Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on how investors and money managers make financial decisions and how these decisions are reflected in financial markets.
What role does perspective play in our ability to stay the course?
The right perspective can be a game changer when it comes to sticking to a plan. But it takes some coaching to stay disciplined. Dr. Meir Statman shares his expertise on exercising perspective during challenging times.
Transcript
Tim Maurer:
Hello and thank you for tuning in to Ask Buckingham an ongoing video podcast series where we invite thought leaders across many disciplines of wealth management to respond to your timely questions with timeless answers. My name is Tim Maurer and I have the privilege of hosting these short discussions as the director of advisor development for Buckingham wealth partners.
Tim Maurer:
Today we’ll be hearing from Dr. Meir Statman, a consultant in Buckingham and the Glen clinic professor of finance at Santa Clara university. Most importantly, one of the world’s foremost authorities in the field of behavioral finance. And here’s the question we’ll be tackling. Dr Statman, how can we use the construct of framing to guide us in times of uncertainty?
Dr. Meir Statman:
Well, framing is a cognitive process whereby you simplify problems by looking at them in a smaller frame. So for example, you can frame today’s market as a decline from its peak, or you can frame it as an increase relative to what you had five years ago. And our natural tendency now is to frame it narrowly, to look at it relative to the peak. And we feel bad.
Dr. Meir Statman:
But if we look at it over a longer horizon, we realize that in fact we have done well and are likely to continue to do well. The other thing that has to do with framing is to think about portfolios as a whole, not just including stocks, bonds and other investments, but really in the context of life because it is about life altogether. And so I like to say that the stock market is not the biggest risk in life. If you want real risks, get married. And if you want more, have children.
Dr. Meir Statman:
So what is it that we are trying to do? We are trying to have a good life for us and our families and our communities. And if we remember that, then we can count our blessings. We can see that the climb is painful and it hurts our pocketbook and it hurts our ego. But it is not the end of the world.
Dr. Meir Statman:
The other thing that has to do with framing is again, ask yourself how do you frame it? Not as the stock market has gone down, but what does it do to you in real terms? In other words, is it just a hit to your ego because now you have less money in your portfolio? Or is it something that now imperils your retirement? And I trust that your advisor and you have formed a portfolio such that it anticipates that stocks might go down and that even if they do, it will not drive you into poverty.
Dr. Meir Statman:
There’s one other aspect of trading that is relevant to those issues of framing. Think about it this way. The way I frame it, or the way I say it, is in every trade there is an idiot. And if you don’t know who it is, you are in trouble. So people tend to frame trading as the equivalent of playing tennis against a practice wall. You know, that is easy. Whatever somebody said on television, buy this stock. You know, that’s easy. Like the stock is on sale, go to the supermarket, and buy it.
Dr. Meir Statman:
But trading is like real tennis and the player on the other side may be Djokovic or even not Djokovic, just somebody who is a professional, somebody who has an advantage over you. And so you should always ask yourself if you’re going to sell now because the market has gone down and you’re afraid it will go down further, who is the idiot who is buying it? And in all likelihood you say, what do I know that is not known by everyone else? And the answer is nothing. And therefore a proper framing says don’t do anything.
Tim Maurer:
Extremely helpful, Dr Statman. And I love that you are helping us reframe the notion of say a single day’s investment performance, a single crises, investment performance within the construct of a broader financial plan, then is within a construct of a bigger life plan. I think that’s absolutely helpful to keep us on track. And one of the points of application I would suggest is that you should be talking to your advisor if you haven’t already about how the impact of this downturn impacts your overall plan, your overall retirement plan, for example, your overall financial plan and your goals. Because in so doing, I think that that will help direct any actions that need to be taken and oftentimes not at all.
Tim Maurer:
Dr Statman, thank you again and thank you for tuning in to this episode of ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website, askbuckingham.com or emailing your question to question@ask buckingham.com or I think there’s something somewhere on your screen right now that you can just click and go directly there.
Tim Maurer:
Remember, there are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good decision making. So please follow us. And by all means, ask Buckingham.
