Andy Rachleff Note: Meir Statman is a longtime advisor to the Wealthfront investment team and a foremost expert in the field of behavioral finance. His new book, “Behavioral Finance: The Second Generation” is published by the CFA Institute Research Foundation and can be downloaded for free at this link.

My new book, “Behavioral Finance: The Second Generation,” presents the second generation of behavioral finance. The first generation, starting in the early 1980s, largely accepted standard finance’s notion of people’s wants as “rational” wants—restricted to the utilitarian benefits of high returns and low risk. That first generation commonly described people as “irrational”—succumbing to cognitive and emotional errors and misled on their way to their rational wants.

The second generation describes people as “normal.” It acknowledges the full range of people’s normal wants and their benefits (utilitarian, expressive, and emotional), distinguishes normal wants from errors, and offers guidance on using shortcuts and avoiding errors on the way to satisfying normal wants. People’s normal wants include financial security, nurturing children and families, gaining high social status, and staying true to their values. People’s normal wants, even more than their cognitive and emotional shortcuts and errors, underlie answers to important questions in finance, including questions about saving and spending, portfolio construction, asset pricing, and market efficiency.
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