As a financial planner, my exposure to the field of behavioral finance isn’t just theoretical. When clients come to my Jerusalem office for a consultation, I’m constantly amazed at how frequently their thought processes and rationalization of decisions follows the scientific research of behavioral finance.
What influences financial decisions?
I recently discussed why people invest the way they do, and why some investors never learn from their mistakes with Professor Meir Statman on my radio show, Goldstein on Gelt. Professor Statman is a professor of finance at Santa Clara University and author of What Investors Really Want, which is being translated into Hebrew.
According to Professor Statman, “People want pretty much the same thing. We want not to be poor, we want a chance to be rich, we want to support our families, we want to leave some money for our kids, we want to play the stock market and win.” Although there are some cultural differences between Israelis and Americans regarding the ways in which they invest, generally their goals are fairly similar.
Professor Statman also spoke about the effect of the past on investment decisions: “People make the same kinds of mistakes, thinking for example that because they can see how things turned out in hindsight then they now have the power of prophecy in foresight.”
Though I often remind my clients that “past performance is not a guarantee of future returns,” I still see many people falling prey to this misconception. When I asked Professor Statman why, he explained that very often people follow their intuition rather than processing the hard facts. So when your best friend tells you about a great investment opportunity, you may not analyze the information and its source, since your intuition fools you into thinking that your well-meaning friend would never give you the wrong advice.
Professor Statman explains the relationship between information and wisdom – that wisdom is how we process information. Simply following intuition and examining last year’s market performance is not enough. Wise decisions come from educating ourselves better.
To hear more of Professor Statman’s insights, listen to the interview here. You can also download for free the e-book of the top interviews of 2012.
(The opinions expressed on the Goldstein on Gelt show are those of the guest, and not necessarily my opinion or the opinion of Portfolio Resources Groups, Inc.)
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published March 11, 2015.