I just finished reading Finance for Normal People: How Investors and Markets Behave, written by Meir Statman, Ph.D., a pioneer of behavioral finance, finance professor and member of the Matson Money Academic Advisory Board. This academically dense text of 488 pages distinguishes between economic theory focused solely on hypothetical investors who are always rational from economic theory that also considers us “normal” investors.
Dr. Statman begins by illustrating the difference between offering a rose to your truelove as compared to offering a ten dollar bill. Standard economic theory suggests cash and the rose have the same utilitarian value, and so your truelove should equally appreciate either. But give that a try and your truelove will likely give you a lesson on the expressive and emotional benefits of the rose that you failed to consider. And you may be sleeping on the couch.
While this book describes how normal investors behave, it is rich in economic theory, formulas and charts that may intimidate a normal investor. Finance for Normal People is more advanced than most casual readers would enjoy. Nevertheless, Dr. Statman makes clear that investment theory must consider real life behaviors of actual investors. He doesn’t dismiss standard economic theory, but instead illustrates how standard economic theory intersects with behavioral economic theory, giving the reader a greater understanding of how investors and markets really work.
My biggest takeaway from reading Finance for Normal People is the power and benefit of coaching. Normal people—you and me—are subject to emotions, cognitive and emotional errors, and biases, many of which are hard to detect in ourselves. Without coaching, normal investors often get caught in these traps, leading them to make critical mistakes with devastating consequences. An engaged investor coach helps the normal investor stay disciplined and aware of potential investing landmines.
For those investors who enjoy getting into the details of why investors behave the way they do, Finance for Normal People is a worthwhile read. But don’t forgot to bring your coach along.