A wants-based approach to your finances

By Larissa Fernand |  11-11-19 | 

In the field of behavioural finance, Meir Statman is a pioneer.

The Glenn Klimek Professor of Finance at Santa Clara University once famously said “financial advisers frame themselves as investment managers, providers of “beat-the-market” pills, when, in truth, they are mostly managers of investors.”

An interesting aspect of his research is how he views preferences, wants and errors through the prism of benefits. And the eventual trade-offs that exist between wants, forcing people to choose wisely among them.

So what do people want from their investments?

They want three benefits: Utilitarian, Expressive, Emotional.

Utilitarian benefit answers the question: What does it do for me? The utilitarian benefits of watches will be time telling; the utilitarian benefits of restaurants include nutritious calories; and the utilitarian benefits of investments are mostly wealth, enhanced by high investment returns.

But we want more. We want more from our investments than the utilitarian benefits of wealth. We want the expressive and emotional benefits of hope for riches and freedom from the fear of poverty, nurturing our children and families, being true to our values, gaining high social status, playing games and winning, and more.

Investments, jobs, products, and services have benefits that enhance wealth, well-being, or both. These include utilitarian benefits, expressive benefits, and emotional benefits.

Expressive benefits convey to us and to others our values, tastes, and status. They answer the question: What does it say about me to others and to me?

Emotional benefits answer the question: How does it make me feel? Insurance policies make us feel safe, lottery tickets give us hope, and an offer to invest in hedge funds makes us proud.

To explain the above with actual examples, I am taking an extract from the conversation Meir Statman had with Jeff Ptak, Morningstar’s global director of manager research, and Christine Benz, Morningstar’s director of personal finance.

The lottery

In standard finance, people are rational, and rational people don't buy lottery tickets. But if you are like you and me, you have at least once a bought a lottery ticket.

  • Emotional benefit: It will give you hope for an entire week, until you find that you have lost.
  • Expressive benefit: You know that you're in the game, that you have a chance to win.
  • Utilitarian benefit: This, if you win the grand prize or just one below it.

And so as long as those wants are within reason--in other words, you're not sacrificing your desire not to be poor for the desire to be rich--you are fine.

So, if you buy $1 worth of lottery tickets or even $5 every week or month, that is fine.

We are neither computer-like rational, not bumbling irrational. We are all normal: having wants such as not to be poor and to be rich, and making our way towards them and often making mistakes along the way.

Consumer goods

Let me speak about benefits in consumer goods since that is more familiar.

Owning a house is different from renting a house, even though in both cases you'll have shelter. But there is some emotional and expressive benefit in ownership – pride. “Yeah, I own the place. I might have a mortgage on it, but I own the place. I'm a homeowner.” That status is dear to many.

People express themselves in the houses they own, the cars they drive, the clothes they wear. Houses are both, a consumption good and an investment, and have expressive and emotional benefits.

When we choose whether to buy a house or rent, we make decisions based on the kind of money that it will cost to buy and maintain a house versus renting.

Financial products

Think, for example, about hedge funds and other alternatives. They have potential utilitarian benefits.

If you ask people why they buy them, they will tell you likely that they have high returns and low risk. And they might actually believe that, although the evidence suggests otherwise.

But it is also the case that in a gathering, it is socially unacceptable to introduce yourself as a rich man, but if the conversation is around investments, you can drop the fact that you are into hedge funds. That of course will indicate that you are a reasonably rich man, because not everyone is eligible to be a qualified investor who is allowed to buy those hedge funds. That is the expressive benefit – you can hint that you are a rich man without saying that.

Money market funds also have expressive emotional benefits. If I'm a young person and have most of my money in a money market fund, you might say that it's not wise, but at least it gives me that sense of calm. The markets go up or down a huge amount every day, and definitely over a year or two, whereas my money market fund just chugs along earning some miniscule rate of return, but at least I have that peace of mind that comes with it.

A young person investing in fixed deposits or money market funds will satisfy their want of tranquility, but are giving up the chance to be rich, and the chance to have a reasonable amount of money that will sustain them in retirement.

Another example is a target-date fund. There is an emotional benefit, because this approach boasts simplicity, there's not as many decisions that have to be made, and that's comforting. With a target-date fund they gain utilitarian benefits and at the same time, they have a sense of calm that they are on their way to doing the right thing.

Or investing in funds that have very low fees; it says that I'm going to get higher utilitarian benefits and higher returns. Second, I am saying that I am too smart to try to beat the market.


People basically want two things: Not to be poor. To be rich. Hence they buy insurance and lottery tickets.

(Those are Statman’s words, not mine.)

The balance each of us strikes between the desire for hope for riches and the desire for freedom from fear of poverty is shaped by our circumstances, life experiences, gender and age, personalities, and cultures.

Investment Involves Risk of Loss

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