The Second Generation of Behavioral Finance

The Second Generation of Behavioral Finance, from Meir Statman, elucidates everyday trade-offs people make between utilitarian, expressive, and emotional benefits, often sacrificing the utilitarian benefits of wealth for expressive and emotional benefits, whether those of sincere social responsibility or high social status. The second generation of behavioral finance is also aware of the cognitive and emotional errors people commit on their way to their wants, but it distinguishes errors from wants.

Too frequently, investors—amateurs and professionals alike—unknowingly fall prey to their best investing intentions. Most often, their disappointment stems from a wide array of well-documented behavioral influences. We know that they are harmful to our financial health, yet we persist in them. Why are behavioral dilemmas so sticky to overcome?