Bogleheads® on Investing Podcast 076: Meir Statman talks about his new book, A Wealth of Well-Being
00:00:00.000 | [music]
00:00:10.880 | Welcome everyone to Bogleheads on Investing, episode number 76. Today our special guest
00:00:16.320 | is Mare Stotman, a professor of finance at Santa Clara University who focuses on behavioral finance
00:00:23.120 | and attempts to understand how investors make decisions. He's the author of two books,
00:00:27.840 | "What Investors Really Want" and recently released "A Wealth of Well-Being."
00:00:32.640 | [music]
00:00:43.040 | Hi everyone, my name is Rick Ferry and I am the host of Bogleheads on Investing.
00:00:47.360 | This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial
00:00:54.080 | Literacy, a non-profit organization that is building a world of well-informed, capable,
00:00:59.600 | and empowered investors. Visit the Bogle Center at boglecenter.net where you will
00:01:05.360 | find a treasure trove of information, including transcripts of these podcasts. Today our special
00:01:11.520 | guest is Professor Mare Stotman. He is a professor of finance at Santa Clara University and his
00:01:17.280 | research focuses on behavioral finance as he attempts to understand how investors make financial
00:01:23.040 | decisions and how these decisions are reflected in the financial markets. Professor Stotman's
00:01:29.120 | research has been published in numerous academic and professional journals and has won many awards.
00:01:34.720 | His first book, published in 2011, was titled "What Investors Really Want" and his recent book,
00:01:42.000 | "A Wealth of Well-Being, a Holistic Approach to Behavioral Finance," digs into the third generation
00:01:48.880 | of behavioral finance, which widens the lens and brings in many other aspects of life when making
00:01:56.160 | financial decisions that may not lead to more money, but it leads us to what Professor Stotman
00:02:03.840 | calls a portfolio of well-being. So with no further ado, let me introduce Professor Mare
00:02:10.160 | Stotman. Welcome to the Bogle Heads on Investing podcast. Well, I'm delighted to be with you, Rick.
00:02:15.920 | I've been following your work for many years. You've written a couple of fine books. The latest
00:02:21.920 | one will be the topic of our discussion in a few minutes, but before we get to that, you have a
00:02:29.440 | very interesting upbringing. And before I even get to you, could you tell me about your parents?
00:02:38.480 | Well, my parents were teenagers in Poland in 1939 when the Nazis invaded and they were on the
00:02:48.320 | eastern part of Poland. And so refugees, Jewish refugees that were escaping the atrocities would
00:02:58.000 | stop by. And so they understood that they better go or bad things will happen. And so they crossed
00:03:06.960 | the river, the River Bug, traveled and lived in Siberia and then down to Uzbekistan, which is
00:03:16.800 | where they met and got married. And I was born in a displaced persons camp, which is a polite word
00:03:24.960 | for a refugee camp in 1947. And we came to Israel in 1949. And the funny thing, there were so many
00:03:35.040 | families who were identically situated that it seems like it's just a normal thing.
00:03:41.200 | Your upbringing was in Israel when the country was being formed.
00:03:45.120 | Indeed. And of course, when you're a child, you know, just one environment, and that is
00:03:51.440 | your particular neighborhood in your particular country. And so in the 1950s, as I was growing up,
00:03:59.680 | there was rationing, food was rationed. So you had to have a coupon in addition to
00:04:06.320 | money. And so my dad was managing grocery stores. And so we had a bit of better access to food. It
00:04:22.080 | is a childhood like, like any childhood, it has its own peculiarities.
00:04:27.840 | So then you ended up going to Hebrew University and getting your undergraduate degree.
00:04:33.760 | Indeed, yeah, my undergraduate degree, and then I continued immediately,
00:04:39.440 | in fact, combined it with an MBA. So that was the late 60s. And I was in the building
00:04:47.520 | that housed the economics department. And so I studied economics, statistics, and then finance.
00:04:53.440 | And in the building right next to me was the psychology department. And I would go there from
00:05:02.800 | time to time to earn pocket money by participating in experiments. And I just found out later that
00:05:11.600 | Kahneman and Tversky were doing their revolutionary work right then. But I never heard their names
00:05:18.080 | from my professors. I had no idea what they were doing, which tells you about how
00:05:26.000 | standard economics and standard finance in particular were at the time.
00:05:31.040 | Small.
00:05:32.640 | Very small, and very narrow, and really kind of proud of being narrow.
00:05:39.040 | So then you decided to come here to the US and go to Columbia University to get your PhD.
00:05:46.080 | That is right. Yeah, I had a boring job as a financial analyst. And so I took that leap.
00:05:54.320 | By then I was married. In fact, we were expecting a baby. But I never really
00:06:00.160 | thought about it in units of risk. I just felt compelled to move on.
00:06:05.200 | You've had a wonderful career. Before we get to your books, I want to talk about the generations
00:06:12.960 | of behavioral finance. You talk about the beginning of it all being standard finance,
00:06:20.080 | which were this idea that, well, people were rational and everything they did were very
00:06:24.240 | computer-like, immune to emotion. Everybody did math perfectly, and no one made mistakes.
00:06:30.880 | This was the thinking of standard finance before we actually get into the first generation of
00:06:37.520 | behavioral finance. So talk about that way of thinking.
00:06:40.720 | At the beginning of the 1980s, I became familiar with the work of Kahneman and Tversky.
00:06:45.360 | My colleague, Hersh Shefrin, did some work that had to do with mental accounting and
00:06:50.960 | self-control with Dick Thaler. And so we kind of got together. And as we were speaking about
00:06:57.200 | self-control and mental accounting, I remembered my experience in New York in 1973, '74,
00:07:05.600 | soon after we arrived, where the energy crisis came and Con Edison, the utility company of New York,
00:07:14.400 | had to pay more for the oil they were buying. And they could not raise their rates fast enough
00:07:22.400 | because they are regulated. And so they had to cut the dividend. And the shareholder meeting
00:07:28.720 | was really raucous. And some people rushed to the stage trying to do harm to the chairman.
00:07:37.760 | And so later on, I got the transcript of that meeting. And it was absolutely fascinating.
00:07:46.080 | So Miller Modigliani, part of rational finance, standard finance, said,
00:07:51.840 | if you don't get a dividend from the company, you create homemade dividend by selling a few shares.
00:07:58.320 | Did not occur to anyone at the meeting. Why? Because it violates the rule of keeping income
00:08:09.200 | separate from capital and don't dip into capital. And selling shares to create those homemade
00:08:16.400 | dividends was verboten because it was dipping into capital. You know, those kinds of experiences--
00:08:24.640 | Models. I mean, they were just mathematical models everybody followed. And everybody
00:08:28.560 | said, well, this is the way finance works.
00:08:30.320 | Yeah. But the problem with any science comes when you have theory and then when you have
00:08:37.360 | observations and they don't match. And so natural tendency in finance is to dismiss the evidence.
00:08:44.640 | My natural evidence is to dismiss the theory. So your evidence there was these people are
00:08:50.480 | rushing the stage because they're upset. And this then becomes, in a way, a representation
00:08:56.800 | of the first generation of behavioral finance, where you say people are irrational, bumbling
00:09:02.800 | behavior, so forth, and cognitive issues and emotional. And so you call it the first generation
00:09:09.920 | of behavioral finance.
00:09:12.080 | That is right. The thing was that we said, here is rational behavior. You should dip into capital.
00:09:17.920 | Here is actual behavior. People don't dip into capital. So they are not maximizing wealth. Now,
00:09:25.120 | the goal in standard finance is to maximize wealth. The goal is described in the first
00:09:30.960 | generation of behavioral finance was also to maximize wealth, but saying that people make
00:09:37.360 | mistakes because they are irrational. So, for example, they don't dip in the capital. They
00:09:42.880 | trade too much. They think that they know the future because they know the past. And the whole
00:09:49.520 | panoply of cognitive errors that I'm sure your listeners and you know very well.
00:09:56.080 | Most of the stuff that we hear about in the media is about this first generation
00:10:00.720 | of behavioral finance. We don't really even hear the second generation of it and then the third
00:10:06.800 | generation, which is what your book is about. So now that we're through all these cognitive
00:10:11.280 | errors and emotions and so forth of the first generation of behavioral finance,
00:10:15.360 | you talk in your book about the second generation of behavioral finance. And there is where, hey,
00:10:21.920 | look, people are irrational. I mean, they are emotional. They are normal. That's how people
00:10:27.120 | are. And there are other reasons why people do what they do with their money besides
00:10:34.160 | creating more money out of it. Talk about the movement from the first generation,
00:10:38.320 | just an irrationality to the fact that, no, actually people are being rational.
00:10:42.000 | Well, people are normal.
00:10:45.280 | Normal, normal. That's the right word, normal.
00:10:47.120 | Yeah, the word is normal, neither rational nor irrational. People are normal. And just look at
00:10:54.480 | other products and services and ask yourself what it is that people want. Now, watches are a nice
00:11:02.960 | example. A $50 watch by Skagen is going to show you precise time. A $10,000 watch by Philippe
00:11:15.280 | Patek will also show you the right time. So why is it that people buy those luxury
00:11:21.760 | watches? To say that they are irrational is really too much. It is perfectly normal because I say
00:11:29.360 | people care about utilitarian benefits that show me the right time. Money is good for buying
00:11:38.080 | groceries, but they're also expressive and emotional benefits. I am a wealthy man,
00:11:46.000 | wealthy enough to afford this watch. It is beautiful, gives me a sense of pride that I can
00:11:53.600 | do that. And then I was thinking, why is it that we think about financial securities and
00:11:59.120 | financial services as being different from all other products and services? And I said,
00:12:06.000 | it is really not different. And so the title of that book that I wrote presenting it was
00:12:12.800 | What Investors Really Want. Exactly. I just held up your book. This is where this book came from,
00:12:20.160 | published in 2011. It came from this idea of the second generation of behavioral finance,
00:12:26.720 | where you say, let's talk about what is it that investors really want. Yes, they do want money,
00:12:32.640 | but they also want other things. Yes. Again, it is really important to me. I am using myself as
00:12:40.320 | a laboratory and I'm looking at experiences and they tell me things. So I remember speaking
00:12:46.880 | before a presentation in Montreal years ago with an investor, friends of the Hebrew University,
00:12:54.320 | and I said something about mutual funds. And he said, I am into hedge funds.
00:13:00.080 | And so what did he just tell me? He told me that he is a wealthy man. He didn't brag, you know,
00:13:08.080 | that is right. But he wanted to send a signal to you to send the signal. And he did. To me,
00:13:14.960 | it's kind of funny. But but it is really an important observation that people think about
00:13:22.400 | securities as they think about watches and restaurants, meal and all of the other things.
00:13:29.360 | And so I said, well, let's look at those other things. You know, people hate regret,
00:13:34.800 | so they hold on to their losers because selling a loser, a paper loss makes this loss real.
00:13:45.440 | And now they feel the pain of regret. It makes you a loser.
00:13:49.280 | And exactly. Yeah. How was I so stupid? It's ridiculous. And, you know, you have to see that.
00:14:01.200 | I mean, I know I am actually taking a lot of risk in the sense that I'm buying
00:14:06.000 | index funds that go up and down by many thousands each day. But I'm very sensitive to regret.
00:14:14.480 | When I put money, I get annoyed. So, you know, interesting that you talk about index funds
00:14:20.560 | because in the sense of utilitarian, emotional and expressive. OK, so I mean, there is definitely a
00:14:30.400 | utilitarian benefit to index funds. You get your fair share of market return, which we know from
00:14:36.800 | many, many, many studies, many of them going back decades. But that's better than what most people
00:14:42.960 | get when they try to outperform the market by using active management or trying to pick stocks
00:14:47.760 | themselves. But it does not provide an expressive benefit. You're going to be the most boring person
00:14:55.280 | at a cocktail party by getting up the, oh, yes, I own the total stock market index fund.
00:15:00.080 | It is a very utilitarian product, but it's not very emotional. It's not very expressive. Now,
00:15:08.000 | it may be expressive to people who really understand investing and say, yeah, you're
00:15:11.200 | smart to buy index funds, but unless they know that, you know, typical people at a party you
00:15:17.520 | go to or whatever, we're not maybe not know that. So, yes, it makes you feel better because
00:15:22.240 | of the utilitarian benefit of index funds, but it doesn't give you that emotional and expressive
00:15:27.600 | benefit. That is right. Now, you actually said it along the way. It actually brings me expressive
00:15:34.720 | and emotional benefits, knowing that I am smart, that this is really the right thing to do. And
00:15:40.240 | this is what I teach my students. And they come at it from the perspective that you have to analyze
00:15:47.520 | the stocks that you are analyzing and so on. And, you know, I say always in every trade there is an
00:15:56.400 | idiot. And if you don't know who it is, you are in trouble. And I use the analogy of tennis that
00:16:03.040 | has been used before, but in a different way. I say people trade thinking that they are playing
00:16:09.600 | tennis against the practice wall. That is easy. And I say, wait a minute, you know, there's a
00:16:15.760 | fellow at the other side of the net, and he is possibly an insider, possibly a professional
00:16:23.680 | tennis player. In the analogy, don't do that. Just stand there. But this is not where it ends.
00:16:30.960 | You have continued with your thinking and continued with your research, and you've gotten to a
00:16:36.640 | different level beyond this second generation of behavioral finance. And you've gone to a third
00:16:43.040 | generation where people are still normal, but that this idea of normal is explicit in describing
00:16:51.120 | life well-being. So here's where you're bringing the idea of well-being into the equation.
00:16:58.480 | My goal, which was not something that I followed exactly, but at least in hindsight, I can see
00:17:06.160 | I'm trying to expand the circle of finance. Cognitive errors still are there, and it makes
00:17:12.720 | sense to avoid them. People view investment with those utilitarian, expressive, and emotional
00:17:19.040 | benefits. But then you ask, what is it all about? And it is about well-being. Money is a way station
00:17:26.960 | for well-being. We need financial well-being for life well-being, but it is not enough. I mean,
00:17:34.160 | everybody knows that, but there is a lot of literature by sociologists and psychologists
00:17:42.160 | and economists about well-being, about life well-being, but it is not known to people in
00:17:48.320 | finance. And so what they did was to say, here are the domains of well-being, and here are some
00:17:56.640 | stories that illustrate those dry academic studies. Just think about society, which is one
00:18:03.520 | of the domains. Right now, half the country is happy and half the country is sad about the
00:18:08.880 | relation. So we should really expand that circle of finance to include all of it.
00:18:14.080 | So you wrote a book. The latest book is called A Wealth of Well-Being, A Holistic Approach to
00:18:21.360 | Behavioral Finance, which penetrates into a different level, the third generation. I spent
00:18:27.760 | a lot of time reading it. I have to say there was a few times in here when I'm reading it, I'm saying,
00:18:33.760 | oh, you can't say that. You're not allowed to say that.
00:18:37.040 | It's true, but you're not allowed to say it. That's how a lot of this book was, and we're
00:18:44.480 | going to go through some of those things. And so just for the listeners' sake, you may not agree
00:18:48.880 | with everything that Mayer brings out in his book, but you have to agree that it's true for
00:18:54.400 | a lot of people. It may not be true about you, but it's true for a lot of people.
00:18:59.200 | I really bet you scratch your head. It's like, wow, he's actually saying things that are taboo.
00:19:04.000 | You're not supposed to talk about. It's all part of this idea of well-being. And you talk about
00:19:10.640 | well-being as though there were three types of well-being. There's experienced well-being,
00:19:18.880 | evaluative well-being, and then meaning. Experienced well-being, what is that?
00:19:26.640 | So experienced well-being is the emotions that you have at the moment. Are you happy? Are you sad?
00:19:33.440 | Are you bored? Are you frustrated? Now, it is important, even in the long term or in the
00:19:40.320 | aggregate, because if you're anxious because your income is low and you know that the car
00:19:48.240 | is on its last legs, and if it breaks down, you will not be able to get to work, and then you're
00:19:55.200 | going to lose your job, this really gets anxiety not just at one moment. It really is a continuous
00:20:04.960 | feeling. The same with sadness. And occasional sadness is okay, but sadness that is continuous
00:20:14.160 | becomes depression, becomes really something that is much more serious. And so this is
00:20:21.360 | experienced well-being. Evaluative well-being is about a question that is as simple as how would
00:20:29.600 | you rank your own life if you were to rank it from a zero, which is the worst possible life,
00:20:37.440 | to 10, which is the best possible life? Are you a six, a seven, an eight, or a nine? And for that,
00:20:44.880 | you have to think not just about how you feel at this very moment, but where are you? How are you
00:20:50.800 | doing relative to 10 years ago? How are you doing relative to your comparison group, your co-workers,
00:20:58.080 | and so on? And meaning kind of goes beyond that to answer a question such as do you agree when I say
00:21:07.440 | my life has meaning? I know why I was put on this earth. That really is also part of that sense of
00:21:16.640 | well-being. And so you can see that they are not the same and there are sometimes conflicts between
00:21:24.720 | them. You can enjoy experience well-being when you are young using drugs, having many women,
00:21:33.680 | but later on you find yourself old and with no one to help you. So you can enjoy one kind
00:21:42.240 | and then suffer in the other. - So we're going to go through the book. I mean, it's full of
00:21:47.600 | information. You have to go back and sometimes reread things a few times to really comprehend.
00:21:55.600 | This was way beyond a happiness book. I mean, there are a lot of happiness books out there.
00:21:59.280 | It kind of incorporates happiness, but it's much deeper than that. And it has to do with finance
00:22:05.120 | and how money intertwines with different well-beings that we're trying to achieve.
00:22:13.360 | We start out at the beginning of the book talking about four kinds of capital. There's financial,
00:22:21.280 | social, cultural, and personal. So we know what financial capital is, but when you talk about
00:22:27.760 | capital in the name of social, cultural, and personal, how do you use the word capital when
00:22:33.440 | you're talking about cultural capital, and social capital, and personal capital?
00:22:38.720 | - So financial capital is straightforward. We're talking about that, and this is known to all the
00:22:44.240 | people who know their finances. And it is the notion that the more money you have in income or
00:22:51.440 | wealth, the higher your well-being, as simple as that. Social capital really has to do with the
00:22:58.960 | circle of friends. Do you have many close friends? Do you have some close friends, but many
00:23:05.680 | who are distant, but still will help you? So for example, that classmate from college
00:23:13.680 | may be a CEO right now, and you have lost your job. It is okay for you to call and say, "Hey,
00:23:22.000 | buddy, I've lost your job. Do you have any leads for me?" So you can see that in different strata
00:23:30.320 | of society, there are different kinds of social capital. Among the poor, it might be, "Hey, I need
00:23:38.240 | to go to the doctor. I cannot afford an Uber. Can you give me a ride?" These are the kinds of things
00:23:44.960 | that you have. And so people in the working class usually have a narrower set of friends, but kind
00:23:53.280 | of deeper friends. The elite have some close friends, but they have many of those contacts
00:24:01.120 | that can help them in many ways. Cultural capital has to do with just knowing what is okay and what
00:24:09.600 | is not. It is about knowing what is okay to say and what is not. Coming from Israel with one culture
00:24:18.560 | to the United States with another, of course, I was on my toes, knowing that I'm in a different
00:24:24.720 | culture. Can you speak about baseball? Can you speak about the opera? All of these are part of
00:24:31.760 | cultural capital. And then personal capital, you can think about character. Are you conscientious?
00:24:38.800 | Do you find saving easy or difficult? Are you tall? Are you handsome? People who are tall,
00:24:47.280 | men who are tall and handsome, find it advantageous at work situations, at interviews,
00:24:53.840 | and with women. The more of that personal capital, and it has to do with gender, it has to do with
00:24:59.520 | race, with all the other things that make you a person or nationality. Just being an American
00:25:07.920 | is advantageous relative to many other countries. You are going to visit a country in Europe,
00:25:15.040 | you don't need a visa, whereas somebody from another country might need it.
00:25:20.240 | It's interesting that we talk about capital in that way, outside of money. Talk about it
00:25:26.320 | with your friends, social capital and what they can help you with, cultural capital. I was in
00:25:32.240 | the Marine Corps, so immediately when I talked to somebody who's in the Marine Corps, we have
00:25:35.680 | a connection. I don't have to have known them, they may not have been a friend, but
00:25:39.120 | we were associated in that way. And then personal, nationality and all that. But these are all
00:25:45.440 | actually, when you think about it, it is capital in a way. And since you're a behavioral finance
00:25:52.880 | person, it's not just about money, but it's about total human capital. And so in your ideas of
00:26:00.080 | investing, sometimes we do things that may not benefit us financially, but it does fall under
00:26:06.160 | cultural or social or personal, where it does make sense to do them that way. Is that the idea?
00:26:14.320 | Yeah, that is the general idea. And you can see also when you say risk, you say,
00:26:21.360 | what is your risk tolerance? And so immediately people think about those investment questionnaires
00:26:28.560 | and where are we going to put you on the very insufficient frontier. But in fact,
00:26:33.520 | the risk that can bring the most rewards are career risks. That is, for me, it was coming
00:26:42.480 | from Israel to study for the PhD, not knowing what comes next. Will I complete my PhD? Will
00:26:50.240 | I get the job? I took that risk and it worked well. And now I invest in a kind of modest risk,
00:26:56.880 | just well-diversified portfolio of index fund. And so we have to, again, broaden the notion of
00:27:04.080 | what returns are and what risk is. So returns, you have utilitarian returns and expressive
00:27:12.160 | returns and emotional returns, and you have the kinds of risks that I just talked about.
00:27:18.320 | And it applies to many domains. I like to say, the biggest risks in life are not in the stock
00:27:24.720 | market. If you want real risk, get married. If you want real risk, have children. People laugh
00:27:32.640 | because the point is really obvious. And yet when we talk about risk, somehow we shun that to the
00:27:39.600 | side instead of realizing that that really belongs in the center. You know, quite frankly, I didn't
00:27:46.880 | think about how finance gets expanded into all these other areas, but you explain it all in
00:27:52.240 | your book. And so financial capital has an interesting spot. Not only is it important for
00:27:57.280 | income, wealth, it feeds into these other types of capital. You can afford an education if you have
00:28:06.560 | money. You can afford to live in a neighborhood that has better schools. As you said, you could
00:28:13.840 | afford to pay people to cut your lawn rather than you having to cut your own lawn. The interesting
00:28:18.640 | thing though about financial capital, and you do bring this out quite a bit, is there are negatives
00:28:23.680 | to this. There's a downside to trying to get more money and growing your wealth. And it has to do
00:28:29.840 | with keeping up with the Jones. It actually creates stress. It takes away from well-being.
00:28:36.480 | So explain that whole concept. So we are interested in our own income and wealth,
00:28:42.800 | how we are doing personally and how are we doing relative to our comparison group. Neighbors,
00:28:49.760 | if you really associate with them, but not if you don't associate with them. But of course,
00:28:54.320 | co-workers you must associate with and family you must associate with. And so they become
00:29:00.240 | your comparison group. And people care about how they are doing, but they also care and sometimes
00:29:09.920 | even more about how they are doing relative to their comparison group. If Mr. Jones got a $100,000
00:29:18.480 | bonus and Mr. James got a $200,000, the first feels miserable because he got just $100,000.
00:29:28.320 | And we say, "Hey, buddy, $100,000 is pretty good money." But their aspiration or their comparison
00:29:36.720 | is with somebody else and they think that they deserve that or that is what they aspire.
00:29:43.680 | And meanwhile, while they don't have it, they feel frustrated, they feel sad and so on. In the book,
00:29:50.560 | I tell about studies of very wealthy families in New York and Manhattan. So here's a woman whose
00:30:01.600 | family income is $2 million a year and her wealth is many times that. You would think that she is in
00:30:10.720 | seven heaven, but she says, "I think that we are about average because we know so many people who
00:30:18.400 | have chauffeurs and private planes." And I look at it and you say, "Whoa." Just being upgraded to
00:30:27.440 | business class is a big deal to me. I speak with a lot of people who live in California and work in
00:30:36.160 | the tech industry and their net worth's in their early 40s or sometimes 5, 6, 7 million and they
00:30:44.160 | own a home worth 2 million and they feel poor relative to the people around them. And I said,
00:30:50.640 | "If you were in any other place except where you are, you'd be wealthy."
00:30:54.800 | The thing is that as we age, the nice thing about aging, you learn to just shrug and say,
00:31:02.880 | "You know, so Joe has more money than me. Big deal." Really knowing when enough is one of bogus.
00:31:10.880 | That is true. And as you age, it is easier to do that. When you are young, it is good
00:31:19.280 | that your aspirations exceed your situation. That is why you strive to get good grades. This is why
00:31:28.080 | you strive to rise at work. But when you are getting to be beyond middle age, all of those
00:31:35.760 | things, if you are lucky, you stop searching for more money. It is something that I think that you
00:31:42.320 | acquire as you age more. At least I know I have, because I know you have used yourself as an
00:31:48.560 | example here. I think so. I think that competitive spirit of earlier years where it was really
00:31:57.200 | make you perhaps even mad that somebody else won a lottery or somebody else got a promotion.
00:32:04.720 | Now you say, "Good for him." You say, "I am doing just fine." Be happy with what you have.
00:32:12.560 | You did point this out in your book, that as people accumulate a lot of wealth, their other
00:32:18.800 | spheres go down. In other words, instead of relying on family to do things for you,
00:32:27.200 | you can now go out and buy that. Instead of family helping you raise your children, well,
00:32:33.760 | you can just take them to daycare. It narrows your other types of well-being that you have
00:32:40.800 | around family, social. Well, yes. You can see that. When I got married, I was 22. Now that my
00:32:51.280 | bride was 21. My parents and Nava's parents got together to decide how much each pair of
00:33:01.680 | parents is going to contribute to the young couple to get them going, to get a down payment
00:33:07.760 | on a house. Well, it was not easy to get bank loans at that time for things like that, and
00:33:15.920 | credit cards really did not exist. My parents had a bit more than Nava's parents, but Nava's parents
00:33:23.120 | borrowed some money because they wanted to match what my parents offered. They borrowed some of
00:33:28.960 | that money from relatives, zero interest, and they paid it back when they could. For that,
00:33:35.360 | you have to have social capital that is more than I'll just charge it on my car.
00:33:42.560 | You can see that if I need to go someplace and my car is broken, well, I just order an Uber,
00:33:49.600 | but somebody who has less money finds Uber pretty expensive. They're going to wait until
00:33:56.080 | their neighbor is going in the same direction and they'll get a ride from that person. Well,
00:34:02.400 | if you're going to do that, then you better maintain good relations with that neighbor.
00:34:06.560 | Exactly.
00:34:08.340 | You can see how those things that have to do with money and status affect things that have to do
00:34:15.280 | with, say, friendship. What do you do if you are a young person and a good friend from college
00:34:22.400 | is now getting married and she's going to have her wedding in Hawaii and she invites you? Well,
00:34:28.800 | you might not have the money for airfare and a hotel in addition to a gift.
00:34:33.760 | Some brides accept it and grooms accept it, and some see that as betrayal of friendship.
00:34:41.120 | So you can see how money, even when it comes to friendship, can create those kinds of frictions.
00:34:48.000 | The next part that you talk about is saving and spending. You talk about a life balance
00:34:52.320 | between spending now and saving, yet you constantly say in the book that it is really
00:34:59.280 | hard to find this balance because it requires a whole set of tools, mental accounting, self-control,
00:35:08.560 | and that is very hard. A lot of people say, "Just find a balance in life, Mir, and you'll be happy.
00:35:13.360 | Everything will be good." But what you're saying is, hey, finding a balance is not easy.
00:35:17.760 | It is not easy, and it is good that we have some institutional arrangements that make it a bit
00:35:24.000 | easier. God knows, just imagine that we didn't have Social Security. Think about the people who
00:35:29.200 | say, "Just give me my Social Security money and I'll invest it the way I want. I'll do better
00:35:35.600 | than the bureaucracy." Well, suppose that you put it in Bitcoin and it goes down. Now you are living
00:35:41.680 | in the street. What then? And so it is good that we have the government do Social Security. It's
00:35:47.200 | good that corporations offer 401(k). Finding the balance is indeed difficult, and many times we
00:35:56.000 | make mistakes in our early years by spending too much. And in our later years, and that is really
00:36:02.480 | one that strikes me, people find it difficult to spend. People have plenty of wealth,
00:36:11.440 | but they have gotten used to the notion that saving is not just for the future. Saving makes
00:36:18.480 | them feel good now. Saving makes them feel virtuous. When I wrote about it some years ago
00:36:25.200 | in the Wall Street Journal, I got so many touching responses of people telling me,
00:36:30.960 | "One, you are describing me. Second, now that I read that, I went out and I bought myself some
00:36:38.320 | fancy golf clubs or hi-fi speakers or whatever it is, knowing that I can afford it."
00:36:46.400 | You wrote, "If it makes you happy, if it truly makes you happy, you should
00:36:50.320 | buy it as long as you can afford it." I do want to say one thing, though. Again,
00:36:54.800 | this is controversial. You are not a big fan of the FIRE movement,
00:36:58.800 | Financial Independence Retire Early. You say, "No, they're in a way pushing the wrong idea."
00:37:05.680 | Well, this idea of retirement as nirvana sounds really ridiculous to me. I'm 77 and I'm still
00:37:15.280 | working. Do I have to? No. Financially, I can retire, but teaching and scholarship is my
00:37:24.240 | vocation. It provides meaning to my life that I will not get just from having leisure. It really
00:37:33.440 | makes no sense to divide life into those two parts. One, you work like a horse with overtime,
00:37:42.320 | with God knows what else, spend close to nothing, and then you have the riches of free time forever.
00:37:51.200 | It does not work. More than that, it really is quite risky because you don't know what will
00:37:56.640 | happen. You retire at 40. You think that you have a million dollars or two or three and that is
00:38:04.240 | going to last you, but the market is not cooperating and so on. You might find yourself in a situation
00:38:11.120 | that is really hard. Balance is that. Just be reasonable. You don't have to work yourself to
00:38:18.640 | death. There is such a thing as family and leisure and all of that, but don't divide your life into
00:38:25.840 | those two compartments. Remember that retirement can be pretty boring. You also talk a lot about
00:38:32.560 | overdoing it where you can become a miser. Becoming a miser is not good. It actually
00:38:40.160 | lowers your well-being. Even though you have more money, more wealth, it actually lowers
00:38:45.760 | your well-being. That's what I found from this letter. When you give permission to spend and
00:38:50.720 | you say, "Hey, you can spend without trouble," it really is going to enhance your well-being.
00:38:59.360 | If you don't want to spend it on yourself, how about spending it on your kids, on your grandkids,
00:39:04.960 | on the community if you have this extra money? There are people who are poor in your
00:39:11.040 | neighborhood close or far. Won't you get some higher well-being if instead of being the richest
00:39:17.920 | man in the cemetery, you get to share your wealth while you're alive? You can say in a way that
00:39:24.960 | they are self-explanatory, they are common sense, but many people don't have that common sense.
00:39:32.400 | When I had an example in one of my articles in The Wall Street Journal about buying lattes at
00:39:39.040 | Starbucks, and yes, of course, if you save it and you invest it, you're going to have so much more
00:39:45.600 | when you're 65. I say, "Well, you spend that same amount on diapers for your baby. Surely,
00:39:52.400 | you're not going to have your baby at 65." There are some things where you have to ask yourself,
00:40:00.560 | "How much is it worth now? How much will it be later?" I'm not suggesting that people spend a
00:40:07.280 | lot of time thinking about it, but you have to develop something like an intuition about it that
00:40:13.360 | is going to guide you right. My mom would say, "Spend money, but don't waste it."
00:40:19.600 | Yeah, and this is all into the realm of well-being, how we feel, who we are, and being a miser where
00:40:27.360 | you never spend money and you don't give money to your children who need it because you don't
00:40:32.640 | want to spoil them. I hear that all the time. It's like, "Yeah, I don't see how if your children are
00:40:37.760 | in their mid-30s and they're, say, they're married, struggling at work, and maybe not having
00:40:43.840 | kids yet because they need to work, and yet people still won't help their kids. They say,
00:40:51.520 | "Oh, well, I don't want to ruin them." It's an interesting mindset that some parents have.
00:40:55.520 | I think it really is part of cultural capital. As I said, that is in Israel,
00:41:03.680 | my parents and Nava's parents gave us money when we needed it with a warm hand.
00:41:09.680 | How people grow to be reasonable or spend for it, we don't really precisely know.
00:41:18.960 | There's a chapter you have on investing, and I think we're in line with the Boglehead's idea
00:41:23.680 | that don't try to think that just because you have a PhD in molecular biology that you can
00:41:31.360 | go out and pick stocks. You just use index funds. You have your own three-fund portfolio.
00:41:38.320 | We have something in the Boglehead's called the three-fund portfolio. Well, you have your
00:41:41.360 | own three-fund portfolio, which is a world equity fund, a bond market index fund, total bond market
00:41:48.960 | index fund, and a money market fund, which is really a simple portfolio. We actually call that
00:41:54.400 | a two-fund portfolio because we leave the money market emergency money out. But it's interesting
00:41:59.520 | that that's the same concept that you came to in all of your work.
00:42:02.960 | Yeah. Keep it simple, stupid. It's still a good banter for investments. The total stock market
00:42:12.240 | fund has more than 3,000 stocks. If you ask me what are their names, I might know two or three
00:42:20.320 | dozen. Do I know their financials? Of course not. I just buy a diversified portfolio, and I assume
00:42:28.720 | that eventually it is going to do well. I have to really get out of the minds of my students
00:42:38.400 | that doing analysis of stocks is going to get them extra. I always ask, who is the idiot on
00:42:46.240 | the other side of the trade? As much as you know, being an engineer, working in biotechnology,
00:42:53.760 | there are people who, one, have inside information. Even if they don't have inside information,
00:42:59.440 | they know this company and industry inside out. This is their day job. Why do you think that
00:43:05.920 | you're going to be able to beat them? Whenever I feel like trading, I ask myself this question,
00:43:11.680 | and then I sit tight. One more thing about investing before we move on,
00:43:16.080 | because I don't want to dwell on investing that much. I want to get to all these other things,
00:43:19.120 | is that you talk about asset allocation. As you get older and you realize you have more money than
00:43:26.720 | you need, that this idea of reducing your exposure to equity may not be what you want to do, because
00:43:35.200 | you have more money than you're going to need. You're going to be now saving for your children or
00:43:42.960 | charity. Therefore, maintaining that higher equity allocation gives you satisfaction,
00:43:50.480 | gives you more well-being. It makes a lot of sense. I like to say that you want two things
00:43:57.120 | in life. One is not to be poor, and the other is to be rich. Roughly speaking, you can say that
00:44:04.000 | bonds are for not being poor, and stocks are for being rich. If you have enough such that you ask
00:44:12.240 | yourself, what if the stock market goes down by 50% or 60% or 70%, will you still be okay?
00:44:20.240 | The answer is yes. Then you can have a portfolio that is still allocated mostly to stocks and then
00:44:28.160 | leave it again for family, for charity, for all good things. Now we're going to get into some
00:44:34.160 | really interesting stuff. We went through the finance stuff, the saving, investing, and financial.
00:44:40.000 | Now we're going to get into some parts of the book that, wow, can you really say that? It has
00:44:45.920 | to do with dating and marriage and widowhood and divorce, parents, children, elderly parents,
00:44:53.360 | grandparents, siblings, all the family stuff. We're going to start out with dating and marriage.
00:44:58.240 | You find that there is a strong link between marriage and well-being. We could all agree on
00:45:05.120 | that, but I want to get to the controversial stuff. Here's what you said. Marriage enhances
00:45:11.600 | well-being more for men than women because women have the household chores to do,
00:45:20.080 | and they have childbearing duties while men benefit from the social support of women.
00:45:27.200 | You're not supposed to say this, Mayor, that we get more out of it in a way
00:45:34.160 | than women do. Our well-being, men's well-being, are benefited more than women's well-being
00:45:40.800 | from marriage. Yeah. Well, I think some of it has to do with housework, and even in
00:45:46.880 | couples that profess equality, that tends to fall on women more than men. But also,
00:45:55.360 | perhaps even more important, women have more friends, more social capital than men.
00:46:02.960 | When women are widowed, they usually have some circle of friends that is going to be there
00:46:09.760 | to support them. When men find themselves in that situation, once their wife dies,
00:46:17.520 | they realize that the only social contact they had was through their wives, and now they feel
00:46:24.880 | entirely lost. You can see how that social capital really matters and why it is important for men to
00:46:35.600 | develop friendships that are reasonably deep, such that you find yourself in a situation where you're
00:46:43.520 | not entirely alone. I tell a story about a man who lost his wife, and he was reluctant to accept
00:46:51.920 | invitations to go to dinner with friends who were in his situation. Eventually, he did, and now he
00:46:59.280 | is kind of in a community of people like him. They have dinner together, and they can lean on each
00:47:06.480 | other, if not financially, surely emotionally. I just think this is a great example of social
00:47:12.560 | capital, because it's true. I see it. I live in an over-55 community, and the whole purpose of the
00:47:18.640 | over-55 community is sort of to bring people together. Men can go play golf or play pickleball
00:47:25.200 | or whatever, and they develop their own groups, their own social groups. I think it is helpful
00:47:31.040 | when somebody in our group's wife passes away. They have the social network in these over-55
00:47:38.400 | communities that you may not have in other places. When I was reading that, it just became very clear
00:47:42.960 | to me that, "Gee, I'm living in a place like this, where we're kind of practicing that."
00:47:47.200 | But let me move on to divorce. Sometimes things don't work out. What you say is that a lot of
00:47:55.360 | times, divorce occurs because there wasn't well-being before people got married. In other
00:48:01.600 | words, marriage doesn't solve that. If your well-being is low before you get married,
00:48:06.960 | the higher probability that you're going to get divorced. Can you explain how all that works?
00:48:11.360 | Yeah. People who have higher well-being are more likely to attract a mate. They're more optimistic,
00:48:19.040 | for example. They smile more. You see that in marriage. Now, of course, there are going to be
00:48:25.120 | bumps in every marriage, but being dour and sour is not really a good recipe. But it is important
00:48:33.920 | to know that sometimes it is two good people, two people who can enjoy high well-being. They're just
00:48:41.600 | not matched right. So divorce, even with kids, might be a better solution than just living there
00:48:51.280 | together for the sake of the kids. The kids get the point. In many cases, if it was obvious that
00:49:00.000 | parents don't get along when they divorce, kids, in fact, are relieved that they don't have to
00:49:06.640 | witness that stress every day and they can go to the home of mother and a home of father and have
00:49:14.800 | a better time than when they are together. And so there are really many stories and they go in
00:49:20.960 | different directions and people have different views as to what to do. For some people, it is
00:49:27.760 | you're married, you have kids, you better stay together if they are minor. Other people say,
00:49:34.240 | no, it just does not make sense for us. We can go our separate ways, take care of our kids,
00:49:43.040 | both financially and emotionally, and go on with our lives. And so I think that what will happen
00:49:50.480 | to readers of the book is that they're going to see themselves in some of the stories and some of
00:49:56.720 | the stories will strike them as being strange, but that's good because it kind of prompts thinking
00:50:02.560 | and you know that you're not alone. And perhaps once you reflect on it, I believe that people
00:50:09.440 | can change, you know, people can improve their well-being. That's exactly what happened to me
00:50:15.040 | as I was reading through the book. There were some things that just turned me the wrong way. I said,
00:50:19.680 | I don't believe that. That's not what I would do. But then there were some things, oh, that's me,
00:50:24.400 | you know. And what you do in the book though is you say, you know, it's not like I'm right and
00:50:29.520 | that other person is wrong. That's not what it is. What enhances my well-being and what enhances that
00:50:36.240 | other person's well-being? And what might enhance somebody else's well-being can be completely
00:50:40.000 | different than what enhances my well-being, but we try to keep everybody within our own
00:50:45.200 | belief system. And the book really opens that up in many different ways. So it's much more than a
00:50:51.920 | finance book, but it does all relate to finance. As you were saying, you know, if you have one
00:50:58.960 | person in a relationship who's a spendthrift or worse, they hide spending and hide debt from the
00:51:05.280 | other spouse. I mean, this is going to eventually blow up. So really interesting observations that
00:51:11.920 | you put way beyond basic behavioral finance that we'd read about. You know, we have a lot of
00:51:17.040 | parental advice in the book. A lot of it has to do with what we call helicopter parent, kind of the
00:51:22.000 | phrase. They want their children to be involved in all these things and don't realize that that
00:51:26.640 | actually takes away from the child's well-being. You wrote that they feel much more stressed with
00:51:32.160 | the extracurricular activities that they're involved in than they do just with their school
00:51:37.280 | work. And how trying to help your child can actually be hurting your child because you're
00:51:43.600 | putting too much stress on them. I mean, that portion wasn't about finance, but I found it all
00:51:47.360 | very interesting and it all does fall together with your well-being, your child's well-being,
00:51:52.880 | your family well-being. And you said this portfolio of well-beings, which of course
00:51:57.040 | includes your children's well-being. Many things, many things that surprised me that I found
00:52:03.280 | fascinating. And I think that readers will find them fascinating as well. That is why is it that
00:52:09.920 | there is this big fascination now with getting the kids into an Ivy League college. I've lived in
00:52:17.360 | this country for 50 years. It was not like that. I studied at Columbia, but it was not because of
00:52:25.200 | its prestige. It's because they offered me the financial aid that was necessary. So what is
00:52:33.520 | going on? Economists try to figure it out. Sociologists try to figure it out. I kind of
00:52:40.480 | bring it together to make sense of it. And perhaps people can get kind of advice from that. I have
00:52:47.680 | many neighbors. It seems like all my neighbors are from India, highly educated people, many
00:52:54.400 | of them engineers. And they come from a culture where graduating from a top university is a big
00:53:02.240 | thing. In the US, it is a thing. And it is big, but it's not as big. You can do well even if you
00:53:11.920 | graduate from a second or third level college. Just understanding that and presenting it. And
00:53:18.880 | I talk about it with those neighbors. And they begin to understand how this country is different.
00:53:27.280 | >> You talk about how the US, it's where you go to college that matters, whereas in Canada,
00:53:32.800 | it's what you study in college that matters. A little different culture.
00:53:37.440 | >> Exactly. So in some cultures, I know a couple of colleague of mine was originally from Korea,
00:53:45.200 | and his wife is from Sweden. In Korea, it is really very important where you graduate from.
00:53:52.640 | In Sweden, it's not. When you put those cultures side by side, you say,
00:53:57.040 | "Why are they different?" And make some judgment as to which of them is better,
00:54:02.480 | which of them enhances well-being better than the other.
00:54:05.600 | >> It doesn't mean that you're going to have more well-being as a student graduating from
00:54:10.880 | one of those prestigious universities and then going and getting a job, that that job is going
00:54:17.040 | to give you any more satisfaction or any more well-being than if you didn't take that path.
00:54:20.880 | And that's what I found very interesting about a lot of the research that you're doing.
00:54:25.120 | Many of you get into elderly parents as well in the sandwich generation.
00:54:30.160 | And that grandparents, because I am one, I have eight grandkids,
00:54:32.960 | love being a grandparent, but to have the grandchildren come and live with us and for
00:54:38.240 | us to raise them, it actually probably for us would diminish our well-being as opposed to just
00:54:44.960 | seeing the grandkids and taking care of them once in a while, which would increase our well-being.
00:54:48.160 | But then you have a situation with money where maybe you have a divorced daughter who ends up
00:54:55.680 | moving in with you with the child. The divorced daughter has to go to work and you end up taking
00:54:59.680 | care of the child. It does tie into money in many ways. It would diminish our well-being,
00:55:04.960 | but it's not something we would admit. You're not going to say to your daughter,
00:55:09.520 | "Well, yeah, I'll take care of your kid and take care of you, but I don't want to."
00:55:14.000 | It's true, but people normally wouldn't say it.
00:55:18.480 | I wouldn't say it to my daughter. Yeah, I would do it, and I would at least pretend that I'm
00:55:24.320 | cheerful about it. That is important. But of course, it does make a difference. Having a
00:55:32.160 | disabled child reduces the well-being of their parents. These are facts. And sometimes when you
00:55:38.880 | say that to people, they feel like you are hurting their feelings.
00:55:44.320 | You're judging them.
00:55:45.200 | Judging them. Except when I say, "Well, I have a disabled daughter, so I'm speaking from where you
00:55:52.160 | are. I'm not trying to be condescending to you. To the contrary, I'm trying to be empathetic to you
00:55:57.760 | and say, 'I know how you feel. I am in your shoes, and here's how we manage.' That is,
00:56:05.600 | we take from domains that are plentiful, like having another daughter who loves her older
00:56:12.960 | sister and supports her, and having that increase the well-being of all of us.
00:56:19.120 | You have a chapter on health. People who have more money generally have more health because
00:56:24.800 | they can afford it. They can afford to go to a doctor if they're not feeling well. They can
00:56:29.280 | afford to spend the time playing pickleball rather than working three jobs. They can afford
00:56:34.880 | a personal trainer, so their health is better. Money and health are related, and it's all related
00:56:41.840 | to well-being. Of course, you have a long chapter on work, and this is a really interesting chapter.
00:56:47.760 | If you think that getting the next promotion is going to make you feel better, you should
00:56:52.880 | read this chapter because it may be the opposite. It's such a fascinating book to get into religion
00:56:59.520 | and society, nationalities, culture, just things that we could talk about for days.
00:57:05.280 | I look at well-being as a portfolio, a portfolio of those domains. There is money, of course,
00:57:12.240 | at the base of it, but there is family and work and religion and society and all of that,
00:57:19.200 | and people allocate more of their well-being to one of the others, and some domains have
00:57:26.480 | bumps in them, a kid that is disabled or a kid that does not do what parents would have hoped,
00:57:33.920 | a work that is not satisfying, and so on. I think that the art of life, well-being,
00:57:39.760 | is the art of the portfolio. You know that you're going to have some stocks that are going to be
00:57:46.080 | dogs, but that's why you diversify because you don't know it ahead of time, and the same applies
00:57:52.880 | here. These are the things that come out of my life, and when I speak to others,
00:57:58.960 | their experiences are similar. And I know we've run out of time,
00:58:03.280 | but I want to thank you so much for being a guest on "Bogleheads on Investing" today.
00:58:08.320 | Well, thank you, Rick, and I hope that people who listen will enjoy it.
00:58:13.280 | This concludes this episode of "Bogleheads on Investing." Join us each month as we interview
00:58:19.360 | a new guest on a new topic. In the meantime, visit boglecenter.net, bogleheads.org, the
00:58:25.520 | Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook,
00:58:30.640 | Bogleheads Reddit. Join one of your local Bogleheads chapters and get others to join.
00:58:36.560 | Thanks for listening.
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