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Meir Statman: SmartMoney
Friday, May. 20, 2011
Meir Statman, Glenn Klimek Professor of Finance, was recently quoted in two SmartMoney articles by Dyan Machan. In her article “The Market vs. the Mind,” Machan discusses the claim that investors would never get caught in bubbles or pay high mutual fund fees if they were truly rational, and the mistakes that investors consistently make.
She claims that investors are hardwired to make the mistakes of ignoring the drip-drip of fees, being cocky, clinging to losers, and chasing the expert herd. In regards to clinging to losers, she says that we hold on to investments that have lost value because we think that they will regain their old value. “Realizing losses brings on the searing pain of regret,” says Statman.
Machan’s article “Mind Games: Lessons for the Irrational Investor” looks at Dan Ariely’s insight into illogical behavior, particularly with regards to our financial decisions. Ariely believes that consumers can anchor their decisions to prices that have nothing to so with the underlying value of the product they are purchasing, and that supply and demand do not play roles in this purchase decision. According to Ariely, this is completely irrational, as are some of people’s other decisions. His research shows that free offers typically lure consumers into deals that are actually worse for them overall, and that most people are willing to cheat a little bit if it means they will receive incentives.
Meir Statman, along with many other behavioral-finance experts and economists, disagrees with Ariely’s claim that people are irrational. He believes investors are rational people who are prone to making understandable errors. According to Statman, investors who make foolish moves are “intelligent people who stepped on a banana.”
Read the entire article “The Market vs. the Mind” here >>