'People Are Normal. They Are Sometimes Ignorant But They Are Not Stupid'

Meir Statman, the Glenn Klimek Professor of Finance, Leavey School of Business, Santa Clara University, California, is the second generation of behavioural finance experts who refused to label people as "irrational" and instead called them "normal". In his latest book, A Wealth of Well-Being: A Holistic Approach to Behavioral Finance, he expands the circle of finance to include life well-being and shows how they are inextricably intertwined. As part of an interview series, 'Wealth Wizards: Money Maestros in conversation with Nidhi Sinha, Editor, Outlook Money', Statman spoke about his research, and explained concepts through anecdotes that can help you take balanced decisions. Edited excerpts:

- Nidhi Sinha

Behavioural finance was a subject of much debate in its early days. Can you tell us about your experience?

I came to Santa Clara University at the beginning of 1980 and met Hersh Shefrin (Canadian economist who worked in behavioural finance), who was working on issues of saving, self-control and mental accounting, and framing that in the context of savings.

As I was listening to him, it thought that in that framework, we can understand the issue of dividends. Why is it that people care about getting dividends rather than creating what (Nobel laureate) Miller Modigliani called homemade dividends by just selling shares? What people do is use dividends as a self-control device. If they spend the shares, they think they might sell too many and not save enough. So, people constrain themselves and spend from dividends and income, but don’t dip into the capital.

Hersh and I then wrote a paper and sent it to a top journal in finance, The Journal of Financial Economics. We didn’t expect it to be accepted because it was so different, but we were fortunate that the referee was Fischer Sheffey Black (American economist, best known as one of the authors of the Black–Scholes equation), who loved the paper. The editor, despite his misgivings, chose to publish it.

Of course, there were objections. One of my colleagues said that I like the paper, but I cannot teach it to my students because it’s not rational.

I went on because there were so many things that could make sense and could be explained (through that).

So, instead of asking if it’s rational or irrational, the question is: do people do that and why do they do that? That was the beginning.

Earlier people hesitated to join, and I thought that was good because they were just leaving the entire field to me, and I didn’t have to rush. Now, of course, it is everywhere.