Interview with Hersh Shefrin



Behavioural Science is a rapidly expanding field and everyday new research is being developed in academia, tested and implemented by practitioners in financial organisation, development agencies, government ‘nudge’ units and more. This interview is part of a series interviewing prominent people in the field. And in today's interview the answers are provided by Hersh Shefrin.

Hersh is a Canadian economist best known for his pioneering work in behavioural finance. Hersh holds the Mario Belotti Chair in the Department of Finance at Santa Clara University's Leavey School of Business, in addition to holding two doctorates: a PhD in economics from the LSE, and an honory doctorate from the University of Oulu. Hersh has long standing collaborations with Richard Thaler and Meir Statman on behavioural finance, being one of the first economists to have incorporated ideas from psychologists like Amos Tversky and Daniel Kahneman into working theories. Additionally, Hersh has written a number of influential books on behavioural finance and its applications to corporate finance and corporate culture. I'm very pleased he made the time to write answers to this interview!

Who or what got you into behavioural science? A combination of three issues. The first was the recognition, while a Ph.D. student, that the standard economic assumptions about rational behaviour were too strong. The second was curiosity about how to modify the standard economic models to account for imperfect rationality. The third was teaming up with Richard Thaler -- we were each others' first behavioural collaborators -- to develop a research agenda along these lines. What is the accomplishment you are proudest of as a behavioural scientist? And what do you still want to achieve? Re accomplishment, I suppose it is being the first modern economists, meaning Thaler and me, to propose a formal "two system" framework for analyzing imperfectly rational behavior involving self-control. We described our framework as a "two-self model." In early 1978, we presented the idea in a seminar to Daniel Kahneman and Amos Tversky, whose models at the time did not have this feature. Later Kahneman came to describe the two system perspective as "thinking, fast and slow," which he did so well in his fantastic book of that title. Some years later, Meir Statman and I applied these ideas to finance, in our work about corporate dividend policy and investors' disposition to sell winners too early and hold losers too long, a phenomenon we called "the disposition effect." Re still wanting to achieve, the first thing that comes to mind is working on the behavioral aspects of climate change. This is an area I first wrote about in my book Ending the Management Illusion (published in 2008), and since then the psychological issues, already problematic at the time, have only become more pronounced. Beyond climate change, I have also been writing about issues such as the impact of AI on imperfectly rational human behavior, and the pandemic -- so these issues might continue to be areas of interest. I should say a word about behavioural pricing kernel theory. I first developed this theory in my book A Behavioral Approach to Asset Pricing (first edition 2005, second edition 2008), with the goal of behaviouralising the modern neoclassical pricing kernel-based treatment of asset pricing. I think that this theory provides a natural meeting place for asset pricing theorists who represent the traditional neoclassical approach and behavioural asset pricing theorists who study how psychological phenomena impact asset pricing. That said, my sense is that traditional asset pricing theorists still prefer to avoid behavioural issues, and behavioural asset pricing theorists prefer to avoid the pricing kernel approach. Nevertheless, at some point, I would like to revisit this area of research, and apply behavioural pricing kernel theory to recent data. In my writings, I suggest that in addition to Keynes' beauty contest analogy to describe the pricing of stocks, there is also a drug pusher analogy involving investors getting hooked on sentiment. This is a position that I revisit intermittently. But coming back to the original question, first I think, comes the behavioural issues associated with climate change!

If you weren’t a behavioural scientist, what would you be doing? I have been a behavioural scientist my entire career, so this question involves a counterfactual which is difficult for me to contemplate. To use the language of the "undoing project," there is a lot to "undo" to come up with an intelligent answer to that question. How do you apply behavioural science in your personal life? The short answer is making a conscious effort to structure my environment so that my two systems (fast and slow thinking) work together in a balanced way, and that the heuristics upon which I rely are reasonably well matched to my environment and personality, without generating major negative side effects. Over time, as circumstances change, negative side effects do emerge, and when they do, I look for nudges, some of which might be self-nudges. With all your experience, what skills would you say are needed to be a behavioural scientist? Are there any recommendations you would make? We live in a world of specialization, so perhaps the answer is the combination of a behavioural skill set and expertise in a specific field. How do you think behavioural science will develop (in the next 10 years)? Having taught both traditional forecasting and behavioural ideas, any response I would give to this kind of question would be couched within a very wide confidence interval. The two-self model which Thaler and I developed in the 1970s and 1980s was neurologically-based; but, neuroscience was in its infancy at the time, and certainly neuroeconomics had not yet come into existence. Since the 1980s, there have been tremendous advances in neuroscience, and so I would answer the question by saying that behavioural science will develop with a greater emphasis on neuro-structural issues. I would hope that behavioural science will also be applied more deeply and frequently to address the world's major challenges. In my book Behavioral Risk Management, I suggest that every major risk management disaster in recent memory stems from psychological pitfalls. If we start to call these out explicitly, perhaps, just perhaps, we might mitigate the impact of these pitfalls.



Which other behavioural scientists would you love to read an interview by? I have a long list, but here are the first ten names that popped into my head, and in no special order: Paul Slovic, Richard Thaler, Daniel Kahneman, Gerd Gigerenzer, Baruch Fischhoff, Robert Shiller, Terrance Odean, Paul Zak, Walter Mischel, John List.



Thank you so much for taking the time to answer my questions Hersh. It is indeed difficult to isolate a specific skillset not knowing what specialisation of behavioural science someone wants to go into!


As I said before, this interview is part of a larger series which can also be found here on the blog. Make sure you don't miss any of those, nor any of the upcoming interviews!

Keep your eye on Money on the Mind!