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Finance for Normal People: How Investors and Markets Behave 1st Edition

4.4 4.4 out of 5 stars 74 ratings

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Finance for Normal People teaches behavioral finance to people like you and me - normal people, neither rational nor irrational. We are consumers, savers, investors, and managers - corporate managers, money managers, financial advisers, and all other financial professionals.

The book guides us to know our wants-including hope for riches, protection from poverty, caring for family, sincere social responsibility and high social status. It teaches financial facts and human behavior, including making cognitive and emotional shortcuts and avoiding cognitive and emotional errors such as overconfidence, hindsight, exaggerated fear, and unrealistic hope. And it guides us to banish ignorance, gain knowledge, and increase the ratio of smart to foolish behavior on our way to what we want.

These lessons of behavioral finance draw on what we know about us-normal people-including our wants, cognition, and emotions. And they draw on the roles of these factors in saving and spending, portfolio construction, returns we can expect from our investments, and whether we can hope to beat the market.

Meir Statman, a founder of behavioral finance, draws on his extensive research and the research of many others to build a unified structure of behavioral finance. Its foundation blocks include normal behavior, behavioral portfolio theory, behavioral life-cycle theory, behavioral asset pricing theory, and behavioral market efficiency.
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Editorial Reviews

Review

"As Pogo used to say: 'We have met the enemy and we are it.' By elucidating clearly the teachings of behavioral finance, Meir Statman shows us how to avoid the common errors investors make and how to become smarter investors." -- Burton G. Malkiel , author of A Random Walk Down Wall Street, 11th ed. Paper, 2016

"Meir Statman describes investors as normal in this insightful book, not irrational as in earlier behavioral finance, and not rational wealth-maximizing caricatures as in typical textbooks. Normal investors underlie Statman's innovative approach to portfolios, saving and spending, asset pricing, and market efficiency." -- Harry Markowitz, Winner, Nobel Prize in Economics, and Professor of Finance at the Rady School of Management

"Meir Statman, a leading light of behavioral finance, describes lucidly and vividly the cognitive and emotional errors underlying the maxim "If you don't know who you are, the stock market is an expensive place to find out." Readers of this behaviorally savvy book will be well prepared to avoid those errors." -- Paul Slovic, Professor of Psychology, University of Oregon, and author of The Perception of Risk

"One of the pioneers of behavioral finance, Meir Statman has done a great service for investors, portfolio managers, and financial regulators with this insightful volume. If you've ever wondered why you sold too early or why you got in too late, you need to read this book!" -- Andrew Lo, Charles E. and Susan T. Harris Professor of Finance, MIT Sloan School of Management

"Yes, to be successful, we need to make good investments, but then we need to be good investors, exhibiting the virtues of simplicity, broad diversification, and low investment costs, and focusing on the long term. This fine book is welcome help." -- John C. Bogle, founder of Vanguard and the first index mutual fund

"Meir Statman has pioneered the integration of behavioral research with financial analysis. Finance for Normal People makes the insights of behavioral finance available to the ordinary investors, helping them to understand markets - and themselves." - Baruch Fischhoff, Howard Heinz University Professor, Carnegie Mellon University, and co-author of Risk - A Very Short Introduction

"Finance for Normal People is a tour de force. Literally covering the field of Behavioral Finance from A to Z, this is a user friendly book that should be read and on the shelf of every serious financial advisor/manager and all serious investors." - Harold Evensky, Chairman at Evensky & Katz and Professor of Practice, Department of Personal Financial Planning, Texas Tech University

"For investment professionals and their clients, this book can provide a significant boost to their understanding and decision making in managing real-world portfolios." --Financial Analysts Journal

"It is a readable book of applicable findings from behavioural finance particularly for thosewho take long-term investing seriously." -- Financial Times

From the Author

Finance for Normal People: HowInvestors and Markets Behave
Oxford University Press, 2017
 
My book, Financefor Normal People, has just been published by Oxford University Press and isavailable from Amazon and other booksellers. I have also prepared student and instructormanuals, facilitating the use of the book as a textbook. I would be pleased toprovide them.

I write in the introduction:

Behavioralfinance presented here is a second generation behavioral finance. The firstgeneration, starting in the early 1980s, largely accepted standard finance'snotion of people's wants as "rational" wants - restricted to the utilitarianbenefits of high returns and low risk. That first generation commonly describedpeople as "irrational" - succumbing to cognitive and emotional errors andmisled on their way to their rational wants.

Thesecond generation describes people as normal. It begins by acknowledging thefull range of people's normal wants and their benefits - utilitarian,expressive and emotional - distinguishes normal wants from errors, and offersguidance on using shortcuts and avoiding errors on the way to satisfying normalwants. People's normal wants, even more than their cognitive and emotionalshortcuts and errors, underlie answers to important questions of finance,including saving and spending, portfolio construction, asset pricing, andmarket efficiency. These are presented in this book.

Wewant more from our investments than the utilitarian benefits of wealth. We wantthe expressive and emotional benefits of hope for riches and freedom from thefear of poverty, nurturing our children and families, being true to our values,gaining high social status, playing games and winning, and more.

Iwrite further:

Weoften hear that behavioral finance is nothing more than a collection of storiesabout irrational people misled by cognitive and emotional errors, that it lacksthe unified structure of standard finance. Yet today's standard finance is nolonger unified because wide cracks have opened between its theory and theevidence. This book offers behavioral finance as a unified structure thatincorporates parts of standard finance, replaces others, and includes bridgesbetween theory, evidence, and practice.

Table of Contents

Introduction: What is Behavioral Finance?

Part1: Behavioral People are Normal People
            Chapter 1: Normal people
Chapter 2: Our wants for utilitarian, expressive, and emotionalbenefits
Chapter 3: Cognitive shortcuts and errors
            Chapter 4: Emotional shortcuts anderrors
            Chapter 5: Correcting cognitive andemotional errors
Chapter 6:Experienced happiness, life-evaluation, and choices: Expected Utility Theoryand Prospect Theory
Chapter 7: BehavioralFinance Puzzles: The dividend puzzle, the disposition puzzle, and the puzzlesof dollar-cost-averaging and time-diversification
 
Part2: Behavioral Finance in Portfolios, Life-Cycles, Asset Prices, and MarketEfficiency
Chapter 8: Behavioral portfolios
Chapter 9: Behavioral life-cycle of saving and spending
Chapter 10: Behavioralasset pricing
Chapter 11: Behavioralefficient markets
Chapter 12: Lessons of behavioralfinance
 
 
 

Product details

  • Publisher ‏ : ‎ Oxford University Press; 1st edition (May 1, 2017)
  • Language ‏ : ‎ English
  • Hardcover ‏ : ‎ 488 pages
  • ISBN-10 ‏ : ‎ 019062647X
  • ISBN-13 ‏ : ‎ 978-0190626471
  • Item Weight ‏ : ‎ 1.69 pounds
  • Dimensions ‏ : ‎ 9.21 x 6.14 x 1.06 inches
  • Customer Reviews:
    4.4 4.4 out of 5 stars 74 ratings

About the author

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Meir Statman
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Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on behavioral finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. Meir's latest book, "Finance for Normal People: How Investors and Markets behave" has been published by Oxford University Press.

The questions he addresses in his research include: What are investors’ wants and how can we help investors balance them? What are investors’ cognitive and emotional shortcuts and how can we help them overcome cognitive and emotional errors? How are wants, shortcuts and errors reflected in choices of saving, spending, and portfolio construction? How are they reflected in asset pricing and market efficiency?

Meir’s research has been published in the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, the Journal of Financial and Quantitative Analysis, the Financial Analysts Journal, the Journal of Portfolio Management, and many other journals. The research has been supported by the National Science Foundation, the Research Foundation of the CFA Institute, and the Investment Management Consultants Association (IMCA).

Meir is a member of the Advisory Board of the Journal of Portfolio Management, the Journal of Wealth Management, the Journal of Retirement, the Journal of Investment Consulting, and the Journal of Behavioral and Experimental Finance, an Associate Editor of the Journal of Financial Research, the Journal of Behavioral Finance, and the Journal of Investment Management and a recipient of a Batterymarch Fellowship, a William F. Sharpe Best Paper Award, a Bernstein Fabozzi/Jacobs Levy Outstanding Article Award, a Davis Ethics Award, a Moskowitz Prize for best paper on socially responsible investing, a Matthew R. McArthur Industry Pioneer Award, three Baker IMCA Journal Awards, and three Graham and Dodd Awards. Meir was named as one of the 25 most influential people by Investment Advisor. He consults with many investment companies and presents his work to academics and professionals in many forums in the U.S. and abroad.

Meir received his Ph.D. from Columbia University and his B.A. and M.B.A. from the Hebrew University of Jerusalem.

Customer reviews

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Customers say

Customers find the book provides fresh insights and an analytical approach to behavioral finance. They appreciate the clear explanations and simple examples that help them understand complex topics. The book is described as a comprehensive introduction about the current state of the subject, providing readers with a perfect and professional experience.

AI-generated from the text of customer reviews

22 customers mention "Educational value"20 positive2 negative

Customers find the book informative and engaging, providing fresh insights into behavioral finance. They appreciate its analytical approach and interesting concepts. The book provides useful information for current and future investors. It is recommended as an academically and practically focused book.

"...And it is very educational: I am much more knowledgeable now about why I do things (and relieved to understand myself better)...." Read more

"...the wants and constraints of normal investors and Part two introduces behavioral portfolio theory, behavioral life cycle theory, and behavioral..." Read more

"This is an excellent book, well written and full of information and fresh insights for all investors and investment professionals...." Read more

"This book was easy to follow and beneficial to current and future potential investors...." Read more

15 customers mention "Explanation quality"15 positive0 negative

Customers find the book provides a comprehensive introduction to finance. They appreciate the clear explanations and examples that help them understand the material. The chapter summaries are good, and the book is an excellent guide for people interested in finance.

"...: Statman has a gift both for memorable examples and for expressing things clearly...." Read more

"...People" is the latest book of Dr. Statman that presents a comprehensive introduction about the current state of "behavioral finance."..." Read more

"This is an excellent book, well written and full of information and fresh insights for all investors and investment professionals...." Read more

"...Dr. Statman does a good job of explaining theoretical concepts and applying it to to the real world...." Read more

15 customers mention "Readability"15 positive0 negative

Customers appreciate the book's content and new theories. They find it informative and useful for professionals and novices alike. The book is described as an interesting and in-depth read that delves into the world.

"I enjoyed this book very much. It is very entertaining: Statman has a gift both for memorable examples and for expressing things clearly...." Read more

"...finance or a formal understanding of the field, this book is a great starting point...." Read more

"This is an excellent book, well written and full of information and fresh insights for all investors and investment professionals...." Read more

"This book is very interesting and helpful for finance student. Chapter 1 provides great explanation about Normal People...." Read more

Top reviews from the United States

  • Reviewed in the United States on April 23, 2017
    I enjoyed this book very much. It is very entertaining: Statman has a gift both for memorable examples and for expressing things clearly. And it is very educational: I am much more knowledgeable now about why I do things (and relieved to understand myself better).

    In particular, I like the explanation of why much of my behaviour is sensible ("normal") even though it falls outside of old-fashioned financial economics. Normal people make decisions not only because things we buy or invest in are financially useful; we also like to feel good emotionally, and to convey an image to others. All three motivations are sensible, but financial economics accepts only the first motivation, because it assumes (wrongly) that we're all purely rational, unemotional people. Once you accept (as I definitely do!) the emotional motivations, it changes our understanding of how the world works.

    That doesn't mean that everything we do is "normal". Statman explains that we can be normal-knowledgeable, normal-ignorant or even normal-wrong. He gives hundreds of illustrations. For example, we ought to find out financial facts, so that we know how much of the value of something we pay for is utilitarian and how much we're paying for the emotional and expressive benefits that might come attached. The more we understand our own behaviour, the more we can avoid what he calls "cognitive errors" (where we leap to a conclusion that's wrong) -- again, many examples. And since our assessments of costs and benefits vary from person to person, understanding why we want something helps us to make a cost-benefit trade-off that works for us, even if it might not work for others.

    As someone who has been involved with capital markets for most of my career, thinking that I understood both theory and practice, I found his explanation of the difference between price-equals-intrinsic-value markets and hard-to-beat markets clear, and the explanation of who beats a hard-to-beat market, instructive and convincing. (Typical insight from Statman: "In other words, markets may be crazy, but this does not make you a psychiatrist.")

    I'll stop there. The list of my learnings would be long. But basically, all of this has been, for me, not just educational but also reassuring and energizing.
    3 people found this helpful
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  • Reviewed in the United States on April 23, 2017
    Dr. Meir Statman is one of the fathers of "behavioral finance." He has pioneered and developed the field of behavioral finance during the past three decades. "Finance for Normal People" is the latest book of Dr. Statman that presents a comprehensive introduction about the current state of "behavioral finance." It is written in plain English and very easy to follow. The text comes with many real world examples to deliver the concepts to readers even without a strong background in finance. Part one of the book helps readers to understand the wants and constraints of normal investors and Part two introduces behavioral portfolio theory, behavioral life cycle theory, and behavioral asset pricing. I covered a number of chapters in my behavioral finance course for Master’s students and have received overwhelmingly positive feedback from students regarding the usefulness of the book. Many students commented that the knowledge they learned from the book is useful for daily life decisions about and beyond personal finance and investing. The book is accompanied with an instructor manual and a student manual, both of which contain many interesting materials and websites that are current and relevant. Regardless of whether you are looking for a casual reading about behavioral finance or a formal understanding of the field, this book is a great starting point. I would recommend it to anyone who is interested in understanding herself as a human who wishes to make better financial decisions under cognitive and emotional constraints. College educators who wish to use a good behavioral finance book should also consider this book seriously.
    3 people found this helpful
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  • Reviewed in the United States on April 30, 2017
    This is an excellent book, well written and full of information and fresh insights for all investors and investment professionals. Several chapters struck special cords with me as president and CEO of Wealthfront, an automated investing service. Statman is one of our advisors.

    Chapter 9 emphasizes the benefits of automatic saving and investing so people can focus on the things that really matter to them. Chapter 7 addresses the cognitive and emotional obstacles to realizing losses despite their tax benefits, and the benefits of automating loss realization to maximize long-term investment returns.

    And Chapter 11 addresses market efficiency, emphasizing the dangers of jumping from observation that markets are not price-equal-value efficient to the conclusion that they are easy to beat. Statman writes: “Hard-to-beat markets are not impossible to beat. Investors with exclusively available information find it easy to beat the market, and investors with narrowly available information find it hard but not impossible to beat the market. Yet, on average, investors with nothing more than widely available information find it impossible to beat the market. Such investors are beaten by the market more often than they beat it. Indeed, investors with exclusively available and narrowly available information gain their market beating returns by emptying the pockets of investors who attempt to beat the market with widely available information alone.”
    15 people found this helpful
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  • Reviewed in the United States on April 22, 2017
    This book was easy to follow and beneficial to current and future potential investors. Dr. Statman does a good job of explaining theoretical concepts and applying it to to the real world. I especially like his examples because it makes the concepts far more concrete.

    I would have liked to see bullet points or a summary at the end of each chapter.

    But overall, I recommend this book, especially for people who want to understand and correct cognitive, emotional, and psychological errors we make in our investment decisions.
    3 people found this helpful
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