FinSam_Peter_Mixdown_1
00:00:00.000 | - Hello everybody, it's Sam from
00:00:01.800 | the Financial Samurai podcast.
00:00:03.880 | And in this episode, I have a special guest with me,
00:00:06.180 | Peter Atwater, author of "The Confidence Map."
00:00:10.020 | Say hello Peter and welcome.
00:00:12.000 | - Hi Sam, glad to be here.
00:00:13.520 | - So you are a adjunct professor
00:00:16.520 | at the College of William & Mary, my alma mater.
00:00:19.240 | So I've got to start by asking you,
00:00:21.680 | how's that experience going and how did you find that job?
00:00:24.960 | - So it's interesting 'cause I'm an alum.
00:00:28.080 | I'm also the parent of William & Mary's alums.
00:00:31.280 | My wife is an alum.
00:00:32.580 | And so this has been sort of a round trip
00:00:35.960 | to go back into the department that I graduated from
00:00:39.560 | and actually working with colleagues
00:00:41.840 | that taught me at one point, which is a wild thought.
00:00:45.440 | But no, I started teaching a class
00:00:48.920 | at the University of Delaware
00:00:50.320 | and got talking to some of my former colleagues
00:00:53.800 | at William & Mary and they said,
00:00:56.440 | "Why don't you come teach that here?"
00:00:58.360 | And so that's how this all started.
00:01:01.080 | - Is it that easy to say, "I'm an alum.
00:01:03.480 | "I have something to teach, please hire me."
00:01:05.440 | How does that work?
00:01:06.680 | - So I think they were looking for somebody
00:01:09.120 | in the department who had applied experience.
00:01:12.720 | A lot of economics tends to be theory.
00:01:16.360 | And my interest more broadly is,
00:01:19.720 | how does what we teach theoretically get applied
00:01:24.320 | in real terms in the markets?
00:01:25.960 | So, because I think that often there's a disconnect
00:01:28.680 | between the behavior we would anticipate in concept
00:01:32.240 | and what happens in practice.
00:01:34.640 | - Right, right.
00:01:35.480 | I mean, absolutely.
00:01:36.360 | So behavior finance,
00:01:37.800 | are you in the finance department or economics department?
00:01:40.040 | - Economics department.
00:01:41.320 | - Okay, yes.
00:01:42.160 | I was an economics major as well.
00:01:44.240 | Those were good times.
00:01:45.620 | How old are your children now?
00:01:48.560 | - In their 20s.
00:01:49.880 | - Okay.
00:01:50.720 | And so the graduate from William & Mary,
00:01:51.600 | what are they up to?
00:01:53.120 | - So they both work for government contractors in DC.
00:01:56.720 | - Ah, okay, okay.
00:01:58.600 | That's, there's a lot of money and power
00:02:00.440 | up in Northern Virginia.
00:02:02.280 | - There is a fascinating place.
00:02:04.520 | - So congrats on your book, "The Confidence Map."
00:02:09.000 | I had to read, great book.
00:02:10.760 | And I'm looking to help listeners get an understanding
00:02:14.440 | of what the confidence map is.
00:02:15.800 | I can describe it,
00:02:16.620 | or maybe you can talk about the X-axis,
00:02:18.760 | the Y-axis and the four quadrants.
00:02:22.080 | - Sure, so the confidence map is trying to create
00:02:25.400 | a framework to visualize confidence.
00:02:28.080 | Confidence tends to be something that we talk about,
00:02:30.780 | but don't really understand.
00:02:33.240 | We know when we see it,
00:02:34.820 | but we've not really spent much time
00:02:37.080 | thinking about what it is.
00:02:38.720 | And I concluded that confidence requires
00:02:42.280 | two critical feelings,
00:02:44.240 | a feeling of certainty,
00:02:46.400 | that we know that things are predictable
00:02:48.200 | and that we can anticipate what's ahead.
00:02:51.280 | And then the other is control,
00:02:52.800 | that we feel prepared and have the tools
00:02:55.960 | and resources necessary to be successful.
00:02:58.880 | And so what I did was to put those as axes
00:03:02.560 | on a simple two by two box chart
00:03:05.320 | with certainty on the X-axis and control on the other.
00:03:10.320 | And the result is four environments
00:03:14.000 | where we have different mixes
00:03:16.200 | of how those two things come together.
00:03:19.400 | - Right, and so for those who want to know
00:03:22.080 | what the boxes are,
00:03:23.600 | so high certainty, high control is the comfort zone,
00:03:27.440 | high certainty, low control is the passenger seat,
00:03:31.160 | low certainty, low control is the stress center,
00:03:34.800 | and high control, low certainty is the launch pad.
00:03:39.600 | And I think most of us would like to be
00:03:42.240 | in the high certainty, high control comfort zone,
00:03:44.920 | upper right-hand box,
00:03:47.000 | but I'm not sure how many of us can actually get there.
00:03:50.160 | And we must probably be in different boxes
00:03:52.760 | with different types of subject matters
00:03:54.600 | and different types of activities.
00:03:56.600 | - And even at different moments of our day.
00:03:59.000 | I mean, I demonstrate in the book
00:04:01.240 | that a plane ride can take us all over those four boxes,
00:04:06.000 | depending on if the ride is turbulent
00:04:08.880 | and you can suddenly find yourself in the stress center.
00:04:11.800 | - So one of my favorite topics about personal finance
00:04:16.440 | is giving people the courage, the confidence
00:04:20.360 | to be able to do what they want,
00:04:22.680 | to be able to speak their mind,
00:04:24.560 | to be able to live a life more true to themselves,
00:04:27.480 | not true to someone else.
00:04:29.000 | And I think part of the way to get there
00:04:30.840 | is to have more money,
00:04:32.040 | because the more money you have,
00:04:34.120 | the more you can tell people to screw off
00:04:35.800 | and you can just do whatever you want.
00:04:37.480 | So one of my questions for you, Peter,
00:04:39.200 | is given we like control and certainty,
00:04:43.000 | why do you think more people don't save more money?
00:04:47.280 | Why not save more money?
00:04:48.440 | Why not learn more about personal finance?
00:04:50.360 | Why not invest more for your future?
00:04:52.360 | What's going on here?
00:04:53.440 | - So I think part of it is that
00:04:55.440 | when we don't have confidence,
00:04:57.760 | we don't think as much about the future.
00:05:00.800 | So the opposite of confidence is vulnerability.
00:05:04.600 | And so if I'm feeling vulnerable,
00:05:07.120 | I'm focused on the problem that's in hand.
00:05:10.760 | And so my whole orientation
00:05:13.960 | turns from the future to the present.
00:05:17.360 | And that affects all of the choices that I make.
00:05:20.760 | And so I'm not gonna commit the resources
00:05:24.200 | to this abstract thing called retirement or the future,
00:05:27.840 | when in fact I have an immediate problem
00:05:30.840 | that I need to address.
00:05:32.600 | And I think that's a big piece of why you don't see
00:05:36.560 | the focus on the future and retirement,
00:05:38.960 | particularly today,
00:05:40.000 | given where a lot of consumers' confidence is.
00:05:43.600 | - And where do you think the average consumer confidence is
00:05:47.680 | in terms of their personal finances?
00:05:49.680 | - I think the further away you get
00:05:52.160 | from people in the market, the lower it is.
00:05:55.120 | I'm the economist who came up with the K-shaped recovery.
00:05:58.800 | And what I've found is that
00:06:00.200 | those who are closest to the markets who've been invested
00:06:03.720 | tend to feel really good right now.
00:06:06.080 | They've done extraordinarily well.
00:06:08.120 | There's a lot of wealth that's been created.
00:06:10.800 | But if you didn't participate,
00:06:13.440 | you have feelings like you've been left behind.
00:06:15.920 | And you add inflation,
00:06:17.800 | particularly food and energy inflation,
00:06:20.080 | and you really start to feel like you're behind.
00:06:22.760 | - Right.
00:06:24.000 | And when you start feeling behind,
00:06:26.680 | is it fair to say that you will take action
00:06:29.360 | to stop feeling behind
00:06:31.360 | and to try to learn more and do more?
00:06:33.840 | What happens there?
00:06:35.040 | - So learning is really hard when we don't have confidence
00:06:38.760 | because our brain is already preoccupied
00:06:43.560 | with the problems that we're trying to solve elsewhere.
00:06:47.080 | It's much easier to think creatively and abstractly
00:06:52.080 | when you have confidence than when you don't.
00:06:54.360 | And there's a lot of work that Daniel Kahneman has done
00:06:57.520 | looking at the way that the actual cognitive processing
00:07:01.560 | that we use.
00:07:02.400 | And we use up a lot of bandwidth when we feel vulnerable
00:07:07.400 | because we're trying to address other things
00:07:11.200 | that are bothering us.
00:07:12.400 | - Right.
00:07:14.360 | So there was a great part in your book.
00:07:16.560 | It talked about, I think it was about problem solving
00:07:19.000 | or stressing or like solving one and then solving two.
00:07:22.360 | And when, what were the terms again?
00:07:24.880 | - So system one and system two
00:07:26.680 | are the processing terms that psychologists use.
00:07:30.040 | - Oh, right.
00:07:30.880 | So I thought that was really fascinating
00:07:32.200 | because in terms of system one,
00:07:35.040 | you talked about kind of doing things almost on autopilot.
00:07:37.880 | But as soon as we get into system two,
00:07:40.160 | where we're trying to multiply by 17
00:07:42.480 | versus multiply by two,
00:07:44.360 | then the whole cognitive process slows down.
00:07:48.600 | Can you just talk about that whole system one, system two?
00:07:51.040 | - Sure.
00:07:51.880 | So if I think about counting by twos,
00:07:53.480 | two, four, six, eight, 10, 12,
00:07:54.800 | that's system one thinking.
00:07:56.800 | It's easy, it's fast, it's impulsive.
00:08:00.320 | I'm not even thinking necessarily
00:08:02.440 | when I'm rattling all those off.
00:08:04.680 | And it's like driving your car
00:08:06.720 | on a straight highway on a sunny day.
00:08:09.320 | Psychologists talk about that almost as in terms of fluency.
00:08:13.480 | And I like that 'cause it just,
00:08:15.480 | not only does it describe
00:08:17.560 | learning a second language effectively,
00:08:19.000 | but just that through that, that through feeling.
00:08:21.840 | And through is all about system one thinking.
00:08:25.120 | - Right.
00:08:26.120 | - But if I suddenly make you add by 17s,
00:08:29.680 | now you've got complexity that's hard and slow and tiring.
00:08:34.680 | And it becomes really difficult
00:08:40.520 | to deal with other things
00:08:43.320 | when your brain is still struggling
00:08:45.400 | with these problems that you're trying to solve
00:08:48.720 | in the back of your mind unconsciously.
00:08:51.080 | - Right, right.
00:08:52.080 | No, absolutely.
00:08:53.240 | And so how does one move from system two
00:08:56.800 | to system one more efficiently?
00:08:59.240 | - So it's about regaining a sense of control
00:09:04.080 | and feelings of certainty in the process.
00:09:06.680 | And often that starts with really small steps.
00:09:10.120 | Doing something to demonstrate that you have that,
00:09:16.360 | often it means preparing to take control
00:09:19.760 | and establishing little habits,
00:09:24.480 | little routines that gets you prepared
00:09:27.240 | for that big moment where you may be changing jobs
00:09:30.920 | or you may be moving locations
00:09:33.120 | or doing something dramatic to take control.
00:09:37.000 | We don't necessarily take the time to be prepared for that.
00:09:41.640 | And so we fail, we get discouraged again,
00:09:46.520 | and then we stop trying.
00:09:48.240 | - Right, yeah.
00:09:52.280 | That's one of the things we talk about on Financial Samurai
00:09:54.560 | is why give up when you can keep on going?
00:09:58.240 | Is there something about confidence and giving up
00:10:01.520 | that's interrelated?
00:10:03.520 | - Yeah, so when we deliberately take risk,
00:10:08.520 | take control, and we don't succeed,
00:10:12.120 | we feel like we have only ourselves to blame.
00:10:16.320 | And that box of low certainty, low control,
00:10:20.240 | that stress center is a place
00:10:22.720 | where our stories reflect how bad we feel.
00:10:26.800 | And we're mean to ourselves in that box.
00:10:30.880 | In so many dimensions, we search,
00:10:36.840 | am I ugly, am I stupid, am I fat?
00:10:39.120 | But we self-criticize,
00:10:43.760 | and often it's a function of the fact
00:10:47.120 | that we've failed at something
00:10:49.120 | and we have nobody to blame but ourselves.
00:10:51.680 | And we get focused on the past
00:10:53.880 | rather than just living in the present.
00:10:56.920 | - Now, is that one of the reasons why people don't try?
00:10:59.480 | Because if you don't try,
00:11:00.360 | then nobody can blame you or criticize you?
00:11:02.720 | - Yeah, or often they've been led to believe
00:11:05.600 | that they don't have the ability in the first place.
00:11:08.520 | A lot of folks who are in the passenger seat,
00:11:11.120 | who are in a workplace environment
00:11:14.400 | where their manager may be demeaning and belittling,
00:11:17.840 | or they're in a relationship
00:11:19.880 | where their partner's not encouraging,
00:11:22.240 | have been told stories that they believe
00:11:25.280 | that they couldn't successfully take a chance
00:11:28.720 | and succeed.
00:11:31.200 | So they have a whole narrative
00:11:34.280 | that goes along with their low confidence.
00:11:36.560 | - Yeah, that's a good point about managing,
00:11:39.760 | bad managers and employees.
00:11:42.400 | I think about that as a parent now
00:11:44.280 | in terms of the messages that I wanna give my children,
00:11:47.480 | and maybe some listeners or parents themselves.
00:11:49.840 | Is there some kind of psychological thing
00:11:53.720 | where maybe parents have their own low self-confidence
00:11:56.240 | that gets fed onto their children?
00:11:59.240 | Where do you think parents are in the confidence map?
00:12:03.000 | - So parenting, yeah, I mean,
00:12:04.560 | parenting moves us all over the place.
00:12:06.360 | If you've taught your kids to drive,
00:12:09.320 | you've been in that passenger seat.
00:12:11.080 | - Nope, not yet.
00:12:11.920 | - And well, it can go from being very calm
00:12:14.800 | to chaotic in a flash.
00:12:16.960 | - Absolutely.
00:12:17.800 | - I could speak to that from personal experience.
00:12:20.280 | But one of the things as a parent,
00:12:25.280 | we often try to solve a problem
00:12:28.920 | or help our children to solve a problem
00:12:31.920 | without also thinking about the lingering feelings
00:12:36.920 | from what have just happened.
00:12:40.080 | When I talk to doctors,
00:12:42.160 | I say the difference between curing and healing a patient
00:12:46.320 | is the restoration of confidence.
00:12:49.120 | And so to think about,
00:12:52.360 | and I've done this work with coaches,
00:12:55.280 | you know, when somebody is struggling
00:12:58.440 | to help them to think directly about,
00:13:03.320 | you know, what are the steps that you need to take,
00:13:06.000 | have to take to regain control, to regain certainty,
00:13:11.000 | and not to presume that you know,
00:13:13.120 | that you as a parent understand,
00:13:15.800 | because you may, if you impose your own experiences,
00:13:20.800 | chances are you're wrong.
00:13:21.960 | And that's one of the things that I've discovered is,
00:13:25.320 | we can all go through the same experience,
00:13:27.720 | but perceive that experience in very different ways.
00:13:32.720 | - Yeah, parenting is super hard.
00:13:36.040 | I think we're probably in the stress center a lot,
00:13:39.800 | low certainty, because we don't know
00:13:41.360 | whether our parenting skills will help them,
00:13:43.840 | because it's gonna take maybe 20 years
00:13:45.720 | to figure out if they're good people.
00:13:48.040 | And then control, maybe medium control.
00:13:51.680 | I mean, we control what they do,
00:13:53.320 | and what they eat, and what they watch,
00:13:54.560 | but after they gain a certain age, no more control.
00:13:58.400 | - No, it's a process of losing control as a parent.
00:14:01.520 | And hoping that, you know,
00:14:04.240 | I think the self-help world has done a lot of people
00:14:09.240 | a disservice in suggesting that you have to have confidence
00:14:13.200 | to be successful.
00:14:14.440 | And rather than encouraging our children to be confident,
00:14:19.640 | we should be encouraging them to be resilient,
00:14:21.960 | to accept that there are going to be moments in life
00:14:26.240 | where you're naturally feel vulnerable,
00:14:28.880 | where you naturally don't have control,
00:14:30.720 | naturally don't feel things are certain.
00:14:35.120 | And that success ultimately comes from developing the skills
00:14:39.440 | to navigate those, to be comfortable in being uncomfortable.
00:14:44.440 | - No, I absolutely agree.
00:14:49.520 | Now, as a behavior economist
00:14:51.240 | who came up with the confidence map,
00:14:53.300 | can you recognize people who are underconfident,
00:14:57.280 | confident, or overconfident?
00:14:59.560 | What are some kind of titles that you can see?
00:15:01.920 | I mean, we're talking right now,
00:15:03.760 | I don't know how you're viewing this conversation,
00:15:06.640 | or you're viewing me.
00:15:07.800 | What are some things that go on in your head
00:15:09.440 | when you think about confidence in other people?
00:15:11.440 | - So I look for two other behaviors
00:15:15.600 | that will naturally tie to how people feel.
00:15:19.720 | One is the stories they're telling themselves and others,
00:15:22.940 | because our narratives always mirror our mood.
00:15:26.180 | And so your description of what you think is coming,
00:15:31.420 | how you feel about the world around you,
00:15:34.640 | those stories are gonna give me insights.
00:15:36.880 | And so is your behavior,
00:15:38.480 | because a confident person behaves in ways
00:15:41.240 | that are distinct from somebody
00:15:42.560 | who doesn't have confidence.
00:15:44.780 | We readily accept the notion of overconfidence,
00:15:49.440 | and overconfidence is seeing more certainty
00:15:52.460 | and feeling more control than are real.
00:15:55.760 | We need to be as open to the idea of underconfidence
00:16:01.320 | where we perceive too much uncertainty
00:16:04.800 | and feel too powerless versus what's real.
00:16:07.480 | When I think about people catastrophizing,
00:16:10.480 | that's a telltale sign of somebody who's underconfident.
00:16:15.360 | - Yeah, you see that all the time on the internet.
00:16:19.100 | Like the world is coming to an end.
00:16:20.600 | - Yeah, and we have a lot of that today.
00:16:22.480 | I actually think underconfidence
00:16:24.560 | is one of the greatest risks that we have.
00:16:29.840 | That people are overestimating the troubles
00:16:34.800 | and what might be ahead,
00:16:37.360 | and that that itself becomes a self-fulfilling prophecy.
00:16:42.080 | - Yeah, definitely.
00:16:43.600 | I mean, I play a lot of tennis
00:16:44.760 | and I play competitive tennis.
00:16:45.940 | And if you tell yourself you can't win,
00:16:48.120 | you're already losing.
00:16:49.520 | It's really hard to win if you don't believe you can win.
00:16:53.080 | What about the confident person
00:16:54.720 | who kind of shows underconfidence?
00:16:58.560 | Is there such a person where
00:17:00.600 | you know that they're pretty smart,
00:17:02.120 | you know that they know their stuff,
00:17:03.840 | but they kind of give off a,
00:17:06.160 | ah, I don't really know what I'm talking about.
00:17:08.200 | Is there that type of archetype?
00:17:10.360 | - Yeah, 'cause I think confidence and self-confidence
00:17:13.680 | or confidence and self-esteem
00:17:15.960 | are two very different things.
00:17:18.520 | I mean, I've dealt with many successful people
00:17:22.000 | who are not self-confident.
00:17:25.880 | - Oh, awesome.
00:17:26.840 | - And so they wear this mask of bravado
00:17:31.120 | that is hiding the lack of self-confidence that they have.
00:17:35.940 | Now, as a researcher in what I do,
00:17:39.440 | I'm not really focused on self-confidence.
00:17:42.320 | To me, that's an inward assessment.
00:17:45.240 | What affects our behaviors a lot more
00:17:48.440 | is our outward assessment.
00:17:51.040 | I mean, you look at COVID
00:17:53.040 | and I saw lots of people
00:17:54.400 | who were incredibly self-confident,
00:17:57.520 | but whose confidence was really shaken by the outbreak.
00:18:02.520 | - Right, and during COVID,
00:18:04.600 | that was, I guess, the stress center,
00:18:06.640 | low control, low certainty,
00:18:08.520 | 'cause nobody had any idea what was going on.
00:18:11.120 | - That's right, and we acted like it.
00:18:12.840 | I mean, if you look at our decisions from March 2020,
00:18:17.240 | none of them were focused on the future.
00:18:19.120 | I mean, we couldn't imagine a future.
00:18:21.400 | And they were all impulsive and emotional.
00:18:24.880 | And here's the irony of it, Sam,
00:18:27.640 | that the world is panicking.
00:18:30.920 | And panic, as a researcher, to me,
00:18:33.960 | is a wonderful leading indicator
00:18:37.280 | that a low in confidence is rapidly approaching,
00:18:41.120 | that the worst is actually behind us,
00:18:43.780 | not ahead of us like we think.
00:18:45.720 | And so if we, particularly from an investing perspective,
00:18:50.920 | can look at panic with some distance
00:18:54.480 | and appreciate that it's telling us
00:18:58.720 | that people around us are losing all confidence
00:19:03.720 | and are at the risk of catastrophizing
00:19:05.840 | and becoming woefully underconfident,
00:19:08.800 | then we can get prepared to go into the markets
00:19:13.000 | rather than run away from the markets with the crowd.
00:19:16.800 | - No, I agree.
00:19:19.520 | It's interesting right now in late 2023
00:19:23.000 | how S&P 500 seems like it's back to bull markets,
00:19:26.440 | tech stocks are on fire, a lot of confidence,
00:19:30.200 | and yet earnings seem to be declining year over year.
00:19:35.200 | There's a lag effect with the Fed funds rates
00:19:37.280 | slowing down consumption spending and business spending.
00:19:40.980 | Where do you think we are now on the confidence scale?
00:19:43.780 | - So one of the things that I think is really important
00:19:48.040 | is the difference between 2023 investing
00:19:52.340 | and early 2021 investing.
00:19:55.340 | If I rewind the clock two and a half years
00:19:59.520 | and I look at what investors were piling into,
00:20:04.160 | it was SPANs, it was NFTs,
00:20:07.900 | crypto with names that I can't say on TV,
00:20:14.540 | and things that were highly abstract and futuristic
00:20:18.900 | and fantasy and untested.
00:20:21.220 | And if I look at this year,
00:20:25.120 | what did investors flooded into?
00:20:29.620 | The magnificent seven,
00:20:31.940 | the most proven horses in the stable.
00:20:35.900 | Rather than being interested in, you know,
00:20:40.340 | that these unborn or young untested cult,
00:20:44.300 | we're investing in thoroughbreds that have,
00:20:47.740 | and that to me is a reflection of reduced confidence.
00:20:51.820 | - Reduced, right.
00:20:52.660 | - That we're not as confident
00:20:54.540 | as we were two and a half years ago.
00:20:56.540 | The way the indices work,
00:21:00.260 | that relative decline in confidence has been masked
00:21:05.260 | because those magnificent seven dominate,
00:21:09.240 | you know, Apple and Microsoft and Google,
00:21:11.780 | they dominate the indices.
00:21:14.620 | But I'm quite troubled by
00:21:18.340 | how relatively underconfident
00:21:22.560 | investors are versus two years ago.
00:21:26.900 | This is a different kind of bubble.
00:21:30.360 | This is a bubble in the things that are tried and true.
00:21:35.360 | - Yeah, it is interesting,
00:21:36.980 | the lack of breath in market participants,
00:21:40.300 | company participants of the S&P 500 is astounding.
00:21:43.820 | - Yeah.
00:21:44.740 | - Yeah, so it's gonna be interesting to see
00:21:46.940 | because they're definitely,
00:21:48.300 | if you look at the history of time,
00:21:50.020 | inverted yield curves lead to recession.
00:21:53.460 | But actually speaking of which,
00:21:54.700 | so a recession, the definition of a recession
00:21:56.960 | when I was at William & Mary
00:21:58.060 | was two consecutive quarters of declining GDP growth.
00:22:01.420 | That's what we had, I think,
00:22:03.740 | for fourth quarter last year and first quarter 2023.
00:22:06.980 | And I think we had that again in 2022 in the beginning.
00:22:10.500 | So why aren't we admitting?
00:22:12.460 | Why isn't the government saying,
00:22:14.140 | we already went through a recession?
00:22:15.900 | - You know, it's funny, Sam,
00:22:17.620 | I don't pay any attention to economic data at all.
00:22:22.620 | It tends to be a lagging indicator in the work that I do.
00:22:29.120 | And I don't, to me, what matters isn't the data,
00:22:36.060 | it's our interpretation of the data.
00:22:38.660 | And so I care, I pay much more attention
00:22:41.100 | to the stories that investors are telling each other,
00:22:44.420 | not the actual objective figures
00:22:47.380 | 'cause objective figures are not very useful.
00:22:50.100 | And I use the example in the book.
00:22:52.340 | I can tell you, if I tell you it's 70 degrees,
00:22:55.380 | you have to decide whether that's warm or cool to you.
00:22:58.460 | And if it's warm, you're gonna wear shorts.
00:23:02.020 | If it's cool, you're gonna grab a sweater.
00:23:04.620 | So data by itself needs a story.
00:23:08.720 | And it's those stories that actually translate
00:23:12.700 | into behavior, not the data itself.
00:23:15.620 | - Okay.
00:23:17.780 | I've never heard an economist not look at the data,
00:23:20.460 | pay attention to the data before.
00:23:22.660 | So what are the stories that you're hearing now
00:23:24.540 | from the business leaders you talk to
00:23:26.740 | or other professors or students?
00:23:29.260 | - Sure, so the stories are that the worst of inflation,
00:23:33.580 | the worst risks of recession are behind us.
00:23:37.760 | And that bothers me for two reasons,
00:23:41.900 | because to me, the best indicator of a recession
00:23:46.540 | is the fearlessness with which we take a recession seriously.
00:23:51.540 | And so there seems to be a broad consensus
00:23:56.380 | that there won't be a recession,
00:23:58.140 | or if it is, it's a soft landing
00:24:00.180 | where we've already concluded
00:24:03.140 | that we've successfully navigated it.
00:24:05.600 | So I'm more worried about a recession today
00:24:09.880 | given how few people are.
00:24:12.540 | And that's the nature of the work that I do.
00:24:14.740 | I'm far less worried about a recession
00:24:18.260 | when everyone is convinced it's coming.
00:24:20.500 | - Yeah, it'll be interesting.
00:24:24.220 | I mean, like you said, the terms, the behavior,
00:24:28.100 | it just seems to me like we're just talking
00:24:30.140 | stories, everything is a story.
00:24:32.340 | What is the definition of recession?
00:24:34.380 | Seems like it can be different for anybody
00:24:36.340 | interpreting it, and if you lose your job,
00:24:38.980 | well, that's probably a big recession.
00:24:40.940 | And if you don't, you're like everything is hunky-dory.
00:24:44.180 | And so one of the problems that I have
00:24:46.420 | on financialsamurai.com and the podcast
00:24:49.460 | is I'm generally a really optimistic person.
00:24:52.780 | I'm a super optimist.
00:24:54.140 | I think if I sprained my ankle,
00:24:56.220 | I think, thank God I didn't break my ankle,
00:24:58.780 | and I can still record a podcast the next day.
00:25:02.420 | And so what would you say to those super optimists,
00:25:05.820 | to those people who probably are overconfident?
00:25:08.780 | I'm probably a little overconfident.
00:25:11.460 | What should we do to make sure that we're not losing?
00:25:16.020 | We're not losing the audience here?
00:25:18.600 | - So what I think we should do is to remember
00:25:24.780 | that the future is always uncertain.
00:25:28.740 | And anytime you're convinced
00:25:32.660 | that you know what's coming for sure,
00:25:35.840 | you're going to be wrong.
00:25:37.860 | And that's true at both extremes.
00:25:40.460 | If I'm certain it's the end of the world,
00:25:42.500 | or I'm certain it's unicorns and rainbows,
00:25:45.020 | I'm gonna be wrong.
00:25:46.980 | And so we have to realize that our own imagination
00:25:51.980 | of the future is a function of our own level of confidence,
00:25:57.400 | that we're the ones who paint the image.
00:25:59.860 | And to be very careful
00:26:03.280 | when we can't imagine a different picture,
00:26:06.780 | because the more you can't imagine that other picture,
00:26:11.620 | the more likely that other picture is going to be.
00:26:15.700 | So I think you wanna be prepared for all pictures.
00:26:19.300 | And this is where as an investor,
00:26:24.620 | you wanna recognize that things are uncertain
00:26:28.240 | and allow for possibility
00:26:31.360 | both good and bad in your portfolios.
00:26:33.700 | - So in other words, I guess emotion is huge to investing.
00:26:39.280 | And I think people will go through
00:26:40.320 | these emotional roller coasters
00:26:41.560 | when they make so much and lose so much.
00:26:44.360 | And perhaps it's to obviously diversify,
00:26:47.880 | look at your risk tolerance
00:26:49.280 | and not get too caught up in the ups and downs,
00:26:52.580 | like many people did in 2021, for example.
00:26:56.720 | - Yeah, you wanna avoid those extremes in emotion,
00:27:00.940 | either being terribly optimistic or terribly pessimistic,
00:27:04.720 | because we make our worst financial decisions
00:27:08.040 | in those two moments.
00:27:10.240 | And I think it's, again,
00:27:12.840 | remember that you are encoded biologically, physiologically
00:27:19.340 | to behave in ways that makes investing
00:27:23.400 | completely counterintuitive.
00:27:26.140 | Successful investing means running into the fire
00:27:29.760 | and getting out of the bar
00:27:32.480 | where the champagne is being tossed around.
00:27:35.400 | And we don't, that's hard.
00:27:40.020 | That's hard to do exactly the opposite
00:27:42.680 | of what our gut is telling us to do.
00:27:45.440 | But if we can just avoid those two bad decisions,
00:27:49.940 | we're gonna be much better off
00:27:50.940 | because we do them in too big a scale,
00:27:53.460 | in too definitive a way.
00:27:55.380 | We sell out everything at the lows
00:27:57.260 | and we put everything in at the top.
00:27:59.980 | And just avoiding those two moments
00:28:03.020 | gives us much better long-term success.
00:28:06.060 | - Right.
00:28:07.900 | What do you think are the reasons
00:28:11.620 | why we are so emotional?
00:28:14.920 | Because what is our end game?
00:28:17.100 | What is our end game to investing in your opinion?
00:28:19.660 | What are all your students hoping to accomplish
00:28:23.020 | in 30 years?
00:28:24.140 | - Yeah, the end game in investing is abundance.
00:28:28.060 | And I say abundance generally because it could be money,
00:28:34.100 | it could be power, it could be choice.
00:28:38.700 | There are a lot of stories that we associate with wealth
00:28:43.320 | that aren't really about wealth.
00:28:45.060 | And if we can step back and identify
00:28:49.200 | what's the abundance we're looking for,
00:28:51.900 | then we can also identify the scarcity
00:28:54.500 | that we're afraid of on the other side,
00:28:58.280 | because that's where we get really emotional.
00:29:00.820 | If we don't have enough of what it is
00:29:05.740 | that matters most to us,
00:29:07.780 | then we become very impulsive and very emotional.
00:29:11.940 | And that's when we do, we make bad choices.
00:29:16.540 | - And do you think that fear of scarcity
00:29:20.620 | is overdone here in America in the land of abundance?
00:29:24.740 | - I think we lack an appreciation
00:29:28.660 | for the relative abundance that we have
00:29:31.220 | versus a lot of the rest of the world,
00:29:34.500 | but appreciate that this is an environment
00:29:38.780 | where comparison is so easy and is never ending.
00:29:43.780 | And I think one of the real downsides
00:29:48.620 | to social media today is the comparisons
00:29:51.740 | that people are making to those
00:29:54.460 | who are demonstrating confidence theater out,
00:29:57.420 | in such a grotesque manner that we feel inferior.
00:30:06.300 | And that inferiority is driving people again
00:30:10.020 | to making decisions that they would be wise not to.
00:30:14.020 | - Yeah, it's so interesting 'cause I grew up in Zambia,
00:30:17.100 | Malaysia, Taiwan, Japan,
00:30:19.660 | and some of the countries like Malaysia in the 80s,
00:30:22.340 | there's not a lot of abundance,
00:30:23.380 | or there's a huge dichotomy between the wealthy
00:30:25.540 | and the poor.
00:30:26.980 | And so when I come to America for high school,
00:30:29.700 | I'm impressed with how well off the general population is.
00:30:34.500 | And it seems like we take it for granted
00:30:36.140 | how good we have it, the clean water, the food,
00:30:39.260 | the internet access, stable government.
00:30:41.620 | And I wish more of us would just see the world more.
00:30:45.500 | - And one of the things that that requires
00:30:49.900 | is a sense of confidence.
00:30:52.140 | Travel is, particularly to places that are unfamiliar to us,
00:30:57.140 | requires a level of confidence to begin with.
00:31:00.860 | And so in a lot of the work that I do,
00:31:03.420 | I focus a great deal on are people traveling,
00:31:07.420 | where are they traveling?
00:31:08.780 | Because that is itself a reflection of mood,
00:31:11.900 | but I agree with you to the extent
00:31:13.500 | that you can see things that are unfamiliar,
00:31:16.620 | the people, places, it also creates a level of resilience
00:31:21.620 | because you've learned how to navigate what is unfamiliar.
00:31:27.220 | And those skills, again, are transferable
00:31:30.220 | to other moments in your life.
00:31:32.900 | - Tell me a little bit about your children in their 20s.
00:31:36.860 | I guess if you could rewind time
00:31:39.660 | to when they were 10 or eight or 15,
00:31:42.820 | is there anything you would have done differently
00:31:44.500 | in terms of teaching them or anything?
00:31:46.820 | - I think I would have encouraged them
00:31:52.900 | to have experiences where they fail more often,
00:31:58.700 | to appreciate that not succeeding
00:32:03.340 | is an important skill to learn.
00:32:06.100 | Not only does it foster empathy,
00:32:09.340 | but it also teaches them skills
00:32:14.340 | that become very useful later in life.
00:32:18.020 | I tell my students, fail early and often.
00:32:22.020 | Learn where the consequences of loss are,
00:32:28.900 | very low on a relative basis.
00:32:31.420 | I encourage them, take an improv course,
00:32:34.500 | you do things that push you out of the comfort zone.
00:32:38.580 | We have a lot of high-performing young people
00:32:43.540 | who some of them have never gotten to be.
00:32:46.580 | And that's a really bad experience.
00:32:51.160 | When you get that in your 20s and not eight and nine,
00:32:58.740 | you just get used to not succeeding.
00:33:01.940 | And often it's a very motivating,
00:33:04.460 | it's gonna push you in other ways.
00:33:09.220 | - Well, tell me about that B,
00:33:10.420 | because I remember trying to get straight A's
00:33:12.740 | as an economics major at William & Mary, and I couldn't.
00:33:16.060 | It was just so hard.
00:33:17.340 | I tried so hard and I couldn't get it.
00:33:19.840 | So as a professor, how much power do you have to say,
00:33:23.220 | you know what, Bob or Jane, you tried really hard.
00:33:27.140 | You didn't quite get it on the test,
00:33:29.140 | but you've got it at the end, but not on the test,
00:33:32.580 | but you explained it to me, you understand the concepts.
00:33:35.220 | Can you say, okay, I'll give you an A
00:33:37.540 | for who you are based on what you've learned,
00:33:39.660 | or is it very rigid?
00:33:40.820 | How does that process work?
00:33:42.580 | - Oh, I don't think there's a universal,
00:33:44.860 | from professor to professor.
00:33:47.660 | In a lot of the work that I do, Sam,
00:33:50.900 | I grade things anonymously.
00:33:53.420 | So I have no idea whose paper is whose,
00:33:56.180 | or whose test is whose, and that I found to be very helpful
00:34:00.140 | because unknowingly we bring a lot of bias
00:34:02.980 | to how we read things.
00:34:05.720 | And so it's helpful to disassociate the voices in class
00:34:11.820 | with what's on paper.
00:34:14.380 | - But let me ask you this though,
00:34:15.860 | which is, I think it's good to be objective
00:34:17.360 | in your grading, but what about the student that says,
00:34:21.940 | Peter, Professor Atwater, I would love to meet with you
00:34:24.940 | at office hours, once a week.
00:34:27.220 | And so you develop a relationship, you get to know them,
00:34:29.860 | they're trying hard.
00:34:31.940 | There has to be some kind of behavioral or bias
00:34:34.820 | towards that student who's trying harder than the others.
00:34:37.660 | - You know, at the end of the day, it's about outcomes.
00:34:42.140 | And helping them to realize that they've made progress,
00:34:47.140 | that what they've learned in that process
00:34:49.940 | is gonna help them.
00:34:52.700 | And I've often had students who've done poorly
00:34:55.980 | for whom I've written tremendous recommendations
00:34:59.820 | to graduate school, to say, you know, here's the grade,
00:35:04.380 | you know, student got a B or a C, you know,
00:35:07.660 | but that doesn't tell the story of what they did.
00:35:10.100 | And I think those are really powerful.
00:35:13.700 | And at the same time, I've had students who've gotten A's
00:35:16.380 | that have come and asked for a review and I've said,
00:35:19.020 | you got an A, great.
00:35:20.780 | That's all I know about you.
00:35:22.320 | - Well, that tells me that making the effort
00:35:26.780 | to make a connection with your professors,
00:35:29.060 | your colleagues, your bosses, your readers,
00:35:31.680 | your listeners matter.
00:35:33.220 | People wanna help people they like.
00:35:34.980 | - It matters hugely.
00:35:35.900 | And again, it comes back to confidence.
00:35:38.140 | If we have a relationship and you're familiar to me,
00:35:41.460 | then, you know, there's trust, there's confidence
00:35:46.460 | and, you know, there's strength in that.
00:35:50.300 | - And it's one of those things, again,
00:35:51.700 | in our world of 24/7, you know,
00:35:55.780 | friends that are thousands of miles away online,
00:35:59.420 | we don't, there are a lot of young people
00:36:01.900 | who don't have those relationships right there with them
00:36:06.900 | that you're physically proximate.
00:36:11.000 | Those people who will come to your side
00:36:13.500 | in a crisis that we need in life.
00:36:16.780 | - Yeah.
00:36:18.580 | You know, when I was younger, I always heard,
00:36:20.740 | oh, networking is so important, office politics, all that.
00:36:24.340 | And it really run me the wrong way.
00:36:26.820 | But as I get older, I see the value of those relationships
00:36:30.140 | because as you get older, you gain more friendships,
00:36:33.780 | deeper friendships, and you can just call your friends
00:36:35.620 | and say, can you help me with this?
00:36:37.380 | Or, you know, your cardiologist friend
00:36:39.220 | or our professor friend in behavior economics
00:36:42.500 | or podcasting, you know, it's just,
00:36:44.580 | it's unbelievable what your network can do to help you.
00:36:47.300 | - Yeah, and to remember that asking for help
00:36:50.660 | isn't weakness, it's taking control of the situation.
00:36:54.980 | It's one of the first steps that we should take,
00:36:57.980 | but many, many people are afraid to ask for help
00:37:01.540 | because somewhere in the back of their head,
00:37:03.840 | they're hearing that's weakness, that's not,
00:37:07.020 | I should be better equipped, I should know better.
00:37:09.980 | It's like, no, no, no.
00:37:11.340 | You know, asking for help is taking control.
00:37:17.060 | - I wanted to ask you one final question on the book
00:37:18.980 | and that's, I thought it made a lot of sense.
00:37:21.660 | You said it was like the hidden, the horizon map.
00:37:24.740 | - Yeah. - Was that right?
00:37:25.580 | The horizon map.
00:37:26.740 | And can you tell the listeners what is the horizon map
00:37:29.660 | and how does it affect your decisions and your confidence?
00:37:32.420 | - Sure, I call it horizon preference,
00:37:35.260 | which is to say that how we feel
00:37:39.940 | affects how deep out into the world we look.
00:37:46.400 | If you, and I think we're almost,
00:37:49.200 | we've been filled with variable lens goggles
00:37:52.000 | that are a function of our level of confidence.
00:37:55.520 | As I said, when we are vulnerable, we're forced to focus
00:38:00.320 | and focus isn't just this intense aim
00:38:03.920 | at what's in front of us,
00:38:05.480 | it's also the elimination of everything around us
00:38:08.480 | that's not important.
00:38:10.280 | And so it's like we fog out anything
00:38:13.320 | that's not right here, that me here now.
00:38:17.200 | I'm gonna fog out tomorrow,
00:38:18.680 | I'm gonna fog out other people, other places.
00:38:21.120 | As our confidence rises, that fog abates
00:38:27.120 | and we can see further ahead.
00:38:30.980 | We can see into the future,
00:38:32.800 | we can see comfortably into other places.
00:38:36.880 | And that impacts then the kinds of choices we make.
00:38:40.480 | I'm gonna start planning for tomorrow.
00:38:42.660 | I might even be planning to take a trip in two years time
00:38:46.000 | to a place I've never been to before.
00:38:48.560 | And that change in preference
00:38:51.700 | is impacting all of our decisions at once.
00:38:55.000 | We're gonna be more social,
00:38:56.280 | we're gonna be more collaborative when we feel confident
00:38:59.520 | because our world is bigger
00:39:02.440 | and things that were once very psychologically distant
00:39:06.920 | to us now feel familiar.
00:39:10.240 | And that is a really useful tool
00:39:13.900 | to assess how people are dealing with the world.
00:39:18.900 | If I'm dealing with you, Sam,
00:39:21.180 | and you've just been in an accident,
00:39:24.040 | I need to know that you are in me here now mode.
00:39:28.220 | And so any suggestions, all of my conversations
00:39:33.220 | need to be focused around you in that moment.
00:39:36.320 | They're telling you that everything's gonna be better
00:39:39.660 | in a year, you're gonna look at me like, you don't get me.
00:39:43.740 | So I need to be talking about what do you need
00:39:47.060 | for you to feel better right now
00:39:49.180 | because I wanna help you to eliminate the vulnerability
00:39:53.920 | that you feel in that moment.
00:39:56.180 | And so realizing how confidence affects our interests
00:40:01.180 | and our needs, I think,
00:40:04.580 | enables us to communicate more effectively.
00:40:08.020 | If I'm in marketing, it helps me to sell things
00:40:10.380 | more persuasively, but it's a really important way
00:40:14.700 | of assessing how people feel is how big's your world.
00:40:19.420 | I remember one year I asked folks,
00:40:22.620 | I give them a picture that has the word me
00:40:26.620 | in the middle of a bullseye
00:40:28.020 | and said, draw the world around you.
00:40:30.720 | And that's all I say.
00:40:33.000 | And some do it geographically, some do it socially,
00:40:36.140 | some different ways.
00:40:37.720 | One student drew a picture of his feet on this
00:40:42.720 | and I was like, that's interesting.
00:40:45.060 | And so I pulled him aside after class,
00:40:46.860 | I said, so what's going on?
00:40:49.840 | And he said, when I think of the world around me,
00:40:52.840 | I look down.
00:40:53.880 | And his world was incredibly small.
00:40:58.700 | That's how he looked at things.
00:41:00.360 | And I immediately wondered, everything okay.
00:41:03.260 | You're telling me in this picture
00:41:06.400 | that your confidence is very low
00:41:08.300 | because if your world is just your feet and nothing more,
00:41:14.140 | you're very inward.
00:41:16.420 | And what can we do to help you to feel more confident,
00:41:20.340 | to make your world feel bigger, become bigger?
00:41:23.060 | - And what was his answer and how did you help him?
00:41:28.080 | - So he acknowledged that, yeah,
00:41:29.580 | he was a first semester freshman.
00:41:32.260 | It had been a rocky start.
00:41:34.260 | And we talked about ways that he could,
00:41:38.440 | how could he build his network,
00:41:40.320 | find his people on campus,
00:41:43.000 | the folks that would ultimately become very good friends.
00:41:46.320 | - Yeah, that's amazing.
00:41:49.160 | That's good to ask a question, a simple question
00:41:52.360 | and let people figure it out on their own
00:41:54.000 | to self-discovery.
00:41:56.120 | That's great.
00:41:58.040 | Well, thank you so much, Peter, for your time.
00:42:00.880 | For anybody who wants to read and buy "The Confidence Map,"
00:42:04.580 | where can they pick up the book?
00:42:06.100 | - Book is available online now.
00:42:08.180 | It's also available in a lot of local bookstores
00:42:10.420 | and I encourage folks to please support
00:42:12.660 | your local bookstores.
00:42:13.700 | They're vitally important today.
00:42:16.340 | - Yeah, and congratulations for working with Noah.
00:42:18.660 | He's our fellow editor at Portfolio Penguin Random House.
00:42:22.220 | - I feel very blessed.
00:42:23.380 | - Yeah, I know that you went through some revisions
00:42:26.420 | and different iterations
00:42:27.540 | and he helped push you to the finish line.
00:42:29.500 | So that was great.
00:42:30.320 | Shout out to Noah.
00:42:31.820 | Well, thanks so much, Professor Atwater
00:42:33.940 | and congratulations on your book
00:42:36.180 | and thank you for spending time
00:42:37.480 | on the Financial Samurai podcast.
00:42:39.080 | - I really appreciate it, Sam.
00:42:40.220 | Thanks so much.
00:42:41.380 | - Take care.