Whether to save or spend is an emotional issue for investors, says Meir Statman, who specializes in behavioral finance research and is the author of the book What Investors Really Want. Here, Statman chats with Managing Editor Lorie Konish about where investors are today and how financial advisors need to address clients' emotional outlook on the markets.

1. Where do you see investors now? Investors are caught between hope and fear—between the desire to be rich and the fear of being poor. The risk we are willing to take is proportional to the relative desire to be rich and the fear of being poor. Different people balance it differently. If you are in your 70s and have a portfolio of, say, $1 million in stocks and the dividend yield is 2%, that means $20,000 a year to add to your Social Security amount. Well, it makes no sense. After all, somebody who is 70 might live to the late 90s, but he or she is not going to live to be 150. So this really is a time to dip into the capital. Even if you live 20 years, you can take $50,000 each year from capital without much trouble. Roughly, let's divide people into two camps: the saving kind and the non-saving kind. We know from studies of people's personalities that one aspect—conscientiousness—really matters greatly in saving. Conscientious people naturally think about tomorrow. But others don't think ahead. What we in behavioral finance try to do is to nudge non-savers toward smart behavior with techniques like automatic enrollment, for example, and escalation. But it doesn't really work for a segment at the bottom. I think we have to shove them into doing what's in their interest and really make it mandatory.

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