Meir Statman Says Investors Underestimate the Role of Luck

By on October 25, 2011

Meir Statman - author - professor - Santa Clara UniversityPimm Fox interviewed Meir Statman, professor at Santa Clara University and author of What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions.   Statman is an expert in behavioral finance.

Fox began the interview by saying investors exhibit the definition of ‘crazy’ behavior with their poor decision making. Statman corrected Fox claiming that people are “normal, stupid” by misinterpreting feedback received.

Statman said investors take credit for their decisions resulting in a positive outcome, but if their decision turns out poorly they claim it was bad luck. Statman added ‘we’ don’t learn our decisions were poor and don’t stop repeating the same mistakes.

Statman stated there are analogies to people who are skilled at playing cards with those who are successful investors. Successful blackjack players know how to “arrange the odds in their favor.” They know how much luck is involved and can gain a slight edge. However, according to Statman, investors get into their head they are absolutely sure the market will go up (being bullish) or it will go down (they are bearish). This leads them to avoid diversifying. Statman stated, “they put all their money in gold, or treasuries, or whatever; they win sometimes, but very often they are losers.”

Fox asked Statman what role luck plays in investing. Statman indicated luck plays a huge role and market movements can’t be fully explained by news headlines. He claimed skill plays a small role, but investors think it’s the other way around.

Statman stated diversification is a wise idea because then an investor admits to themselves the role luck plays.

Statman commented on money market funds, but was cut off before he could finish.

See the video interview of university professor Statman at this link.

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