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Behavioral Finance: The Second Generation

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Overview

Behavioral Finance: The Second Generation

Behavioral finance presented in this book is the second-generation of behavioral finance. The first generation, starting in the early 1980s, largely accepted standard finance’s notion of people’s wants as “rational” wants—restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational”—succumbing to cognitive and emotional errors and misled on their way to their rational wants. The second generation describes people as normal. It begins by acknowledging the full range of people’s normal wants and their benefits—utilitarian, expressive, and emotional—distinguishes normal wants from errors, and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People’s normal wants include financial security, nurturing children and families, gaining high social status, and staying true to values. People’s normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions of finance, including saving and spending, portfolio construction, asset pricing, and market efficiency.

About the Author(s)

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Meir Statman PhD

Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara University. His research focuses on behavioral finance, and he attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. Dr. Statman consults with many investment companies and presents his work to academics and professionals in many forums in the United States and abroad. His most recent book is Finance for Normal People: How Investors and Markets Behave. Dr. Statman’s research has been published in numerous journals, including the Journal of Finance, the Journal of Financial Economics, the Review of Financial Studies, the Journal of Financial and Quantitative Analysis, the Financial Analysts Journal, the Journal of Portfolio Management, and more. He is a member of the advisory board of several academic journals and is an associate editor of the Journal of Behavioral Finance and the Journal of Investment Management. Dr. Statman is a recipient of a Batterymarch Fellowship, a William F. Sharpe Best Paper Award, a Bernstein Fabozzi/Jacobs Levy Outstanding Article Award, a Moskowitz Prize for best paper on socially responsible investing, a Matthew R. McArthur Industry Pioneer Award, three Baker IMCA Journal Awards, and three Graham and Dodd Awards. He was named as one of the 25 most influential people by Investment Advisor. Dr. Statman received a BA and MBA from the Hebrew University of Jerusalem and a PhD from Columbia University.