In the field of finance, understanding how human behavior interacts with financial decisions has been a subject of much debate and deliberation. Meir Statman, the Glenn Klimek Professor of Finance, Leavey School of Business, Santa Clara University, California, a prominent figure in behavioral finance, has discussed this topic in his latest book, "A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.” In a candid interview with Outlook Money, Statman gives insight into the intricacies of behavioral finance and how it impacts our financial choices.
Early on while pursuing his research in behavioral finance, Statman realized that it was more productive to view people as normal, rather than tagging them as irrational. He joined hands with fellow scholars to find out how human behavior influences financial decisions. Their research challenges traditional notions of rationality in finance and paves the way for a more detailed understanding of human behavior in economic contexts.
A major idea that Statman discussed is the idea of different “capitals” that influence financial decisions: cultural, social, personal, and financial. Cultural capital includes knowledge of societal norms and practices, that can affect one’s comfort and success in different environments. Social capital refers to the network of relationships and support systems that people rely on in times of need. Personal capital means traits such as beauty and personality, which can impact how others perceive and interact with us. Financial capital refers to monetary resources and investments.
Statman tries to explain the importance of different types of capital and how they affect money choices. For example, there are cultural norms that might shoot up the aspiration of sending kids to renowned schools and colleges, irrespective of financial outcomes. On the other hand, the social network provides a cushion during tough financial times. Moreover, personal qualities such as optimism or attractiveness can influence how people approach money matters.
“Cultural capital has to do with knowledge of the culture that you are in and other cultures as well so that you feel comfortable in it. Social capital has to do with who are your friends, the people you can rely on, and who can rely on you. Among the working class in the US, family is at the center of social capital. So, you can rely on your brother to maybe borrow money if you need it. Among the elites, family is still central, but we tend to have more of those friendships where there is somebody we know professionally and can ask them for a reference for a job,” says Statman.
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“To understand personal capital, think about beauty. People who are more beautiful have more friends, they are more attractive to those of the opposite sex, and so on. Their life well-being is higher. And then there's personality. There are optimistic people who tend to enjoy life more than people who are always thinking about the half-empty glass,” adds Statman.
In the era of digitization, now robo-advisors are playing an important part in managing investments. While these automated platforms offer cost-effective solutions, Statman emphasizes the value of human advisors in providing emotional support and personalized guidance. Human advisors can feel for the client’s unique circumstances and help them overcome complex financial decisions, balancing practical concerns with emotional needs.
Overall Statman’s research stresses the interconnected nature of finance and human behavior. By understanding how different capitals influence financial decisions, people can make more informed choices that align with their values and goals, leading to greater overall well-being.
