Bonus Episode - Prof. Meir Statman: A Wealth of Well-Being

0:03This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

0:18So a couple of months ago, we got an email from our friend, Professor Mayor Statman, that he has a new book coming out and he offered to us to come on to talk about it. So we did, and it was a great conversation that Ben and I had earlier this week. The book is called A Wealth of Well-Being, A Holistic Approach to Behavioral Finance. Mayor is the Glenn Klemek Professor of Finance at Santa Clara University and is, I think we all agree, one of the giants in the domain of behavioral finance and a really nice guy. He has a PhD from Columbia and is BA and MBA from the Hebrew University of Jerusalem.

0:51This is a vast book. It covers so many topics. It's a fascinating read. It explores what does it mean? What does life well-being mean and how do all these different facets of your life impact your well-being? And then we talked at the end a lot about how the finance part of it underpins so many of those other parts. So it was a really fascinating conversation. And also we talked a fair amount about risk. To go back to your comment, Mark, about how it's the risk that you don't think of that can really cause an impact like getting married, getting divorced, living a long time, these things that are beyond standard portfolio management type conversations.

1:26Ben, what else did you add to that? Anything? It was great to talk to Mer again. He is brilliant. And he's money and finance relates to life well-being. He makes the comment that finances underpin all other domains of life well-being, which I think is pretty cool and also pretty accurate. We had a wide-ranging conversation with Mayer. His book is textbook level, serious writing. Serious writing. Okay, let's go to our conversation with Professor Mayer Statman.

1:58Professor Mayer Statman, it's great to welcome you back to the Rational Miner podcast. I'm delighted to be with you and Ben. It's so great to see you again. And this book is incredible and vast. We're just going to scrape the surface of it today, but let's jump right into it. How does life well-being fit into the study of behavioral finance? So let me begin with a story. Some years ago, I was speaking to a large group of financial advisors about saving and spending and financial well-being and life well-being. And after my talk, a number of advisors came over to tell me about the need to increase saving and reduce spending, about the danger of giving adult children money without asking them to pay it back, stories about widows who plurge after their husbands die.

2:55One advisor, a woman, stood aside and waited for the others to leave. And then she said, I started to cry when you said it is better to give with a warm hand than a cold one. I turned out that she lent her son some$27 ,000 for his tuition. And now that he graduated, she asked him to pay by the agreed schedule. schedule. Now, that woman didn't really need that money, but she thought that by paying by schedule, it will teach her son very important lessons about financial responsibility and increase his financial well-being. The son was broke at the beginning of his career, and she said that he didn't even have money to buy his girlfriend an engagement ring.

3:52And of course, that relationship between her and her son deteriorated. And so it is a nice illustration of financial well-being and life well-being. That woman had high financial well-being. Her son had low financial well-being. But financial well-being is just one part of life well-being. Other parts include family, mothers, fathers, children, and also marriage, of course, friendship, work, health, education, religion, and more. And so you can see the kind of trade-offs we make. That is, by increasing financial well-being, her financial well-being, she really, one, diminished his financial well-being, And worse, she really created a diminishment of life well-being in that domain of family, parents, and children.

5:00And so the point that I am making in this book is that we have to expand our vision, our horizon, to see financial well-being as one element within life well-being. And this, in fact, goes to behavioral finance as I see it. And so we started with standard finance, where people are rational, computer-like rational, caring only about wealth or financial well-being. Then we went to the first generation of behavioral finance, where we said, wait a minute, people are actually bumbling irrational. They want to maximize wealth, but they're too stupid to do that. And so they make all kinds of cognitive errors, overconfidence, excessive fear, and so on.

5:49Then I introduced the second generation of behavioral finance where I said people care not just about risk and return and wealth. They also care about those expressive and emotional benefits beyond the utilitarian benefits. So they care, for example, about social status. They care about, say, not realizing losses because they don't want to suffer the regret that comes with realizing losses. And now in that third generation of behavioral finance, I expand the circle of finance. It's not a frontier. It is a circle. And that circle includes everything from standard finance to the third generation.

6:36But it is really broad, seeing people as whole persons and caring about their financial well-being, but even more so about their life well-being. You mentioned multiple domains of life well-being. Can you talk about the role that finances play? Yes. So financial well-being is really important. And there are many books about life well-being or happiness that tend to say what is really most important is marriage or friendship and so on. Yes, they are all important, but finances are important for two reasons. One, on their own, they are important. And second, they underlie everything else, all the other domains.

7:25And so let me talk for a moment about how they matter by themselves. The more money you have, the higher your life well-being. No ifs and buts. So even people who have wealth of a million are not as happy and not enjoying as much life well-being as people who have two million. And it is not just their evaluative well-being. In other words, the part that is the answer to if you think about your life as a whole, where will you put yourself? At the top, the bottom, in the middle, and so on. But also the day-to-day emotions of happiness and sadness and anger and frustration. People who have more money, even if it is in the millions, are happier in this sense, this emotional well-being or experienced well-being.

8:19And so that really matters. The other part is, of course, that financial well-being, finances underlie all of well-being. So think about marriage. Marriage is important. Marriage without money is just on the way to a divorce. That is, you just cannot support a family without money. The kinds of arguments that come because of lack of money make life miserable. And people say, I'd rather divorce. You cannot support children without money. You cannot gain education without money. You cannot even enjoy religion without money, because if you are a member of a church or synagogue, they expect you to pay.

9:05And without money, of course, it's embarrassing to go when you have nothing to put into the collection plate. And so it is really important to realize that finances are important on their own and underlying everything else. But finances alone are not sufficient for life well-being. You can be very wealthy and very miserable. God knows we read stories about people whose wealth is in the billion who are estranged from their children and who are on their fourth marriage. I have less money, but I'm still married to the woman I married more than 50 years ago, and my life well-being, I dare say, is higher.

9:53That statement from the book that finances underlie all the other domains of life well-being is striking. It's almost obvious when you say it, but very, very interesting point. Yeah, it is really very important. When I speak to financial advisors, I often say the biggest risks in life are not in the stock market. I say, if you want real risk, get married. And if you want more risk, have children. And so people laugh as you do now, because the point is obvious. And yet that point is usually lost when people, financial advisors, investors speak about finances and they forget that finances are just a way station to life well-being.

10:37What a great line. So keep going on that, Mer. What role do you see for financial advisors to help improve our clients' life well-being? So it is really important, I think, for advisors to move from being financial advisors or wealth managers to be well-being advisors. It is really important for financial advisors to move from how much can you withdraw in retirement, blah, blah, what will the Fed do, to what's going on in your family? What about your children? Are they in their 20s and are squeezed for money? Is it that you have all the money in the world, but you wouldn't give it because you're afraid of spoiling them?

11:23Is it the case that you would like to have the money to send the kid to the most expensive university, but the kid won't even go to community college? There are things that are really central to life that can be missed. One One advisor a long time ago told me about a couple that came to him and they said, first, you should know we have a disabled son. And before you start planning for us, you should plan for that son such that he is taken care of long after we are gone. Now, some clients, some prospects will come up front and tell you what goes on in their families, their points of pain. Others will not.

12:13And so it is really important for advisors to probe gently. And you don't have to be a psychologist for that. You just have to be a good friend. good friends disclose their pains and the people who listen to them then disclose their pains and then they can empathize with one another and help. And advisors can help clients with the financial aspects and more. And so it is really both important and does not come naturally to all advisors. One thing that I say, one woman who listened to me, an advisor, she said, isn't it easier for women to cross this line from finances to life than men? And I said, that is generally true.

13:03But being able to cross the line from finances to life is a skill that can be learned. I said, here I am. I am shy by nature, but here I am on the stage speaking to hundreds of you. I've learned to overcome my shyness and be able to speak to a large audience, to interact with them. The same thing applies here. A self-serving point, if advisors have my book, share it with their clients, it might be a beginning of a conversation because they can ask, what did you like about it? What do you agree with and what do you disagree with? What do you think about the statement? It's better to give with a warm hand than a cold one.

13:50You agree that they might bring up the fact that they don't have enough money. That is perfectly okay. You cannot give what you need for yourself, but they also might say things like, I don't want to spoil my children by giving them money, it will extinguish their ambition. And then you can get into a conversation. And I say, I don't know if it's tongue-in-cheek or not, lost kids, when their parents pass away, they choose another advisor. They move away from that old advisor who advise their parents for many reasons. But I think that just knowing as a kid that your advisor advised your parents to share the wealth with them when you really need it, when you are in your 20s and 30s, I think is a nice point for them to say, this advisor cares about me and perhaps I should retain him rather than switch.

14:51You talked earlier about how finances on their own are important to life well-being. How important is someone's financial capital relative to the other people around them to their well-being? Very important. So you ask yourself, why does a man or a woman with a billion dollar want two billion dollars? It is more that they can spend in a lifetime? The answer is that people care about social status. And social status, in many ways, is determined by wealth. And so you will have a situation where my income and your income go up by the same percentage. Our ranking in terms of status stays the same.

15:34But if you get a smidgen more than me, then I feel that I am behind and I do need to do something. Now, one thing that you can do, one thing that we all do that is very productive is to realize that there is more than finances. That is either I'm richer than you or you are richer than me. But I can have a happy marriage and you can have a happy marriage. and my marriage, we don't compare that and say, mine is about 20 % better than your marriage. So people move to things that are not comparable and people compare themselves as much as they can to reference groups, to comparison groups that give them a sense that they are doing fine.

16:22I worked with a person who is a money manager and who is worth billions. I am about a million or two short of a billion. But we worked really as colleagues. I did not waive my PhD. He did not waive his billions. We were in different domains with different rankings. And so I did not feel that I lag him and he did not feel that he lags me. We respected each other. That is really what we do. For some people, it is their work, their position in work. Are they executives? Are they just a run-of-the-mill workers? For other people, it might be what they're doing for their church, what they're doing in volunteer work, the kind of satisfaction they get there.

17:14One, social status matters greatly to well-being. Second, if you choose your comparison group wisely, you can really diminish the kinds of hurts where you feel behind and have a sense that I'm doing just fine. There's really no need for me to run faster than I do. Interesting. How does the gap between what we have and what we aspire to have affect life well-being? So there is a very interesting and insightful finding that life well-being on average in developed countries tend to have a U-shape that is like the letter U, That is life well-being goes down from early adulthood till about the mid-50s and then begins to go up.

18:02And you ask yourself why. One reason is really about the gap between situations and aspirations. So when you are young, your aspirations tend to be higher than your situation. You don't have much money then. You are still, say, in school. What you do is using that gap to motivate you. And so you stay in your dorm room and study for the exam rather than go to a party because you know that by acing that exam and getting into medical school or whatever it is, you are going to enjoy higher well-being in the future. And so that gap can be a motivator. But there comes a point, surely for me in my 70s, where I say, I don't care.

18:56That is, it's not that I have accomplished some huge things, but rather I have really diminished my aspirations such that they meet my situation. Look at that and I say, hey, I am married, I have kids, I have a job, people like me, I like them, and so on. What is happening really is that there comes a point where having aspirations that are so much higher than your situation is really self-defeating because it makes you miserable without really motivating you to do better in the future. You gave an example of self-control with a person, I think, studying for their exam. We know that in spending, a lack of self-control can be a problem.

19:42That's often referenced as the problem to solve, but can too much self-control in spending also be a problem? Absolutely. And so what we have really, the way we get ourselves to save, I'm sure that it applies to the two of you. It applies to me. It applies to all people who are successful in life. It is that we have learned to, for example, put our money in separate mental accounts. So we have income and we have capital and we move money from income to capital, for example, with 401k. But then we use a self-control rule that says spend income, but don't dip into capital. This is wonderful in getting you to accumulate a lot in this capital mental account.

20:32But there really comes a point where your income ceases or goes down substantially as you retire. and now it is time to spend. But those habits of self-control and don't dip into capital get to be really part of your life and they get to be part of who you think you are. And you think that virtuous people save, they don't spend. When I talk with financial advisors who advise retired people, the problem is not that they overspend. The problem is that you cannot even get them to spend enough on small things. My mother-in-law, she needed a sofa. The sofa she had was really falling apart. But she said, it is perfectly fine.

21:22I don't really need a new sofa. Her kids went out. They bought a new sofa. They tossed out the old one. So she smiled and She said, you're spending your inheritance. Good. The time to spend the inheritance is now. That is when people are all, yes, replace this shaggy carpet rug that you have. Replace that sofa. Buy the better tickets to the opera. Enjoy yourself. Find out what is joyful for you. For some people, it is a cruise around the world. For me, if I was on a cruise around the world, I think after a few days, I would jump overboard. It's not for me. But I spend on things that matter to me.

22:11If I go long distances over oceans, say from the United States to Israel, I buy business class tickets rather than hope for an upgrade because sometimes upgrades don't come. And I'm just too old and too well off. to be in coach in this long flight. That really is important. A friend of mine says, if you fly coach, your son-in-law will fly first class. So that is perhaps sufficient to get people to move and spend. How do finances affect dating and marriage? So we like to think that the days when people cared about how much wealth and earnings and has been in the past, but they are not. And in some cultures, like in India, it is explicit that is in matrimonial advertisements, in dating sites, they say things like, I'm looking for a man who is having a stable employment and high earnings and so on.

23:19You will see much less of it in a place like the United States. But still, the old stereotypes are real. We have a lot of evidence that marriages where the wife earns more than the husband are less stable than marriages where the husband earns more. It is sad, perhaps, but that is life. And people deal with it in many ways. One is that husbands exaggerate how much they earn and wives diminish what they actually earn to keep the egos aligned. We have that struggle between the traditional roles where husband earns and wife takes care of the kids and the house and where we want to go, which is where we, husband and wife, are equally good at loading the dishwasher and we share the raising of kids and cleaning the house equally.

24:22It is something to know. It is something to fight against if you are trying to avoid problems in your marriage. It is just simple things. That is, a wife who gets to pick her husband's socks every day, at some point is going to say, it's not the socks, but I don't think that this man really respects me. And if he does not respect me, maybe I should not be his wife. I like the section on respect in marriage in the book. What role does work play in well-being? Work, of course. We need work unless we are born wealthy and our parents let us enjoy that wealth early on, we need to work. And so work can be a job.

25:07It can be a career. It can be a vocation. When it is a job, I do it because I need the money. I need the health insurance. But if I could, I would quit right now. And perhaps I'm going to be retired on the job doing the minimum that I can. Whereas a vocation is really where your being is associated with what you do. For me, being a professor is a vocation. That is, I don't need it really for the income anymore, but I do it because a professor is who I am and a teacher and a scholar as who I am. When I talk about injuries in the domains, some of us have an injury in that work domain in that we just don't have the skills to move up.

26:00We do a menial job. We do a service job that is low level. We are really not happy about it. We really wait for the weekend. You can then use other domains like family, where you have a lot of satisfaction to compensate for the less happy circumstances of your job. But if you are lucky enough to have a vocation, one that pays reasonably well, but really is who you are, that is wonderful. That really enhances well-being by huge amount. Two more questions for you, Mayor. What effect does education have on life well-being? So education, beyond getting you better jobs and a higher income, is also one where you develop curiosity, the habits of learning that last long after college or graduate school, kind of benefit in your social capital, that you develop a lot of friendships and contacts in college and graduate school that serves you later.

27:15The cultural capital where Bulgaria is, you know how to dress for an interview and so on. These are important. But let me talk about one aspect of education that is really important and in many ways said. I live in Silicon Valley. I am an immigrant myself, of course. There are many immigrants around me from India and from China. They themselves tend to be people with high education. In fact, this is how they got to immigrate. Many of them really push their kids to get into an Ivy League or similar prestigious university. And it works for many, but it makes many others really miserable. And the thing is that in terms of financial well-being, graduated from a top university or just an okay university does not really matter much on average.

28:18It matters a great deal in prestige and social status. You can put a sticker on your car and say, my son goes to Harvard, but it does not really do much in enhancing wellbeing. It is really important and people get to see that, to realize that college is just the beginning of adult life, not the end. And by the way, since you are Canadians, you would appreciate the difference. You probably are quite aware of the difference. In the United States, the pyramid of procedure of university is very steep. You have the Ivy Leagues at the top, you have community colleges at the bottom, then you have everyone finding their place in between.

29:03People find themselves going to their safety school. They're not really happy, but that's what they'll do. Whereas in Canada, that pyramid is pretty flat. That is, people choose universities not by their total ranking, but rather by what is it that they want to specialize in. Is it creative writing? Is it being a physician? One Canadian woman said, when you go to a physician, do you check where they got their MD? You don't. You assume that they have the medical knowledge necessary to treat you. And you expect them to have that bedside manner. You expect them to be kind to you, to ask you questions, to answer your questions, and so on.

29:54And so it is really very important that we remember that life does not end with college. It begins with college. I have lots of neighbors who are originally from India, and I occasion have conversations with them and they get the point. They really change their behavior. And so the son of a neighbor of ours is going to Purdue University. He's interested really in engineering and Purdue is very well known as high quality in engineering. It does not rank as high as Ivy League, but that son and his parents know what they're trying to do to get a good beginning of life. and this is where he goes. There's a paper from Neil Ruiz at Northwestern, a 2011 paper, I think, that looks at the top regrets that people have.

30:44And education is in the list of top regrets that people have. Why do you think that would be? Because education can be really difficult. That is, you go to college, it is hard work. You find that even though you were okay in high school, In college, competition is tougher. You feel that you are lagging behind and you ask yourself, what difference does it really make? And instead of making money by getting a job now, I'm spending money. And so people get discouraged and they drop out. And it is really very hard later on when you're in your 40s and 50s to go back. You feel that the doors are now closed.

31:28They're actually not. All the people who just go back to community college can pick up. And just going to community college gets you many of the benefits of a four-year college, both in income and in that curiosity, those other benefits that you get from just being a student. Here, as we mentioned before, this issue of self-control matters greatly. And having a group of people around you, both professors and classmates, who encourage you to do your best and help you on your way is really very important. I remember my days at the Hebrew University. I did not take calculus in high school, but I found a friend who did.

32:10Actually, pretty soon I found that his knowledge really ends at about the third lesson. And we were at the same level, but just having this assurance that I have next to me, somebody who knows calculus and who can guide me, was quite reassuring. And I overcame, of course, this impediment of not have had that education before. All right, our last question for you, Mayor. Very interested in the answer to this one. How does religion affect well-being? For many people, if you ask them what brings meaning to life, that is really beyond how do you assess your life, the evaluative well-being, to a meaning well-being, they will say religion, my relationship with the Lord, and also my community in the church or the synagogue.