If you have ever visited Universal Studios in California and taken the trolley tour through the backlot sets, you have no doubt experienced “Oh Yeah Street.” The name comes from the reaction of the tour group every time the guide says something like: “You might recognize this as the Courtyard Square used in Spiderman 2” or “This is where that famous scene from Austin Powers was shot.” The crowd, in unison, inevitably responds: “Oh, yeah!”

Well, that’s the feeling I got when I read Meir Statman’s latest book, What Investors Really Want: Discover What Drives Investor Behavior and Make Smarter Financial Decisions. What I experienced as I was reading was instant recognition of something very familiar yet not so obvious until someone points it out. I saw myself characterized in many of the financial decision-making patterns Statman describes, even though I would not likely have appreciated that fact on my own.

I have long been a fan of Statman, who is a professor of finance at Santa Clara University in California and an internationally recognized expert in the field of behavioural finance. According to Statman, behavioural finance offers an alternative to modern portfolio theory by describing the nature of individual investors and markets.

Modern portfolio theory is based on the assumptions that investors are rational and markets are efficient. Behavioural finance, on the other hand, makes the claim that investors are “normal” rather than rational and that markets are not efficient, even if they are difficult to beat.

Statman further argues that normal investors are “normal smart” at times and “normal stupid” at others. That’s because their motivation to make money clashes with their irrational actions when they fail to understand how emotional motives affect their decision-making.

Nowhere is there more evidence of this conflict than in an individual investor’s efforts to “beat the market.” Comparing index investors with beat-the-market investors, Statman describes the former as “buy-and-hold investors who trade only infrequently.” In addition to enjoying returns that are equal to risk, index investors have the added advantage of low expenses.

On the other hand, according to Statman’s book, beat-the-market inves-tors “work hard to find investments with returns higher than their risks … but cognitive errors and emotions mislead many beat-the-market investors into the belief that investments with returns higher than their risks are readily available, when, in truth, they are not.”

In an interview conducted shortly after the publication of this book, Statman said: “Individual investors should treat the market as unbeatable and realize that when they try to beat it because it is inefficient, they are likely to injure themselves rather than gain at the expense of another.

“If some people win,” he continued, “it means that some people lose relative to what they can get by being in an index fund. People above average tend to be the professionals; and people below average tend to be individuals. People should be clear what it is they want. If they have hope of being a winner, look for a winning mutual fund or manager, but don’t try to tell me you are maximizing return to risk. You are doing it because you like the game.

“If, on the other hand, investors want the highest ratio of return to risk, then index funds are the way. If they want to be socially responsible, buy a socially responsible mutual fund….”

Statman’s book describes the effects of other variables, such as culture, mental conditioning by minor circumstances and our “follow the herd” instincts. He illustrates, through real-life stories, how human behaviour has influenced various financial disasters, such as stock market crashes and the recent banking credit/debt crisis.

If there is any comfort to be had, it’s in learning that the factors separating humans from the wealth they could acquire are shared by titans of finance, novice investors and those of all levels of sophistication in between.

In the end, Statman doesn’t give specific instructions about investing based on the principles in his book. That’s for readers to tease out using the tools he has provided. In my view, that’s just fine.

Although the book doesn’t quite live up to its “story-telling” promotion, it is as readable as an academic of Statman’s stature probably could make it. I keep waiting for the ultimate book on this subject. Until it arrives, this effort is probably among the best there is. IE