← Afford Anything | Get Smarter With Money![[F] Why Your Brain Sabotages Your Money [GREATEST HITS] — Afford Anything | Get Smarter With Money cover](https://megaphone.imgix.net/podcasts/76596ff0-aae1-11ec-9d71-2f600d8e89e7/image/_artwork_-_AffAny_2019-06_1400_347kb.png?ixlib=rails-4.3.1&max-w=3000&max-h=3000&fit=crop&auto=format,compress)
Afford Anything | Get Smarter With Money
[F] Why Your Brain Sabotages Your Money [GREATEST HITS]
00:45:44
Loading summary
Transcript55 lines
- [00:01]
A
Merry Christmas. Happy final day of Hanukkah. Today is Monday, December 22nd. We are doing something very special this week. We are playing five of our greatest episodes from our greatest hits vault. These five episodes are themed around our favorite acronym fiire. Today we are playing an episode around the letter F financial psychology. Tomorrow we're gonna play the letter I, increasing your income. On Wednesday, Christmas Eve, we're going to be playing the second letter I, investing. On Thursday, Christmas day, we're going to play R for real estate. And on Friday, E for entrepreneurship. Five episodes this week, all from the greatest hits vault and themed around fi I R E. In honor of the letter F for financial psychology, we are playing an interview with the psychologist and behavioral finance expert Dr. Daniel Crosby, who discusses why we so often pay attention to the wrong things. This interview Originally aired on November 16, 2022, and we are pulling it from the greatest hits vault to share with you. Enjoy. Hi, Daniel.
- [01:15]
B
Paula. Hey, great to be here.
- [01:17]
A
Daniel, you are trained both as a clinical psychologist and as a behavioral finance expert. At the risk of an obvious question, how have you seen the worlds of psychology and investing overlap and where. What is there new to say about it? We all know about cognitive biases. We all know about heuristics and mental models. What is new that is being discovered in this field?
- [01:41]
B
I don't think it's an obvious question. I think it's a great question. And I think the growth and the development of behavioral finance has largely mirrored the growth of psychology broadly. If you look at psychology, you know, it starts more or less is popularized with Freud. And Freud is of course studying what's wrong with you. Right. He's studying brokenness, depression, anxiety, all these things. And then it's only in like the 80s and 90s that we begin to get a psychology of wholeness, you know, a psychology of not just what makes people sad, but what makes people happy and what makes people great leaders and great spouses and great teachers. And I think that behavioral finance is trending in that very same direction. It had to break with traditional economics by sort of documenting these departures from full rationality, you know, the heuristics and the biases that you mentioned. And that was an important break. Like we had to sort of break ties with the old school, and that was necessary. But, you know, now I think you're seeing a lot of talk about what makes people financially happy, what makes people well. And that, I think, is an exciting new direction for the field.
- [02:51]
A
Are there any discoveries that you've made as a Behavioral finance expert. Any conclusions that you've read about or discoveries that you've encountered that are counterintuitive.
- [03:01]
B
A lot of what I'm finding is that money is so central to our lives. I'm 42. The American Psychological association has studied the stressors in the lives of Americans. Since about the year I was born. We've been studying what stresses Americans out. And every single year since they've studied it. Finance is the number one stressor in the lives of Americans. What you see is that as people start to get their financial lives in order, other parts of their lives come in order too. I do a lot of research around some of the benefits of working with a financial advisor. For instance, we know that people who work with a financial advisor are more prepared for an emergency. They have greater global peace of mind. I just had Dr. Sonja Luder on my podcast talking about some of her research, and she found that people who worked with a financial advisor had better marital communications. So you start to see money is sort of transcendent. Money touches every part of our lives. And so as we're able to rein in this number one stressor, we see holistic improvement, whether it be with our relationships, our physical wellness. I think there's a real frontier in workplace financial wellness and some of the benefits that employers will start to see as they help the people they employ become better educated around their personal finances. It's such a problem, I think, for so many people, that once you start to tame that problem, it sort of.
- [04:34]
A
Lifts all boats when it comes to what you're talking about, reaching that state of financial wellness that permeates all areas of your life. There's, of course, a combination of sufficient income as well as good financial habits and good financial literacy that would need to both be involved in the picture. We've heard the studies of that minimum income threshold, anywhere from 75,000 to 200,000 that correlates with happiness, after which it plateaus. We've heard the studies of old. Are there new developments? Is there new research around that piece of it? Is there a minimum income threshold after which more subjective forms of wellness play a larger role in the picture?
- [05:18]
B
If you think back to your Psych 100 classes and sort of Maslow's hierarchy, as our income elevates, the class of our money problems elevates, but they don't necessarily go away. You're talking about the Princeton study done by Kahneman, and it was years ago, so I'm not sure what the number would be today, but at that time, it was at $75,000, it plateaus rather quickly. The benefits of having more money plateau rather quickly. Well, the reason is because money is what we call a hygiene factor in the social sciences, which is just a fancy way of saying, you know, getting it won't make you happy, but not having it will make you miserable. What we understand from that bottom row of Maslow's hierarchy. But as you ascend and you have more and more wealth and you have seen some of the basics of your life taken care of, good shelter and food and good education for your kids and all that, you start to see it have different problems. And now money enters into relationships and you start to have conversations about what is enough and you don't have enough to eat. The function of money is to get you warmth and shelter and food. But once those things are provided for, you start to have these more relational, these existential financial problems about, you know, does money define you as a person? How can you be philanthropic? How can you try and buy happiness with your money? There's research around all of that, but it elevates the problems. But there's just sort of a new class of problems.
- [06:49]
A
Right, and what are some of those problems within this new class of problems?
- [06:53]
B
One of the things that we found among people who were better off these are people who had mean incomes in sort of the mid six figures, were working with a financial professional. They were still having some distress around money. We were measuring relational stress effectively. What are they fighting with their partner about? Found it broke down along a couple of dimensions. The most powerful dimension was, is money best used to secure tomorrow or to enjoy today? And of course, you know, both of those things are important. You need to kind of live it up and nothing's promised and YOLO and all that. But we also know we need to plan for the future. We also found disagreements around individualistic versus communal concepts of money. And this broke down largely by culture, culture of origin. So people from Western societies were more likely to say, you know, this money is mine. This money is mine and yours. Whereas people outside of the west were more likely to say, no, this money is for me, you and grandpa and the community, and my aunt who needs a place to stay, and had sort of a more communal take on it. We also looked at couples who were having differences around their level of anxiety around money, which is no shocker, but also the level of importance. We found there were about half of people who found money was sort of no big deal. Having wealth was not very defining of who they were. But for other Folks, it was, it was highly wrapped up with their sense of self and their personality. All these folks had their basics covered, but they were still experiencing some form of sort of relational turmoil around money, around some of these thorny problems.
- [08:37]
A
What's interesting to me is that we started the conversation with a focus on how the field of behavioral research is trending towards looking at wellness and happiness. And very quickly now we're discussing what those problems are.
- [08:51]
B
Still, the inverse of a problem is happiness, right? And so helping some of these folks find that happy medium, that's where we're headed. If you think about this primary place point of differentiation, enjoy today versus secure tomorrow. Those are both important. And where we find points of conflict is when people are at the polls, at the extremes of that measure, but trying to get people towards the middle, right, where they can take a portion of their wealth and enjoy the moment and savor a delicious meal that may cost a little more than usual, or take a vacation while still not neglecting the future. I do think that the wellness piece and the happiness piece with a lot of this that I'm talking about, is found in sort of that happy medium or that synthesis of these two ideas.
- [09:39]
A
One of the observations that you make is that sociologically, neurologically and physiologically, we are wired not to be very good at any of this. And it's interesting to me that you make a distinction between each of the three. So I'd like to elaborate on each one by one. Let's start with physiologically. That's not a term I'd ever thought to associate with behavioral finance or the psychology of money.
- [10:04]
B
The reason that people don't think about it is where I was trying to fill the gap in the literature. Because if you look at things like we know not to go shopping on an empty stomach because you're going to wind up with a basket full of Twinkies and Coca Cola or whatever. But we also know that there's all these other studies that show hunger or fatigue has a dramatic impact on purchase intent. People aren't just buying more Twinkies when they're hungry, they're buying more of everything. And people tend to not understand how their environment and the way that they take care of their body impacts their broader health and their mental health and indeed their financial behavior. When I was a therapist, when I was doing clinical work, this is something that I would always start with. And people really underappreciated it. I have a very specific memory of a client coming to me every day with anxiety. And I found that they were drinking like six cups of coffee a day. And I'm like, well, let's start there. And nobody wants to have that conversation. So there's great research that I cite in the book that looked at Israeli judges, that looked at thousands and thousands of decisions handed down by Israeli judges and looked at how lenient or how punitive these judgments were. And the best predictor of whether or not you were going to get a harsh sentence or a lenient sentence was how recently the judge had eaten. There's all sorts of things like this in our lives where we move through the world thinking we're making sane, rational decisions based on our preferences and our willpower and our goals, when in fact it could be as simple as, did you get enough sleep last night? Or did you have a snack? Getting people to take into account something as simple as diet and exercise and nutrition with respect to putting together a financial life is, I think, under discussed.
- [11:58]
A
Other than broadly pursuing good health, other than the standard principles of get sufficient sleep, eat a nutritious diet, exercise multiple times a week, other than the standard health advice that we all know, is there anything specific that has a particular impact on the financial decisions that we make?
- [12:22]
B
Those are the big ones. And, you know, there's implications for, of course, caffeine and alcohol, of course, having, you know, substance use and caffeine use and in moderation I think is important. But there was one. This is not, you know, this was just kind of a funny study I came across. I don't think it's going to change anyone's life. But they found that people who needed to pee, actually they found something called inhibitory spillover. People who were, say, controlling their bladders, restricting the impulse to need to use the restroom also found that they were restrictive and sort of risk averse when making financial decisions. Now is that groundbreaking? Should you walk around always needing to pee to get your budget in order? No, but I think the broader implication is that something as small as that can have a profound impact on how you're making decisions about your wealth. While this is all standard recommended stuff, eight hours of sleep and three to five days of exercise and nutritious diet and all this, it's not standard practice. Everyone knows to do it, but I think very few of us do it the way we should. And so I do think there's still room for improvement there.
- [13:34]
A
What about neurologically?
- [13:36]
B
Yeah, neurologically we're just wired about opposite as we ought to be wired if we were to be great investors. We really are wired for survival. And as Part of that we're wired for immediacy action. We're wired to be on high alarm. When you think back historically, the cost of getting danger signal and missing it could be your life. But the cost of getting a danger signal and sort of overreacting is maybe you look silly for a minute, but it's not going to cost you your life. Whereas adapting in financial markets takes patience in inaction and long termism. Evolutionarily, we're wired for the here and now. We're wired for action, we're wired for alarm. And so getting past these things and understanding how bad our wiring is I think is the first step to putting appropriate guardrails around yourself in the form of automation, in the form of a coach or an advisor, and in the form of sort of trying to tailor your environment to maximize your probability of success. So in just about every way possible, we're wired the wrong way to be good long term investors.
- [14:55]
A
The fact that we are wired for survival, that indicates why we have such negativity bias, why we have such loss aversion. There are quite obvious parallels there. You also have talked about how we're wired for short term impulses and also we're wired to be lazy. Can you elaborate on both of those?
- [15:16]
B
We're wired to be lazy both physically and cognitively. We'll start to seep into some of the other domains here, but if you'll forgive me. So if you think about your brain, your Brain accounts for 2 to 3% of your body weight, but it accounts for 20 to 25% of your caloric expenditure each day. And so you are always looking for ways to think less. You were always looking for ways to do less, to think less and to conserve that energy, whether it be physical or cognitive. And so all of these heuristics, all of these biases that we've mentioned today, these are just cognitive shortcuts to be less taxing on our brain and you know, to sort of start to bleed over into the social element and see how they're combined. One of the primary means by which we save this cognitive and physical energy is we just do what other people do, right? We say, okay, nine out of ten dentists choose Crest. Sure, fine. Tom Brady wears this kind of jeans. Cool. Me too. We do this with financial news media too. I found when putting together the Behavioral Investor, a study that looked at the brain activity of people who are watching cable financial news and the parts of their brain associated with critical thinking and decision making actually go to sleep. You know, we are wired to defer to other people and to be lazy. Now, the flip side of that is actually, can we use this to our benefit? We can. We know that if we set a process in place whereby we auto withdraw and auto escalate our savings and invest it in a prudent manner because we're lazy, we tend not to mess with that either. So it's hard to get started because we're lazy. But if we set something good in place, we're unlikely to stop it because we're also lazy. So a lot of the power of behavioral finance is understanding ways to make these quirks work in our favor.
- [17:25]
A
Right? How to work with our nature rather than against it. Fight against it.
- [17:30]
B
Yeah.
- [17:37]
A
Hey, folks, let me ask you a serious question. Did you know that driving high is considered driving under the influence? That's right. Driving under the influence of marijuana is against the law in every state. That means even in states where marijuana is legal, that means driving high could get you a dui. And if you think law enforcement officers can't tell when you're driving high, well, my friend, you're wrong. If you're high, they can tell. Your friends can tell. Your co workers can tell. Even your parents can tell. Everyone can tell. What makes you think that law enforcement officers don't know when you're driving high? You'd be wrong. They can tell, too. Driving under the influence of marijuana can slow your response time and change how you perceive time and speed. So even if you think you're fine to drive when you're high, you're not. The bottom line is if you feel different, you drive different. And driving high is driving under the influence. So remember, drive high, get a DUI paid for by nhtsa. If you like having control over your financial future, you need to know about Bolden. It's a retirement planning tool built for people who like to tinker, experiment and see how different choices are may actually play out. With Bolden, you can model all kinds of scenarios. What happens if you save a little more, retire a few years earlier, or adjust your Social Security timing. You can test every what if and see the potential impact instantly. It's like giving yourself a financial control panel. You're in the driver's seat, not guessing or relying on someone else to tell you what might happen. The beauty of Bolden and is that it's powerful. But it's also clear you can dive deep, explore different strategies, and make decisions with confidence all in one place. For anyone who likes understanding the levers, seeing the outcomes, and making their plan work exactly the way they want. This is the tool to use. And what I like about it is that the user interface is so friendly. It's easy to use, it's easy to navigate, it's esthetically pleasing and you can test all kinds of things. You're like, what would happen if I move to a different state? And you can actually see the impact of that. So check it out at go.bolden.com afford that's go.B-O-L-I-I.com afford help take control of your retirement your way. Bolden is for informational and education purposes only and does not constitute investment advice. This year, Give a gift that goes far beyond the moment. An Invest 529 account. Whether it's a child, grandchild or someone just starting out, you're helping them save for education that can open doors for a lifetime. Invest529 is a tax advantaged way to help save for college, trade school, or even apprenticeship programs. It's flexible, easy to start, and you can contribute any amount, big or small, because the money can grow tax free. It's a gift that can really build value over time. So instead of giving something that gets used up or set aside, give the gift that can change a Life. Start an Invest529 account today. Go to invest529.com to learn more and get started. Investments involve risk. Results vary. Consult with your financial and tax professionals administered by Commonwealth Savers Plan. Since we've started talking about how we are also sociologically wired to be pretty bad at this, let's continue down that path. You mentioned that we are prone to group think we're prone to following the crowd. What are the other elements of the way that we socialize that make us bad investors?
- [21:34]
B
Well, to understand how deeply ingrained this is in us evolutionarily, I think it's good to look at how we're differentiated from other animals. So when you look at other animals, they all have something that either is, you know, great offense or great defense that kind of keeps them alive, right? A turtle has a shell, you know, tiger has claws. They can either protect themselves through through violence or through protection. That's how they survive. They're fast, they're tough, they have sharp teeth, they have shells. We are soft. Like we don't have any of those sort of evolutionary advantages. Literally the one thing that we have over the rest of the animal kingdom is cooperation. So we can work together, we can form states, we can form companies, we can write constitutions, we can create religions and Laws of the lands. And all of these things are sort of commonly agreed upon fictions, right? Like the laws of the state of Georgia. Like they didn't get mined from the earth. Like we just got together and we figured them out and we agreed upon them and we act as though they're real. And the same thing is true of economies and stock markets and everything else. So quite literally, this is the number one thing we have going for us, is that we're good at mimicry and we're good at working together. Now, in the stock market, though, we know about herding and crowding and group think. And so you are literally asking people at a time of great enthusiasm or a time of great pessimism to sort of spit in the face of the thing that they do best to say, look, I know that everyone is super enthused about whatever the investment trend du jour is, but you have to run the other way. Or I know everyone is panicking right now, but you have to remain stalwart. So value investors, right, sort of contrarian investors, when you look at them, they show evidence of social isolation and pain and depression. Like there is a real physical cost to these things. There's a real emotional cost to these things. You are literally asking people to turn aside from the thing that they were wired to do better than any other animal. The other thing that I found so fascinating about the social piece in putting together the behavioral investor was that social preferences can literally change the way we perceive the world. There's this famous experiment called the Asch experiment, where, you know, imagine one line on the left and three lines on the right, and you're supposed to match the lines that are the same length, right? Now if you ask people to do this as a one off, everybody gets it right, like it's the easiest thing in the world. But what they ask people to do, though, is to do it in sequence. And so say, Paula, you're the 10th person person in a row to do this, and the nine people ahead of you are confederates of the experiment. So they give the wrong answer. You know, let's say the right answer is C and the nine people ahead of you say B. We know that three quarters of the time the person in that number 10 slot, you know, you give the wrong answer and it's the easiest thing in the world. A kindergartner could do it. And yet three times out of four they give the wrong answer. We used to think that's because they were succumbing to peer pressure. But what more recent evidence has shown is that peer pressure can literally alter the way they physically see the line so that it actually, this is kind of trippy, but it actually physically alters the way you view the length of the line, these other people's perceptions. And so it really can't be overstated how powerful a force this sort of group cohesion is and how much good it does for us. And so it's so, so difficult to ask us to turn our backs on it in this one sort of specific domain of our lives.
- [25:44]
A
Given that reality, does it benefit value investors and other people who take a contrarian approach to find community with one another?
- [25:52]
B
Yes, absolutely it does. I think it speaks to the rise of, of something like Bogleheads or these value forums and other places where like minded people gather. And you know, my friend Dan Egan, who heads up behavioral finance at Betterment, he wrote a piece a few years ago now that really spoke to me and I think is really true. And he said investors need a religion, not like a real religion, but they need a framework to believe in. If the framework is indexing, fine. Like if the framework is value or momentum or growth or a hundred other things. There's many ways to succeed at investing, but we need a framework and we need a tribe and we need a group that we can kind of point to and say, yep, this is how we do it. Because I think it's only through having that tribe and that larger sort of theoretical framework that you're able to make it through the tough times which inevitably come to any form of investing, no matter how prudent.
- [26:53]
A
Talk about the four types of behavioral risk that you've written about. You describe them as ego, conservatism, attention, and emotion. I'd like to talk about each one distinctively. Let's start with ego.
- [27:06]
B
Yeah. One theme you're starting to hear is that things that serve us well other places in our lives serve us poorly as investors. And this is certainly true of ego. Ego is just basically the various forms of overconfidence. And there are a couple. We know that we think we're better than other people on average. Right? We know that something like 85% of people think they're better than average drivers. That's not how that works. Not everyone doesn't get to be great at this. One study I cited in a previous book showed that 95% of men thought they were better looking than average. That's not how this works. The second piece is thinking we know more about the future than we actually do. A third piece is thinking that we're luckier than average. And then the final one is what's called over precision, which is, I think, one that people don't look at much. It's this belief that we can like nail it, be very precise in our predictions about the future. One study that I thought was funny, it asks people how many books are there in the Old and New Testament of the Bible. Most people don't know that. So you take your guess and then the second question is, give me a range that you're sure encompasses the number of books there are in the Bible. So when I did this, the answer to the first question was 25, which you know that's wrong, but sure, okay, most people don't know that. No expectation there. But the answer to the second question is 20 to 30. Now a rational answer would be something like one to a billion. Right. If you're asked to give a range that you're confident includes the right number of books and the right number is 66, you know, you're going to guess one to a million or one to a billion or something like that. But nobody does that because we think we can predict and know the future and guess things better than we can. All of these are sort of forms of overconfidence.
- [29:07]
A
Right. So over precision, that extreme certainty in what we have forecasted or what we have guessed.
- [29:14]
B
Yeah. You know, we got the inflation numbers this morning and it was hilarious watching people on Twitter. You know, the consensus forecast was 8.7, it ended up being 8.5. And people are like, well, I think it's going to be 8.4 because gas prices are down. And you're like, what? Like, you know, nobody can, you can't just back of the napkin, you know, the U.S. economy, and yet we think we can. And again, all of this helps us in other places. It makes us brave, it makes us ask the good looking person on a date, it leads us to start a business, it makes us happy. So there's lots to like about overconfidence in other places in investing, it gets us in big trouble.
- [29:58]
A
How does that work in tandem with, you know, you also mentioned in addition to over precision, there's the excess belief in your own skill. Most people think that they are more skilled than average, which mathematically speaking cannot be true. On top of that, there's also excessive optimism or unrealistic optimism. It seems as though with all of those working together in tandem, that leads to a massive ego problem. Can just one of those be ratcheted down or do they all need to Be ratcheted down or kept in check together.
- [30:32]
B
Yeah, it's a great question. And you know, to further compound this, I think ego is the sort of the bias that begets all of the other biases, because it's because of our ego that we never even recognize these errors in our thinking or sort of take the time to check ourselves. I think some people are more prone to one or the other. And what we find, it's interesting, we find in about 80% of people, they have overconfidence, while the 20% of people who don't suffer from overconfidence, it's not like they're dead on, they're sort of depressed, they're undershooting the mark, whereas people who are overconfident are overshooting the mark. So I think very few of us see the world clearly and it's just sort of knowing where we sit along each of those spectrums. And I think some of us are more prone to certain forms of overconfidence than others. But if you don't kind of get this one right, and if you don't at least own that you're susceptible to this none of the other stuff, you won't have the appropriate humility to work on any of the other pieces.
- [31:40]
A
Right, so let's talk about some of the other pieces. Conservativism is another one of the pieces that you discuss. First of all, how would you define that and how does that apply to investors who would identify as more aggressive or more risk taking?
- [31:57]
B
Conservatism is this. It encompasses a couple of things. What I tried to do with these four is cover a lot of waterfront with four broad tendencies. But conservatism includes things like our distaste for uncertainty and our confusing what we know with what is good. Now it also includes stuff like risk aversion or loss aversion. I've never been asked this question, but I think it's a very deep question and a very good question. So you might look at someone who is, on their face, a very aggressive investor, right? And you'd say, how do they suffer from conservatism? Well, what we see in some really aggressive investors is this tendency to confuse what they know with what is safe. So they might be all in on. We won't name individual securities, but like they may be all in on a certain electric vehicle manufacturer. And they would say, look, I know all about this. I go to every forum, I read everything the founder ever says, I know all about this. And they might confuse their awareness of that Thing with the desirability of the investment. You know, another thing that we see is people over investing in their home country, in their region of the country, and even in their own part of the business world. People in the Northeast over invest in financials, people in the west over invest in tech, People in the Midwest over invest in ag stocks. And this is all because they know it, right? They're like, oh, I live in Manhattan, I'm around finance folks all day, so I'm going to invest in finance. Or I live in Silicon Valley, so let's do some tech stuff. Because I know that, well, living in San Francisco and knowing how to diligence a tech stalker are different things. And so I think you can fall prey to some of this conservative thinking or what I'm calling conservatism, and still do something that's quite, quite risky because you're just confusing your familiarity with safety.
- [34:01]
A
How can people overcome their tendency towards this behavioral risk?
- [34:06]
B
I'll kind of give a blanket answer for all of them. Behavior change is so difficult. Something like 80 something percent of behavior change interventions fail. And anyone who set a New Year's resolution knows this. But I have the E's of behavior change. The first E is education. So, Right. The folks who are listening to your podcast today are learning about these things. Hopefully they're seeing these tendencies in themselves and they're going, oh, you know, I'm a little bit, whatever, I'm a little bit overconfident. I should work on this. Part of education is what we call meta knowledge, which is knowing what you don't know, it's not getting it all right? It's just like knowing where you're weak, knowing what you don't know. The second piece is environment. And I think this is probably where people fall down a lot. You know, one of the things that I've learned in my study of human behavior is people are usually about as good or bad as their systems. And I think what people try and do when they read a book like mine is sort of White Knuckle it Through. They're like, okay, well look, I know about all this bias now, so I'm just going to kind of white knuckle my way through my investing life now, trying to discretionarily pick out times when I'm, you know, encountering some of these biases. It just doesn't work that way. The number one thing you need to do is surround yourself with the right people, the right asset allocation, the right tech platform, because some of them incent you to do really stupid stuff. All of these things in your environment, down to the type of news you're watching and the articles you're reading, these are highly predictive of how you're gonna behave. And then the last E is encouragement, which is the human element. Even when you've forgotten all those lessons, even when your environment hasn't been enough to keep you in check, you need that advisor, that coach, that friend, spouse, whatever, who's helping you and bailing you out at the moment when you want to do the wrong thing. If you've got the right education, the right environment and the right people in your corner, you can get there. But it does take all three legs.
- [36:15]
A
Of that stool when it comes to that last one. How do you separate good advice from bad? How do you avoid groupthink? The challenge with having people in your corner is the sociological problem.
- [36:27]
B
The first thing I would do is look for a professional. A professional is going to trump your buddy from book club more, more often than not. And look for someone with advanced training in these things. This isn't perfect advice, but it's directionally right. Once the professional stuff is taken care of, they've got the cfp, the cfa, whatever it is. Once you see that their incentives are good, you know how they get paid. They're not taking advantage of you. I think it's important that you have a connection with someone. You know, when I was doing clinical work, one of the things we knew from the clinical outcomes literature, we looked at who got better and who didn't in therapy. And the best predictor of that was the level of trust and the level of rapport between that therapist and their client. You could work with the smartest expert in the world, but if you find them obnoxious or you don't click, you're unlikely to follow their advice. It's a mix of making sure you've got a real expert in your corner, making sure they're being compensated in a fair way, and then making sure you like each other and that you connect, because that matters a great deal.
- [37:40]
A
Close your eyes. Exhale, Feel your body relax, and let go of whatever you're carrying today. Well, I'm letting go of the worry that I wouldn't get my new contacts in time for this class. I got them delivered free from 1-800-contacts. Oh, my gosh, they're so fast. And breathe. Oh, sorry. I almost couldn't breathe when I saw the discount they gave me on my first order. Oh, sorry. Namaste. Visit 1-800-contacts.com today to save on your first order 1-800-contacts. Hey, what's up, y'?
- [38:10]
B
All?
- [38:10]
A
Kelly Clarkson with Wayfair. My favorite thing about the holidays? Decking out my whole house. It's not a competition, but if it was, well, I'd win the season with Wayfair Outdoor inflatable Santa.
- [38:21]
B
Got it on. Wayfair. Trees, lights and ornaments.
- [38:23]
A
Wayfair hosting must haves like dining sets, beds, sheets and towels. Wayfair for everything in your style delivered with fast and free shipping. Visit Wayfair.com or the Wayfair app to win the season. But again, it's not a competition. Wayfair Every style, every home.
- [38:40]
B
Shopping is hard, right? But I found a better way. Stitch Fix Online personal styling makes it easy. I just give my stylist my size, style, and budget preferences. I order boxes when I want and how I want. No subscription required. And he sends just for me, pieces, plus outfit recommendations and styling tips. I keep what works and send back the rest. It's so easy. Make style easy. Get started today@stitch fix.com Spotify that's Stitch Fix.com Spotify.
- [39:17]
A
Let's talk about the two behavior risks that we have not discussed yet. The next one is attention. What is the risk of diverting our attention to the wrong places?
- [39:27]
B
The easy way to put this bias is that we confuse things that are loud with things that are likely. And so if you think about something like people's fear of being attacked by a shark versus people's fear of getting diabetes, it's not even close. People are way more scared of sharks than something like diabetes. But 1 in 300 million people get attacked by a shark every year. And one in three Americans are pre diabetic. But, you know, there's a Shark Week on, on Discovery Channel. There's no diabetes week on Discovery Channel. And so, you know, we do this with popular media. Things are misrepresented in the popular media, so it makes them feel scarier than they are. And then you pair this just with the way that our mind works. We know that bad information is about two and a half times as sticky as good information. You know, even if we're getting a balanced media diet, that's equal parts good and bad news, which would be candidly very hard to do, it's still going to feel a lot scarier than it is. A lot of the chapter around attention is just getting people to think in terms of probability and not in terms of their gut. If you look at something like investing in a single stock, I mean, this is something that people want to do all the time. I like company X, I like company Y. I'm going to throw some money in there. If you look just from a probability standpoint, I think it's 3/4. I think it's 74% of stocks. Individual names have a lifetime expected return of zero. So when you look at, you know, you look at the average individual stock, what it does on a long enough timeline is go bankrupt and fall to pieces. But if you look at the average index, you know, you're getting 8 to 10% a year over long periods of time because a few hundred stocks do all the heavy lifting, right? People don't think about the numbers. They don't think, hey, three quarters of companies go bankrupt and they think, oh, what if I had bought Apple when I bought, when it IPO'd? I could have turned my $10,000 into $10 billion or whatever the number is of what could have been is louder than the likelihood of any individual names probably going to go to zero. Trying to get people to think probabilistically is a big deal.
- [41:53]
A
I'm hearing multiple cognitive biases that touch that answer. There's the availability heuristic, there's recency bias, there's survivorship bias. All of that seems to be wrapped up in this behavioral risk of putting our attention towards that which is most salient rather than that which is most probable.
- [42:11]
B
Yeah, you nailed it.
- [42:13]
A
The last risk is the risk of managing emotion. Can you talk about that?
- [42:18]
B
Yeah. So, again, emotion is one of these things that's so much a part of how we make decisions. I think there are some people who think that emotion can be a form of signal, right? Like emotion can be used to trade more effectively or to make better decisions. This is almost universally not the case. When we look at emotion, we know that people make really poor decisions in times of heightened emotion, whether it be positive or negative. And we know that people tend to engage in something called answering an easier question. That has somewhat to do with the affect heuristic that you talked about earlier. If you think about something like, is boating dangerous? Right. If you ask people, is boating dangerous? You know, hey, do you want to go on a boat ride with me? Everyone goes, yeah, like, I'll go on a boat ride. And you know, I'll go, I'll go on a boat ride. I'll go to the lake. Well, boating is super dangerous, but people don't perceive it as dangerous because it's fun. Right? The emotion of fun overrides the objective assessment of the dangers of boating. Now, you ask the average person is investing dangerous. And they go, oh yeah, investing is dangerous. Wall Street's a casino. Or all these things that we hear over the long term. Investing is not dangerous at all if you're doing it at all correctly. Investing for the long term is quite safe, and yet people have a different emotional experience of it than, say, boating. There's all these studies I found where sort of limiting emotion, trying to mechanize your process, to automate your process, led people to make really good decisions. The small departure from that, I would say, is that positive emotion can push you to save more and to take risk. There was a great study I cited in one of my books that talked about two groups of people. One was a control group, so no intervention. The other group was shown a picture of their children and their family for five seconds before they could transact any business in their checking account. And the people who saw a picture of their kids for five seconds every time that they logged in saved more than twice as much as the control group. Now that's emotional, right? They were being sort of recentered on the thing that mattered most to them. And so that was leading them to make different decisions and emotional decisions, but they were positive decisions. Just make sure that the emotion you're feeling is sort of channeling that behavior in a good way. We know that people continued to save in college savings plans all through the great financial crisis, even as they were pulling money out of every other equity vehicle because they love their kids and they see their kids every day and they go, oh God, I gotta send little, you know, Bobby to college. It allowed that positive emotion, allowed them to overcome that fear. Use emotion to help you overcome your fears, but don't succumb to the emotion that tells you to be fearful.
- [45:24]
A
On that note, when is fear prudent and when is it misguided? How can we validate a given investing idea that we have?
- [45:35]
B
There's this idea that I stole from the 12 step programs called halt. And in the addiction recovery programs, they say to halt or to stop when you are hungry, angry, lonely or tired. So I think emotional extremes, whether extremes of fear or extremes of happiness or euphoria or greed, are largely to be avoided. But one of the things that I will say about fear is perhaps you're having a fear of not a 10% market decline, but a fear of perhaps I haven't saved enough, or perhaps this person I've entrusted with by money is not an honest person. These are the types of fears that I warrant further exploration. But if the fear is about a sort of typical amount of market volatility. I think that can be mitigated with education and encouragement and all the things we talked about earlier. But there are certain types of financial fears that may be warranted. I think people in large respect are not as worried about retirement as they should be. If you look at the number of people who say they're worried about retirement and then what the average person has to pay for retirement, some people should be feeling more fear. If that fear pushes you in a more prudent direction, then it's worth listening to. If it pushes you toward panic, it may be worth working past.
- [47:03]
A
Well, Daniel, we are coming to the end of our time. Are there any final takeaways that you would like to leave this community with?
- [47:09]
B
I'll go back to my earlier thought about just how money touches every part of our lives. And I just hope that people you do such a service here by educating your listeners about sort of the fundaments of personal finance. And I just hope people will take 10 minutes, 15 minutes today to take one step in the direction of, of getting their financial house in order. Because I do think it lifts all boats. It's not this thing that's disconnected from the more important parts of life. It's actually quite connected. And in terms of people finding me, I'm on Twitter at Daniel Crosby. I have my own podcast called Standard Deviations, and I'm also on LinkedIn. Daniel Crosby, PhD.
- [47:53]
A
Thank you so much for listening. This was one of five episodes themed around fi r e. Tune in every day this week because we'll have another great episode from our greatest hits vault. Again, the episode that you just heard Originally aired on November 16, 2022 and is themed around that letter F for financial psychology. We're sharing this with you as every day this week we play five letters of fiire. A new episode is each day. Thank you so much for being part of the Afford anything community. Happy final day of Hanukkah for all who celebrate. Happy holidays to all. And I will see you tomorrow for the first of the two letter increasing your income. That's tomorrow. I'll see you there.