Transcription
[Music] [Applause] [Music] [Applause] welcome everyone to Bogleheads on Investing episode number 76. Today, our special guest is Meir Statman, a professor of Finance at Santa Clara University, who focuses on behavioral finance and attempts to understand how investors make decisions. He's the author of two books, *What Investors Really Want*, and the recently released *A Wealth of Well-Being*.
[Music] [Applause] [Music]
Hi everyone, my name is Rick Ferry, and I am the host of Bogleheads on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a nonprofit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net, where you will find a treasure trove of information, including transcripts of these podcasts.
Today, our special guest is Professor Meir Statman. He is a professor of Finance at Santa Clara University, and his research focuses on behavioral finance, as he attempts to understand how investors make financial decisions and how these decisions are reflected in the financial markets. Professor Statman's research has been published in numerous academic and professional journals and has won many awards. His first book, published in 2011, was titled *What Investors Really Want*, and his recent book, *A Wealth of Well-Being: A Holistic Approach to Behavioral Finance*, digs into the third generation of behavioral finance, which widens the lens and brings in many other aspects of life when making financial decisions that may not lead to more money, but it leads us to what Professor Statman calls a portfolio of well-being.
So, with no further ado, let me introduce Professor Meir Statman. Welcome to the Bogleheads on Investing podcast.
Well, I'm delighted to be with you, Rick. I've been following your work for, uh, many years. You've written a couple of fine books, uh, the latest one will be the topic of our discussion in a few minutes. But before we get to that, you have a very interesting upbringing. And before I even get to you, could you tell me about your parents?
Well, my parents were teenagers in Poland in 1939, uh, when the Nazis invaded. And they were on the eastern part of Poland, and so refugees, Jewish refugees that were escaping the atrocities would stop by. And so they, they understood that they better go, or bad things will happen. And so they crossed the river, the River Bug, traveled, lived in, uh, Siberia, and then down to Uzbekistan, which is where they met and got married. And I was born in a displaced person's camp, which is a polite word for a refugee camp, in 1947. And we came to Israel in 1949. And the funny thing there was so many families who were identically situated that it seems like it's just a normal thing.
Your upbringing, uh, was in Israel when the country was being formed.
Indeed. And of course, when you are a child, you know, just one environment, and that is your particular neighborhood and your particular country. And so in the 1950s, uh, as I was growing up, there was rationing. Food was rationed, so you had to have a coupon, uh, in addition to money. Uh, and, and so my dad was managing grocery stores, uh, and, and so we had a bit of better access to to food. It is a, a childhood like, like any childhood, it has its own peculiarities.
So then you ended up going to Hebrew University and getting your undergraduate degree.
Indeed. Yeah, my undergraduate degree, and then I continued immediately, in fact, combined it with an MBA. So that was the late '60s. And I was in the building that housed the economics department, uh, and so I studied economics, statistics, and then finance. And in the building right next to me was the psychology department. And, and I would go there from time to time to earn pocket money by participating in experiments. Uh, and, and I just found out later that Kahneman and Tversky were doing their revolutionary work right then, but I never heard their names from my professors. I had no idea what they were doing, which tells you about about how standard economics and standard finance, in particular, were at the time: small, very small, and very narrow, and, and, and really kind of proud of being narrow.
So then you decided to come here to the US and go to Columbia University to get your PhD.
That is right. Yeah. I had, I had a boring job as a financial analyst, and so I took that leap. But by then, I was married. In fact, we were expecting a baby. But I never really thought about it in terms of risk. I just felt compelled to move on.
You've had a wonderful career. Before we get to your books, I want to talk about the generations of behavioral finance. You, you talk about the beginning of it all, uh, being standard finance, which, where, where this idea that, well, people were rational, and everything they did were very computer-like, immune to emotion, everybody did math perfectly, and no one made mistakes. This was the thinking of standard finance before we actually get into the first generation of behavioral finance. So talk about that way of thinking.
At the beginning of the 1980s, I became familiar with the work of Kahneman and Tversky. My colleague Hersh Shefrin did some work that had to do with mental accounting and self-control with Dick Thaler. And so we kind of got together. And as we were speaking about self-control and mental accounting, I remembered my experience in New York in 1973-74, soon after we arrived, where, uh, the energy crisis came, and Con Edison, the utility company of New York, had to pay more for the, uh, oil they were buying, and they could not raise their rates fast enough because they were regulated. And so they had to cut the dividend. Then shareholder meeting was really raucous, and some people rushed to the stage trying to do harm to the board. And so later, I got a transcript of that meeting, and it was absolutely fascinating. You know, so Miller-Modigliani, part of rational finance, standard finance, said if you don't get a dividend from the company, you create a homemade dividend by selling a few shares. That did not occur to anyone at the meeting. Why? Because it violates the rule of keeping income separate from capital and don't dip into capital. And selling shares to create those homemade dividends was verboten, because it was dipping into capital. You know, those kinds of experiences, models, I mean, they were just mathematical models. Everybody followed, and everybody said, well, this is the way finance works.
Yeah, but the problem with any science comes when you have theory, and then when you have observations, and they don't match. And so the natural tendency in finance is to dismiss the evidence. My natural tendency is to dismiss the theory.
So, so your evidence there was these people are rushing the stage because they're upset. And this then becomes, in a way, a representation of the first generation of behavioral finance, where you say people are irrational, bumbling behavior, so forth, and cognitive issues, and emotional. And so you call it the first generation of behavioral finance.
That is right. The thing was that we said, here is rational behavior. You should dip into capital. Here is actual behavior. People don't dip into capital. So they're not maximizing wealth. Now, the goal in standard finance is to maximize wealth. The goal described in the first generation of behavioral finance was also to maximize wealth, but saying that people make mistakes because they are irrational. So, for example, they, they don't dip into capital, they trade too much, they think that they know the future because they know the past, and a whole panoply of cognitive errors that I'm sure your listeners and you know very well. Most of the stuff that we hear about, you know, in the media is about this first generation of behavioral finance. We don't really even hear the second generation of it, and then the third generation, which is what your book is about.
So now that we're through all these cognitive errors and emotions and so forth of the first generation of behavioral finance, you talk in your book about the second generation of behavioral finance. And here is where, hey, look, people are irrational. I mean, they are emotional. They are normal. That's how people are. And, uh, there are other reasons why people do what they do with their money besides creating more money out of it. Talk about the movement from the first generation, just an irrationality, to the fact that, no, actually, people are being rational.
Well, people are normal. Normal, normal. That's the right word. Normal. Yeah. The word is normal. Neither rational nor irrational. People are normal. And, and just, just look at, at other products and services that, that is, and ask yourself what it is that people want. Now, watches are are a nice example. A $50 watch by Skagen is going to show you precise time. A $110,000 watch by Patek Philippe will also show you the right time. So why is it that people buy those luxury watches? To say that they are irrational is really too much. It is perfectly normal because I say people care about utilitarian benefits. They show me the right time, yes. Money is good for buying groceries. But they're also expressive and emotional benefits. I am a wealthy man, wealthy enough to afford this, this watch. It is beautiful. Gives me a sense of pride that I can do that. And then I was thinking, why is it that we think about financial securities and financial services as being different from all other products and services? And I said that is really not different. And so the title of that book that I wrote, presenting it, was *What Investors Really Want*.
Exactly. And I just held up your book. This is where this book came from, published in 2011. It came from this idea of the second generation of behavioral finance, where you say, you know, let's talk about what is it that investors really want. Yes, they do want money, but they also want other things.
Yes. Again, it is really important to me. I, I'm using myself as a laboratory, and I, I'm looking at experiences, and they tell me things. So, so I remember speaking, uh, before a presentation in Montreal years ago with an investor, friends of the Hebrew University. And I said something about mutual funds. And he said, "I am into hedge funds." And so what did he just tell me? He told me that he's a wealthy man. He didn't brag, you know, that is not, but he wanted to send a signal to you. He wanted to send the signal, and he did. To me, it's kind of funny, but, but it is really an important observation that people think about securities as they think about watches and restaurants, meals, and all of the other things. And so I said, well, let's look at those other things. You know, people hate regret. So they hold on to their losers because selling a loser, a paper loss, makes this loss real. And now they feel the pain of regret. It makes you a loser.
And exactly. Yeah. How, how was I so stupid to this? Rick Statman. And you know, you have to see that. I mean, I know I am actually taking a lot of risk in the sense that I'm buying index funds that go up and down by many thousands each day, but I'm very sensitive to regret. So when I put money, I get annoyed.
You know, it's interesting that you talk about index funds. Because it, in the sense of, uh, utilitarian, emotional, and expressive. Okay. So, I mean, there is definitely a utilitarian benefit to index funds. You get your fair share of market return, which we know from many, many, many studies, many of them going back decades, that that's better than what most people get when they try to outperform the market by using active management or trying to pick stocks themselves. But it does not provide an expressive benefit. You're going to be the most boring person at a cocktail party by getting up and saying, "Oh yes, I own the total stock market index fund." It is a very utilitarian product, but it's not very emotional. It's not very expressive. Now, it may be expressive to people who really understand investing and say, "Yeah, you're smart to buy index funds." But unless they know that, you know, typical people at the party, you go to, or whatever, not maybe not know that. So, yes, it makes you feel better because of the utilitarian benefit of index funds, but it doesn't give you that emotional and expressive, uh, benefit.
That is right. Now, you actually said it along the way. It actually brings me expressive and emotional benefits knowing that I'm smart, that this is really the right thing to do. And this is what I teach my students. And they come at it from the perspective that you have to analyze the stocks that you are analyzing and so on. And, you know, I, I say always, in every trade, there is an idiot. And if you don't know who it is, you are in trouble. And I use the analogy of tennis that has been used before, but in a different way. I, I say people trade thinking that they are playing tennis against the practice wall. That is easy. And I say, wait a minute, you know, there's a fellow at the other side of the net, and he is, uh, possibly an insider, possibly a professional tennis player. In the analogy, don't do that. Just stand there.
But this is not where it, it ends. You, you have continued with your thinking and continued with your research, and you've gotten to a different level beyond this second generation of behavioral finance, and you've gone to a third generation, where people are still normal, but this idea of, uh, normal is explicit in describing life well-being. So here's where you're bringing the idea of well-being into the equation.
My goal, which was not something that I followed exactly, but at least in hindsight, I can see I'm trying to expand the circle of Anan. Cognitive errors still are there, and it makes sense to avoid them. People view investment with those utilitarian, expressive, and emotional benefits. But then you ask, what is it all about? And it is about well-being. Money is a waste station for well-being. We need financial well-being for life well-being, but it is not enough. I mean, everybody knows that. But there is a lot of literature by sociologists and psychologists and economists about well-being, about life well-being, but it is not known to people in finance. And so what I did was to say, here are the domains of well-being, and here are some stories that illustrate those domains. High academic studies. Just think about society, which is one of the domains, right? Now, half the country is happy, and half the country, the elite. So we should really expand that circle of wellness to include all of it.
So you wrote a book. The latest book is called *A Wealth of Well-Being: A Holistic Approach to Behavioral Finance*, which penetrates into a different level, the third generation. I spent a lot of time reading. I have to say, there were a few times in here when I'm reading it, I'm saying, "Oh, you can't say that. You're not allowed to say that." It's true, but you're not allowed to say it. That's how this, a lot of this book was. And we're going to go through some of those things. And so I, just, just for the listener's sake, you may not agree with everything that Meir brings out in his book, but you have to agree that it's true for a lot of people. It may not be true about you, but it, it's true for a lot of people. And really makes you scratch your head and like, "Wow, he's actually saying things that are taboo. You're not supposed to talk about." It's all part of, uh, this idea of well-being. And, and you talk about well-being as though there were three types of well-being. There's experienced well-being, evaluative well-being, and then meaning. Experienced well-being, what is that?
So experienced well-being is the emotions that you have at the moment. Are you happy? Are you sad? Are you bored? Are you frustrated? Now, it is important even in the long term or in the aggregate, because if you're anxious because your income is low, and you know that the car is on its last legs, and if it breaks down, you will not be able to get to work, and then you're going to lose your job. This really, uh, gets anxiety, not just at one moment. It really is a continuous feeling. The same with sadness. An occasional sadness is is okay, but sadness that is continuous becomes depression, becomes really something that is much more serious. And so this is experienced well-being. Evaluative well-being is about a question that is as simple as, uh, how would you, uh, rank your own life? If you were to rank it from a zero, which is the worst possible life, to 10, which is the best possible life. Are you a six, a seven, an eight, or a nine? Uh, and for that, you have to think not just about how you feel at this very moment, but where are you? How are you doing relative to 10 years ago? How are you doing relative to your comparison group, your co-workers, and so on. And meaning kind of goes beyond that to answer questions such as, "Do you agree when I say my life has meaning? I know why I was put on this Earth." That really is also part of that sense of well-being. And so you can see that they are not the same, and there are, uh, sometimes conflicts between them. You can enjoy experienced well-being when you are young, using drugs, having many women, but later on, you find yourself old and with no one to help you. So you can enjoy one kind and then suffer, uh, in the other.
So we're going to go through the book. I mean, it's full of information. It, it really, you have to go back and sometimes reread things a few times to really comprehend. This was way beyond a happiness book. I mean, there were a lot of happiness books out there. Kind of incorporates happiness, but it's much deeper than that, and it has to do with finance and how money intertwines with, uh, different well-beings that we're, we're trying to, uh, achieve. We start out at the beginning of the book talking about four kinds of capital. There's financial, social, cultural, and personal. So we know what financial capital is. But when you talk about capital in the name of social, cultural, and personal, how do you use the word "capital" when you're talking about cultural capital and, uh, social capital and personal capital?
So financial capital is straightforward. We were talking about that, and it is known to all the people who know their finances, and it is the notion that the more money you have in income or wealth, the higher your well-being, as simple as that. Social capital really has to do with the circle of friends. Do you have many close friends, or do you have some close friends, but many who are distant, but still will help you? So, for example, uh, you know, that classmate from college may be a CEO right now, and you have lost your job. It is okay for you to call and say, "Hey, buddy, I've lost my job. Do you have any leads for me?" Uh, so you can see that in different strata of society, there are different kinds of social capital. Among the poor, it might be, "Hey, I need to go to the doctor. I cannot afford an Uber. Can you give me a ride?" These are the kinds of things that you have. And so people in the working class usually have a narrower set of friends, but kind of deeper friends. The elite have some close friends, but they have many of those contacts that can help them in many ways. Cultural capital has to do with just knowing what is okay and what is not. It is about knowing what is okay to say and what is what is not. You know, coming from Israel with one culture to the United States with another, of course, I was, I was on my toes, you know, knowing that I'm in a different culture. Can you speak about baseball? Can you speak about the opera? All of these are part of cultural capital. And then personal capital, you can think about character. Are you conscientious? You know, do you find saving easy or difficult? Are you tall? Are you handsome? People who are tall men who are tall and handsome find it, in fact, advantageous at work situations, at interviews, and with women. The more of that personal capital, and it has to do with gender, has to do with race, with all the other things that make you a person, or nationality. Just being an American is advantageous relative to many other countries. You are going to visit a country in Europe, you don't need a visa, whereas somebody from another country might need it.
You know, it's interesting that we talk about capital in that way, outside of money. Talk about it with your friends, social capital, and what they can help you with. Cultural capital. I was in the Marine Corps, so immediately when I talked to somebody who's in the Marine Corps, you know, we have a connection. I don't have to have known them. They may not have been a friend, but we were associated in that way. And then, uh, personal, you know, nationality, and all that. But these are all actually, you know, you think about it, it is capital in a way. And since you're a behavioral finance person, it's not just about money, but it's about total human capital. And so in your ideas of investing, sometimes we do things that may not benefit us financially, but it does fall under cultural or social or personal, where it does make sense to do them that way. Is that the idea?
Yeah, that is the general idea. And, and you can see also when you say risk, you know, you say, uh, "What is your risk tolerance?" And so immediately people think about those investment questionnaires and where are we going to put you on the mean-variance frontier. But in fact, the risk that can bring the most rewards are career risks. That is, for me, it was coming from Israel to study for the PhD, not knowing what comes next. Will I complete my PhD? Will I get a job? I took that risk, and it worked well. And now I invest in a kind of modest risk, just a well-diversified portfolio of index funds. And so we have to again broaden the notion of what returns are and what risk is. So returns, you know, you have utilitarian returns, and expressive returns, and emotional returns. And you have the kinds of risk that I just talked about. And it applies to many domains. I like to say, you know, the biggest risks in life are not in the stock market. If you want real risk, get married. Have children. RK. Have children. True. And people laugh because the point is really obvious. And yet, when we talk about risk, somehow we shun that to the side instead of realizing that that really belongs in the center. You know, quite frankly, I, I didn't think about how finance gets expanded into all these other areas, but, but you explain it all in your book. And so financial capital has an interesting spot. Not only is it important for income, wealth, it feeds into these other types of capital. You know, you can afford an education if you have money. You can afford to live in a neighborhood that has better schools. You know, you, as you said, you could afford to pay people to cut your lawn rather than you having to cut your own lawn. The interesting thing though about financial capital, and you do bring this out quite a bit, is there are negatives to this. There's a downside to trying to get more money and growing your wealth, and it has to do with keeping up with the Joneses. Actually creates stress. It takes away from well-being. So explain that whole concept.
So we are, we are interested in our own income and wealth, how we are doing personally, and how we are doing relative to our comparison group. Neighbors, if you really associate with them, but not if you don't associate with them. But of course, co-workers, you must associate with, and family, you must associate with. And so they become your, uh, comparison group. And people care about how they are doing, but they also care, and sometimes even more, about how they are doing relative to their comparison group. If, uh, Mr. Jones got a $100,000 bonus, and Mr. James got a $200,000, the first feels miserable because he got just 100. And we say, "Hey, buddy, you know, $100,000 is pretty good money." But they, their aspiration or their comparison is with somebody else, and they think that they deserve that, or that is what they aspire. And meanwhile, while they don't have it, they feel frustrated, they feel sad, and so on. In the book, I, I tell about studies of very wealthy families in New York, in Manhattan. So here's a woman whose family income is $2 million a year, and her wealth is many times that. You know, you would think that she is in seventh heaven, but she says, "You know, I think that we are about average because we know so many people who have chauffeurs and private planes." And I look at it and you say, "Whoa." Right? You know, just being upgraded to business class is a big deal for me. You know, I speak with a lot of people. I speak with a lot of, uh, people who live in, uh, California and work in the tech industry. And, you know, their net worths in their early 40s are sometimes $5, $6, $7 million, and they own a home worth $2 million, and they feel poor relative to the people around them. And I said, "You know, if you were in any other place except where you are, uh, you'd be wealthy." Thing is, as we age, that nice thing about aging, you learn to just shrug and say, "You know, so Joe has more money than me. Big deal." Really knowing when enough is one of Bogle's is that is that is true. And as you age, it is easier to do that. When you are young, it is good that your aspirations exceed your situation. That is why, you know, you strive to get good grades. This is why you strive to rise at work. But when you are getting to be beyond middle age, all of those things, if you are lucky, you stop searching for more money. It is something that I think that you acquire as you age more, uh, at least I know I have. Because I know you've used yourself as an example here.
I think so. I think that that competitive spirit of earlier years, where where it was really, uh, made you perhaps even mad that somebody else won a lottery or somebody else got a promotion, now you say, "Good for him." You say, "I'm doing just fine." Be happy with what you have. You did point this out in your book that as people accumulate a lot of wealth, their other spheres go down. In other words, instead of relying on family to do things for you, you can now go out and buy that. Instead of a family helping you raise your children, well, you can just take them to daycare. It narrows your other types of well-being that you have around family, social well-being.
Yes. So you can see that, you know, when, when I got married, I was 22, now my bride was 21. And, uh, my parents and Ava's parents got together to decide, uh, how much each pair of parents is going to contribute to the young couple to get them going, to get a down payment on a house. Well, it was not easy to get bank loans at that time for things like that, and, and credit cards really did not exist. And my parents had a bit more than other's parents, but Ava's parents borrowed some money because they wanted to match what my parents offered. They borrowed some of that money from relatives at zero interest, and they paid it back when they could. For that, you have to have social capital that is more than, "I'll just charge it on my card." And so you can see that if I need to go someplace and my car is broken, well, I just order an Uber. But somebody who has less money finds Uber pretty expensive, and so they're going to wait until their neighbor is going in the same direction, and they'll get a ride from that person. Well, if you're going to do that, then you better maintain good relations with that neighbor, right?
Exactly. You can see how those things that have to do with money and status affect things that have to do with, say, friendship. What do you do if you are a young person, and a good friend from college is now getting married, and she is going to have her wedding in Hawaii, and she invites? Well, you might not have the money for airfare or a hotel in addition to a gift. Some brides accept it, and grooms accept it, and some see that as betrayal of friendship. So you can see how money, even when it comes to friendship, can create those kinds of frictions.
The next part, uh, that you talk about is saving and spending. You talk about a life balance between spending now and saving. Yet, you constantly say in the book that it is really hard to find this balance because it requires a whole set of tools, mental accounting, self-control, and that is very hard. So, you know, a lot of people say, "Just find a balance in life, Meir, and you'll be happy. Everything will be good." But what you're saying is, "Hey, finding a balance is not easy."
It is not easy. And it is good that we have some institutional arrangements that make it a bit easier. God knows, just imagine that we didn't have Social Security. Think about the people who say, "Just give me my Social Security money, and I'll invest it the way I want. I'll do better." Then that bureaucracy. Well, suppose that you put it in Bitcoin, and it goes down. Now you are living in the street. What then? And so it is good that we have the government do Social Security. It's good that corporations offer 401(k)s. Finding that balance is indeed difficult. And, and many times we make mistakes in in our early years by spending too much. And in our later years, and that is really one that that strikes me. People find it difficult to spend. People have plenty of wealth, but they have gotten used to the notion that saving is not just for the future. Saving makes them feel good now. Saving makes them feel virtuous. When I wrote about it some years ago in the Wall Street Journal, I got so many touching responses of people telling me, "One, you are describing me. Second, now that I read that, I went out and I bought myself some fancy golf clubs or hi-fi speakers or whatever it is, knowing that I can afford it."
You wrote, "If it makes you happy, if it truly makes you happy, you should buy it, if as long as you can afford it." I, I do want to say one thing though, again, this is controversial. You're not a big fan of the FIRE movement, Financial Independence, Retire Early. You say, "No, they're in a way pushing the wrong idea."
Well, this idea of retirement as Nirvana sounds really ridiculous to me. That is, I'm 77 and I'm still working. Do I have to? No, financially I can retire. But teaching and scholarship is my vocation. So, so meaning, it provides meaning to my life that I would not get just from having leisure. And so it really makes no sense to kind of divide the life into those two parts. One, you work like a horse with overtime, with God knows what else, spend close to nothing, and then you have the riches of free time forever. It does not work. And more than that, it really is quite risky because you don't know what will happen. You know, you retire at 40. I, you think that you have a million dollars or two or three, and that is going to last you. But the market is not cooperating, and so on. You might find yourself in a situation that is really hard. And so just balance is that? Just be reasonable. You don't have to work yourself to death. There is such a thing as family and leisure and all of that. But don't divide your life into those two compartments. And, and remember that retirement can be pretty boring.
You also talk a lot about overdoing it, where you can become a miser. And becoming a miser is not good. It actually lowers your well-being, even though you have more money, more wealth, it actually lowers your well-being. That's what I found from this letter. When you give permission to spend, and you say, "Hey, you know, you can spend without trouble," it really is going to enhance your well-being. Or if you don't want to spend it on yourself, how about spending it on your kids, on your grandkids, on the community? If you have this extra money, there are people who are poor in your neighborhood, close or far. Won't you get some higher well-being if, instead of being the richest man in the cemetery, you get to share your wealth while you're alive? You can say, in a way, that there are self-explanatory, there common sense. But many people don't have that common sense. You know, when I had an example in one of my articles in the Wall Street Journal about buying lattes at Starbucks, and yes, of course, if you save it and you invest it, you're going to have so much more when you're 65. And I say, "Well, spend that same amount on diapers for your baby, and surely you're not going to have your baby at 65." So, so there are some things where you have to ask yourself, how much is it worth now, and how much will it be later? And I'm not suggesting that people spend a lot of time thinking about it, but, but you have to develop something like an intuition about it that is going to guide you.
Right. My mom would say, "Spend money, but don't waste it." And this is all into the realm of well-being, how we feel, who we are. And being a miser, where you never spend money, and you don't give money to your children who need it, because you don't want to spoil them. I hear that all the time. It's like, "Yeah, I don't see how if your children are in their mid-30s and they're, say, they're married, struggling at work, and maybe not having kids yet because they, you know, they need to work." And yet, um, people still won't help their kids. They say, "I don't want to ruin them." It's an interesting mindset that some parents have.
I, I think it really is part of cultural capital. As I said, that is in Israel, my parents, Ava's parents, gave us money when we needed it with a warm hand. How people grow to be reasonable or spendthrifts, we don't really precisely know.
There's a chapter you have on investing. And I think we're in line with the Bogleheads idea of, you don't think that just because you have a PhD in molecular biology that you can go out and pick stocks. You just use index funds. You use your own three-fund portfolio. We have something in the Bogleheads, it's called a three-fund portfolio. Well, you have your own three-fund portfolio, which is a world equity fund, a bond market index fund, total bond market index fund, and a money market fund, which is a really simple portfolio. We, we actually call that a two-fund portfolio because we leave the money market emergency money out. But it's interesting that that's the same concept that you came to in all of your work.
Yeah, "Keep it simple, stupid" is still a good mantra for for investments. The total stock market fund has more than 3,000 stocks. If you ask me what are their names, you know, I might know two or three dozen. Do I know their financials? Of course not. You know, I just, I just buy a diversified portfolio, and I assume that that eventually it is going to do well. I have to really get out of the minds of my students that doing analysis of stocks is going to get them extra. I always ask, you know, "Who is the idiot on the other side of the trade?" That is as much as you know, being an engineer working in biotechnology. There are people who want to have inside information. And even if they don't have inside information, they know this company and industry inside out. This is their day job. Why do you think that you're going to be able to beat them? So whenever I feel like trading, I ask myself this question, and then I sit tight.
One more thing about investing before we move on, because I don't want to dwell on investing that much. I want to get to all these other things. Is that you talk about asset allocation, and as you get older, and you realize you have more money than you need, that this idea of reducing your exposure to equity may not be what you want to do, because you have more money than you're going to need. So you're going to be now saving for your children or charity, and therefore, you know, maintaining that higher equity allocation gives you satisfaction, gives you more, you know, well-being.
Yeah, it, it makes a lot of sense. You know, I like to say that you want two things in life: one is not to be poor, and the other is to be rich. And so, roughly speaking, you can say that bonds are not being poor, and stocks are for being rich. So if you have enough such that you ask yourself, "What if the stock market goes down by 50% or 60% or 70%? Will I still be okay?" And the answer is yes. Then you can have a portfolio that is still allocated mostly to stocks, and then leave it again for family, for charity, for all good things.
Well, now we're going to get into some really interesting stuff. So we went through the finance stuff, you know, the saving, investing, and financial. Now we're going to get into some parts of the book that, wow, can you really say that? It has to do with dating and marriage, and widowhood, and divorce, parents, children, elderly parents, grandparents, siblings, all the family stuff. And so we're going to start out with dating and marriage. You find that there is a strong link between marriage and well-being. We can all agree on that. But I want to get to the controversial stuff. Here's what you said: marriage enhances well-being more for men than women, because women have the household chores to do, and they have childbearing duties, while men benefit from the social support of women. You're not supposed to say this, Meir, that we get more out of it, in a way, than women do. So our well-beings, men's well-beings are benefited more than women's well-being from marriage.
Yeah, well, I think some of it has to do with with housework. And even in, uh, couples that profess equality, that tends to fall on women more than men. But also, perhaps even more important, women have more friends, more social capital than men. When women are widowed, they usually have some circle of friends that is going to be there to support them. When men find themselves in that situation, once their wife dies, they realize that the only social contact they had was through their wives, and now they feel entirely lost. And so you can see how that social capital really matters, and why it is important for men to develop friendships that are reasonably deep, such that you find yourself in a situation where you're not entirely alone. So I, I tell a story about a man who lost his wife, and he was reluctant to accept invitations to go to dinner with friends who are in his situation. And eventually, he did. And now he is kind of in a community of people like him. They have dinner together, and they can lean on each other, if not financially, surely emotionally.
I just think this is a great example of social capital because it's true. I see it. I live in an over-55 community, and the whole purpose of the over-55 community is sort of to bring people together. Men can go play golf or play pickleball or whatever, and they develop their own, you know, groups, their own social groups. And I think it is helpful when somebody in our group, wife passes away, they have the social network in these over-55 communities that you may not have in other places. When I was reading that, it just became very clear to me that, gee, I'm living in a place like this where we're kind of practicing that. But let me, uh, move on to divorce. So sometimes things don't work out. What you say is that a lot of times divorce occurs because there wasn't well-being before people got married. In other words, marriage doesn't solve that. If your well-being is low before you get married, the higher probability that you're going to get divorced. Can you explain how all that works?
So, so people who have higher well-being are more likely to attract a mate. They're more optimistic, for example. They smile more. You see that in marriage. Now, of course, there are going to be bumps in every marriage. Marriage, but being dour and sour is not really a good recipe. But it is important to know that that sometimes it is two good people, two people who can enjoy high well-being, they're just not matched right. And so divorce, even with kids, might be a better solution than just living there together for the sake of the kids. You know, the kids get the point. In many cases, if it was obvious that parents don't get along, when they divorce, kids in fact are relieved that they don't have to witness that stress every day, and they can go to the home of mother and a home or father and have a better time than when they are together. And so there are really many stories, and they go in different directions, and people have different views as to what to do. For some people, it is, "You married, you have kids, you better stay together if they are minor." Other people say, "No, it just does not make sense for us. We can go our separate ways, take care of our kids both financially and emotionally, and go on with our lives." And so I think that what will happen to readers of the book is that they're going to see themselves in some of the stories, and some of the stories will strike them as being strange. But that's good, because it kind of prompts thinking, and you know that you're not alone. And perhaps once you reflect on it, I believe that people can change. You know, keep people can improve their well-being. It's exactly what happened to me. As I was reading through the book, there were some things I, that just turned me the wrong way. I said, "I don't believe that. That's not what I would do." But then there were some things, "Oh, that's me." You know. And, and what you do in the book, though, is you, you say, you know, "It's not that I'm right and that other person is wrong. That's not what it is. What enhances my well-being and what enhances that other person's well-being." And when might enhance somebody else's well-being can be completely different than what enhances my well-being. But we try to keep everybody within our own belief system. And the book really opens that up in many different ways. So it's much more than a finance book, but, but it does all relate to finance. As you were saying, you know, if you have one person in a relationship who's a spendthrift, or worse, they hide spending and hide debt from the other spouse, I mean, this is going to eventually blow up. So really interesting observations that you put way beyond basic behavioral finance that we read about.
Yeah, we have a lot of parental advice in the book. A lot of it has to do with what we call helicopter parenting, kind of the phrase. They want their children to be involved in all these things. Don't realize that actually takes away from the child's well-being. You wrote that they feel much more stressed with the extracurricular activities that they're involved in than they do just with their schoolwork. And how trying to help your child can actually be hurting your child because you're putting too much stress on them. I mean, that portion wasn't about finance, but I found it all very interesting. And it all does fall together with your well-being, your child's well-being, your family well-being. And you said this portfolio of well-beings, which of course includes your children's well-being. Many things, many things that surprised me that I
found fascinating, and I think that that readers will find them fascinating as well. That is why is it that there is this big fascination now with getting the kids into an ID League College? I've lived in this country for 50 years; it was not like that. I, I studied at Columbia, but it was not because of its prestige; it's because, because they offered me the financial aid that it was, was necessary. So what is going on, you know? This is not economists try to figure it out, sociologists try to figure it out. I kind of bring it together to make sense of it, and perhaps people can get kind of advice from that.
I have, uh, many neighbors. It seems like all my neighbors are from, from India. Highly educated people, many of them engineers, uh, and they come from a culture where graduating from a top university is a big thing. In the US, it is a thing, uh, and it is big, but it's not as big. It's not a, you can, you can do well even if you graduate from a second or third-level college. Just understanding that and presenting it, and you know, I talk about it with, with those neighbors, and they, they begin to understand how this country is different. You, you talk about how the US, it's where you go to college that matters, whereas in Canada, it's what you study in college that matters. Little different culture, exactly.
So, in some cultures, I, I know a couple of colleagues of mine who is originally from Korea, and his wife is from Sweden. In Korea, it is really very important where you graduate from. In Sweden, it's not. When you put those cultures side by side, side, you say, why are they different? And make some judgment as to which of them is better, which of them enhances well-being better than the other. Doesn't mean that you're going to have more well-being as a student graduating from one of those prestigious universities and then going and getting, getting a job that, that, that job is going to give you any more satisfaction or any more well-being than if you didn't take that path. And which that's what I found very interesting about, uh, a lot of the research that you're doing.
Then you get into elderly parents as well, in the sandwich generation, and that grandparents, cuz I am one. I have eight grandkids, you know, love being a grandparent, but to have the grandchildren come and live with us and for us to raise them, it actually probably for us would diminish our well-being as opposed to just seeing the grandkids and taking care of them once in a while, which would increase our well-being. But then you have a situation with money where maybe you have a divorced daughter who ends up moving in with you with the child. The divorced daughter has to go to work, and you end up taking care of the child. It does tie into money in many ways. It would diminish our well-being, but it's, it's not something we would admit. You're not going to say to your daughter, well, yeah, I'll take care of your kid and take care of you, but I don't want to. It's true, but people normally wouldn't say it. I wouldn't say it to my daughter. Yeah, I would, I would do it, and, and I would at least pretend that I'm cheerful about it. That is important.
But, but of course, uh, it does make a difference. Having a, a disabled child reduces the well-being of their parents. These are facts, and sometimes when you say that to, to people, that kind of feel like you are hurting their feelings, you're judging them, judging them. Except when I say, well, I have a disabled daughter, so I'm speaking from where you are. I'm not trying to be condescending to you. To the contrary, I'm trying to be empathetic to you and say, I know how you feel. I am in your shoes, and here's how we manage that. Is we take from domains that are plentiful, like having another daughter who loves her oldest sister and supports her, and having that increase the well-being of all of us.
You have a chapter on health. People who have more money generally have more health because they can afford it. They can afford to go to a doctor if they're not feeling well. You know, they can afford to spend the time playing pickleball rather than working three jobs. They can afford a personal trainer, so their health is better. So, you know, money and health are, are related, and it's all related to well-being. And of course, you have a long chapter on work, and this is a really interesting chapter. If you're thinking that getting the next promotion is going to make you feel better, you should read this chapter because it may be the opposite.
It's such a fascinating book to, to get into religion and society, nationalities, culture, just things that we could talk about for days. I look at well-being as a portfolio, a portfolio of those domains. There is money, of course, at the base of it, but there are, there's family and work and religion and society, and all of that. And people allocate more of their well-being to one or the others. And some domains have bumps, them a kid that is disabled, or a kid that does not do what parents would have hoped, a work that is not satisfying, and so on. And I think that the art of life well-being is, is the art of the portfolio. That is, you, you know that you're going to have some stocks that are going to be dogs, but that's why you diversify because you don't know it ahead of time. And the same applies here. These are the things that come out of my life, and when I speak to others, their experiences are similar.
And I know we run out of time, but I want to thank you so much for being a guest on Bogleheads on Investing today. Well, thank you, Rick, and I hope that people who listen will enjoy this.
This concludes this episode of Bogleheads on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit boglecenter.net, bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit. Join one of your local Bogleheads chapters and get others to join. Thanks for listening.
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