Reviewing Behavioral Finance The Second Generation

I am kind of half and half on this book. I really like what the CFAI does and the free offerings are fantastic. For what the book is trying to accomplish and the time period, this is great and the fundamental premise is relatively straightforward: the previous generation of finance saw normal human behaviors as irrational.

My main problem with reading, as many will notice over time, is that I am often too familiar with the topics at hand already. If you aren't familiar with behavioral finance, you should read this. It will tell you a lot about how you and other people make decisions in the context of money.

For practitioners in 2025, I feel that Behavioral Finance (Meir Statman, 2019) left much to be desired.

The good is displayed in dividing and expounding upon the benefits investors seek to obtain, splitting away from utilitarian benefits to also include expressive and emotional benefits (think about why people buy an expensive watch and apply the logic to investments). It also refocuses advisors away from correcting and towards guiding investors as they make these decisions based on the 'new' normal human logic. Of course, Meir Statman (2019) also details the various cognitive and emotional biases and provides justification for them, examining them in the context of the market.

While I appreciate the psychology (and the book is still great for advisors), it skims a little too much on the mathematical modeling for my liking. It proposes high level overviews of behavioral financial models, but really just suggests adding beta-weighted factors to create multiple linear regression models such as adding social responsibility factors to the CAPM. This isn't something I would blame on the book itself, as behavioral finance is still, effectively in its infancy (psychology often changes and takes a long time to prove with lengthy periods of new paradigms coming and going).

Looking at a slightly newer book like Goals Based Portfolio Theory (Franklin Parker, 2022) showcases a dramatic difference in the mathematical presentation, however. Franklin Parker (2022) proposes the framework for a new system of formulae predicated on establishing portfolios for individual investors based on storing goals into a probability weighted matrix, where probabilities are based on factors such as their urgency and importance (in summary at least). This difference, of course, lends to increased practicality of the material in Goals Based Portfolio Theory and, typically, greater succinctness as the math speaks volumes.

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