April 19, 2024

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

April 19, 2024

Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara University. His research focuses on behavioral finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. His most recent book is “Behavioral Finance: The Second Generation,” published by the CFA Institute Research Foundation.

Meir received his Ph.D. from Columbia University and his B.A. and M.B.A. from the Hebrew University of Jerusalem.

Meir’s research has been published in 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 many other journals. The research has been supported by the National Science Foundation, the CFA Institute Research Foundation, and the Investment Management Consultants Association (IMCA).

Today, we welcome back Prof. Meir Statman to talk about the role of finances in well-being. We investigate the role of finances in well-being with Prof. Meir Statman through the lens of his new book, A Wealth of Well-Being. Discover why wealth advisors must evolve into well-being advisors and uncover the impact of finances on various life domains. From dating to education, we discuss the profound financial correlations shaping happiness and well-being. Tune in now!

Key Points From This Episode:

(0:00:00) Intro

(0:00:30) How life well-being fits into the study of behavioral finance

(0:06:10) The role do finances play in life well-being

(0:11:02) The role do Meir sees for financial advisors in improving their clients’ life well-being

(0:16:28) The importance to life well-being that someone’s financial capital is relative to the people around them

(0:19:53) How the gap between what we have and what we aspire to have affects life well-being

(0:22:32) Whether too much self-control can impact life well-being

(0:26:17) How finances affect dating and marriage

(0:29:11) The role work plays in well-being

(0:31:40) The effect education has on life well-being 0:39:22 How religion affects life well-being

Read The Transcript:

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

Cameron Passmore: A couple months ago, we got an email from our friend, Professor Meir Statman that he has a new book coming out and he offered to us to come on to talk about it. 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. Meir is the Glenn Klimek Professor of Finance at Santa Clara University, and is, I think we all agree, one of the giants in the domain of behavioural finance and a really nice guy. He has a Ph.D. from Columbia and his BA and MBA from the Hebrew University of Jerusalem.

This 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? Then we talked at the end a lot about how the finance part of it underpins so many of those other parts. It was a really fascinating conversation. Also, we talked 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. Ben, what else would you add to that? Anything?

Ben Felix: It was great to talk to Meir again. He is brilliant and he's thought about this, about how 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 Meir. His book is textbook level serious writing.

Cameron Passmore: Serious writing. Okay, let's go to our conversation with Professor Meir Statman.

***

Cameron Passmore: Professor Meir Statman, it's great to welcome you back to the Rational Reminder Podcast.

Meir Statman: I'm delighted to be with you and Ben.

Cameron Passmore: It's so great to see you again. 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 behavioural finance?

Meir Statman: Let me begin with the 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. After my talk, a number of advisors came over to tell me about the need to increase saving and reduce spending, the danger of giving adult children money without asking them to pay it back, stories about widows who splurge after their husbands die. One 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.” It turned out that she lent her son some $27,000 for his tuition. Now that he graduated, she asked him to pay by the agreed 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. His 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. Of course, that relationship between her and her son deteriorated. 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 the family; mothers, fathers, children, and also, marriage of course, friendship, work, health, education, religion and more. 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.

The point that I am making in this book is that we have to expand our vision, our horizon to see financial well-being is one element within life well-being. This, in fact, goes to behavioural finances I see it. 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 behavioural finance where we said, wait a minute. People are actually bumbling irrational. They want to maximize wealth, but they are too stupid to do that, and so they make all kinds of cognitive errors; over-confidence, excessive fear, and so on.

Then I introduced the second generation of behavioural 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. 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. Now in that third generation of behavioural finance, I expand the circle of finance. It's not a frontier. It is a circle. That circle includes everything, from standard finance to the third generation, but 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.

Ben Felix: You mentioned multiple domains of life well-being. Can you talk about the role that finances play?

Meir Statman: Yes. Financial well-being is really important. There are many books about life well-being, or happiness that tend to say, what is really what's 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're important. Second, they underlie everything else, all the other domains. 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. 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.

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. That really matters. The other part is of course, that financial well-being finances underlie all of well-being.

Think about marriage, okay? 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 a synagogue, they expect you to pay. Without money, of course, it's embarrassing to go when you have nothing to put into the collection plate.

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 billions, 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.

Ben Felix: That statement from the book that finances underlie all the other domains of life well-being, it's striking. It's almost obvious when you say it, but very, very interesting point.

Meir Statman: 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. If you want more risk, have children.” People laugh as you do now because the point is obvious and yet, that point is usually lost when people, financial advisors and investors speak about finances and they forget that finances are just a way station to life well-being.

Cameron Passmore: What a great line. So, keep going on that, Meir. What role do you see for financial advisors to help improve our client’s life well-being?

Meir Statman: So, it is really important, I think, for advisors to move from being financial advisors, or wealth managers, to being 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 now 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? Is it the case that you would like 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 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. 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 upfront and tell you what goes on in their families, their points of pain. Others will not. It is really important for advisors to probe gently.

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. 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?” I said, “That is generally true. But 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.

You 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.” Then you can get into a conversation. I say, I don't know if it's tongue and cheek or not. Most kids when their parents pass away they choose another advisor. They move away from that old advisor, who advised their parents for many reasons. But I think that just knowing as a kid that your advisor advices 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.”

Ben Felix: You 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?

Meir Statman: Very important. 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. Social status in many ways is determined by wealth. You will have a situation where my income and your income go up, but the percentage are ranking in terms of status stays the same. But 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's 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. In my marriage, we don't compare that and say, “Mine is about 20% better than your marriage.” 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.

I 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 Ph.D. He does not waive his billions. We were in different domains with different rankings, and so I did not feel that I lagged 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 the run-of-the-mill workers? For other people, it might be what they are doing for their church, or what they are doing in volunteer work. The kind of satisfaction they get there.

One, 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.

Cameron Passmore: Interesting. How does the gap between what we have and what we aspire to have affect life well-being?

Meir Statman: 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 as life well-being goes down from early adulthood till about the mid-50s, and then begins to go up. You ask yourself why. One reason is really about the gap between situations and aspirations. When you are young, your aspirations tend to be higher than your situation. You don't have much money than you are still, say in school. What you do is using that gap to motivate you. 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. That gap can be a motivator.

There comes a point. Surely, for me in my 70s, where I say, I don't care. 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 it 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 the 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.

Ben Felix: 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. That's often referenced as the problem to solve, but can too much self-control in spending also be a problem?

Meir Statman: Absolutely. 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. We have income and we have capital. 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.

There really comes a point where your income ceases or grows 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. 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. I 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 are 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 and 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. If 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. I'm just too old and too well off to be in coach in this, a long flight. That really is important. A friend of mine says, if you fly coach, your son-in-law will fly first-class. That is perhaps, sufficient to get people to move and spend.

Cameron Passmore: How to finances affect dating and marriage?

Meir Statman: We like to think that the days when people cared about how much wealth and earnings made has been in the past, but they are not. 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. You 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.

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 the husband earns and the 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. It is something to know. It is something to fight against if you are trying to avoid the 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. If he does not respect me, maybe I should not be his wife.”

Ben Felix: I like the section on respect in marriage in the book. What role does work play in well-being?

Meir Statman: 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. Work can be a job. It 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 what 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 is 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. We 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.

Cameron Passmore: Two more questions for you, Meir. What effect does education have on life well-being?

Meir Statman: 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 the cultural capital, where Bulgaria is. You know how to dress for an interview, and so on. These are important.

Let me talk about one aspect of education that is really important and in many ways, sad. 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 emigrate. Many of them really push their kids to get into an Ivy League or similar prestigious university. It works for many, but it makes many others really miserable. 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. It matters a great deal in prestige, in social status and you can put a sticker on your car and say, “My son goes to Harvard.” But it does not really do much in enhancing well-being.

It is really important and people get to see that, to realize that college is just the beginning of adult life, not the end. 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 prestige of university is very steep, and you have the Ivy Leagues at the top, you have community colleges at the bottom, then you have everyone finding their place in between. People 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, 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 your questions, to answer your questions, and so on. It is really very important that we remember that life does not end with college. It begins with college. I have lots of neighbours who are originally from India and I occasionally have conversations with them, and they get the point. They really change their behaviour.

The son of a neighbour of ours is going to Purdue University. He's interested really in engineering. 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.

Ben Felix: There's a paper from Niel Roese at North Western, a 2011 paper, I think, that looks at the top regrets that people have. Education is in the list of top regrets that people have. Why do you think that would be?

Meir Statman: 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. You ask yourself, what difference does it really make? Instead of making money by getting a job now, I'm spending money. People get discouraged and they drop out. 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. They're actually not. Older people who just go back to community college can pick up and just go into 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 you mentioned before, this issue of self-control matters greatly. 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. Actually, 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. I overcame, of course, this impediment of not have had that education before.

Ben Felix: All right, our last question for you, Meir, very interested in the answer to this one. How does religion affect well-being?

Meir Statman: For many people, if you ask them what brings meaning to life, that is really beyond how do you assess your life. They evaluate their well-being to a meaning well-being. They will say, religion. My relationship with the Lord. Also, my community in the church, or the synagogue, because in addition to that connection to the deity, what you have is really a social group that is supportive. One of the findings, for example, is that it is not praying alone that enhances well-being. It is praying in church, or synagogue with others that is doing that.

Then you get help, especially if it is a strict religion, like Mormonism, or Orthodox Judaism, if something bad happens, God forbid, a baby dies, people who are members of a church are likely to get help both in empathy and actual, physical help. In Jewish tradition, when someone dies, there is a Shiva. People sit for seven days at home and visitors come and those visitors bring food with them, and they comfort the people who are grieving. The people who are grieving see that they are among friends, among family. But does not bring the dead back to life, but it really says, which they know, that death comes, sometimes not when people are in their 90s, sometimes when people are young, but we can overcome it together if we have family and friends. You can see, this is another example where you might have an injury in one domain, say a child, God forbid, dies.

But then, having surplus in a way in the friends and family domain, you can use that to fill in to compensate for the injuries in the domain of family. Some people can do that with a form of religion. Other people do it with creating their family elsewhere. When we celebrate Passover, we will read the Haggadah, but we skip the ones that are not to our taste and we invite people who are not Jewish. It is a joy to have them. One of the traditions is that at the end of the Seder, the kids get gifts, supposedly for hiding the matzah and having them deliver it. It is so endearing.

I met a woman, the daughter of a colleague of mine friend, who was at a Seder we had. Oh, God knows, she was eight. She's now in her 40s. I reminded her that she got a Barbie doll as a gift and her mother didn't care much for it, because they’re sexist and all of that. But she said, “Oh, so your family gave it to me. Boy this was my favourite gift.” You see how you create those kinds of communities that go way beyond religion, to become really part of religion, but really, mostly family.

Ben Felix: All right, Meir. That was our last question. This has been a great conversation. Really enjoyed the book. Congratulations on having written it.

Meir Statman: Thank you so much. It is wonderful to speak with the two of you.

Cameron Passmore: Always. Great to see you. Thanks again, Meir.

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