The stock market can be an emotional place, and often investing decisions are made based on emotion, and sub-conscious thought, or cognitive bias, with returns not always ending well! Recognising and understanding how you think when you invest, and how to avoid emotional traps, is vitally important for long-term success. This episode we talk with Meir Statman – an expert in behavioural finance, and understanding how investors think.
Meir Statman is the Glenn Klimek Professor of Finance at 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. His most recent book is “Finance for Normal People: How Investors and Markets Behave.”
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?
In this episode you will learn:
- The difference between a rose, a watch and a stock
- The major cognitive bias that investors fall victim to, and how to avoid them to improve your investing
- How to make sure you’re not eaten by the lions of the market
- What the ‘greater fool’ means, and how you can take advantage in your investing
Stocks and resources discussed: