By Meir Statman

I often note that the biggest risks in life are not in the stock market. If you want real risk, I say, get married. And if you want more risk, have children. People laugh, because the point is obvious. Yet that point is regularly lost when we speak about financial well-being, neglecting life well-being. I was motivated to write my book, “A Wealth of Well-Being, by reflecting on my own financial and life well-being and those of others. We need financial well-being to enjoy life well-being, but it is life well-being that we seek.

Financial well-being comes when we can meet current and future financial obligations, absorb financial setbacks, and keep driving toward financial goals, such as adequate retirement income. Life well-being comes when we live satisfying lives, full of meaning and purpose. I use the book in my finance courses, helping students explore links between financial and life well-being.

Life well-being is at the center of the third generation of behavioral finance, a generation preceded by standard finance and the first and second generations of behavioral finance. Standard finance describes people as computer-like “rational,” immune to cognitive and emotional errors. Rational people aim to increase their wealth and able to strike it perfectly.

The first generation of behavioral finance described people as bumbling “irrational,” hampered from increasing their wealth by cognitive and emotional errors.

The second generation of behavioral finance described people as “normal,” neither rational nor irrational. Normal people aim for expressive and emotional benefits, such as from socially responsible investing in addition to utilitarian ones.

The third generation of behavioral finance also describes people as “normal” but is explicit in describing life well-being as people’s overall want. This generation broadens its lens to see people as whole persons and show them in the domain of finances, but also in the domains of family, friends, health, work, education, religion, and society.

Source SSRN