about debt or making ends meet. I want my money to work for me. I am also interested in learning more about the investing process. I would like to be more of an informed, educated investor.
I guess that’s what most of us want: To hit that sweet spot where the risk matches the returns and there is security from going broke and becoming destitute! It’s a destination I would like to reach as well.
This book sounds interesting for sure. I have not started investing yet and know that when I do it will be hard to not let myself just go on feelings!
Hey Forest,
You’ve been investing in yourself and your life and that is the most important investment of all. Keep on with the journey!