I recently had the opportunity to read “What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions“, by Meir Statman. While many books on investing focus on the mechanics of investing in stocks, bonds, etc… this book instead looks at the investors themselves; it focuses on the emotional and intrinsic benefits we seek when we invest our money the way we do. It looks at many of the pitfalls that people often fall into along the way, and examines the different goals that motivate us when investing our money.
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” over at Amazon.com:
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!