Bogleheads® on Investing Podcast 056: Dr. Daniel Crosby on the behavioral investor, host Rick Ferri

00:00:00.000 | [MUSIC]

00:00:09.900 | Welcome to Bogleheads on Investing, episode number 56.

00:00:14.160 | Today's special guest is Dr. Daniel Crosby, a psychologist and

00:00:18.920 | a behavioral finance expert who helps organizations and

00:00:23.040 | individuals understand the intersection of mind and markets.

00:00:27.480 | [MUSIC]

00:00:37.480 | Hi everyone, my name is Rick Ferry and I'm the host of Bogleheads on Investing.

00:00:41.980 | This episode, as with all episodes,

00:00:44.520 | is brought to you by the John C. Bogle Center for Financial Literacy.

00:00:48.800 | A non-profit organization that is building a world of well-informed,

00:00:52.720 | capable, and empowered investors.

00:00:55.280 | Visit the Bogle Center at boglecenter.net, where you will find a treasure

00:01:00.280 | trove of information, including transcripts of these podcasts.

00:01:04.280 | Today, our special guest is Dr. Daniel Crosby.

00:01:07.960 | Educated at Brigham Young and Emory University, Dr. Crosby is a psychologist

00:01:13.360 | and behavioral finance expert who helps organizations and

00:01:17.480 | individuals understand their mind and the markets.

00:01:22.400 | He has written several books on behavioral finance.

00:01:26.120 | The Laws of Wealth was named one of the best investment books of 2017, and

00:01:31.920 | his latest book, The Behavioral Investor, is an in-depth look at how sociology,

00:01:37.560 | psychology, and neurology all impact investment decision-making.

00:01:42.600 | So with no further ado, let me introduce Dr. Daniel Crosby.

00:01:46.680 | Welcome to the Bogleheads on Investing podcast, Doctor.

00:01:50.560 | Yeah, Rick, great to be here, and please just call me Daniel.

00:01:54.320 | Daniel, thank you so much.

00:01:55.640 | You've got a very deep background in behavioral investing and

00:02:02.360 | have written several books and are a noted authority on this topic.

00:02:07.440 | So I'm really happy to have you on the podcast.

00:02:10.280 | Although I do say every time I have a behavioral finance person,

00:02:14.240 | I feel very inadequate at the end of the podcast.

00:02:17.160 | [LAUGH] Because all of my mistakes are remembered during the podcast.

00:02:23.440 | But tell us a little bit about you, your childhood memories, school.

00:02:29.360 | I mean, how did you get to where you are today?

00:02:32.040 | Sure, you got to ask about childhood memories when you have a shrink on,

00:02:36.920 | for sure.

00:02:37.440 | So great question.

00:02:39.320 | So I'm actually a clinical psychologist by education.

00:02:42.360 | I wasn't joking about being a shrink.

00:02:44.200 | I went to school with the aim of working in clinical psychology, and

00:02:48.800 | indeed, that's what my degree is in.

00:02:50.920 | But about three years into what is a five-year program, I began to burn out.

00:02:56.840 | I was already seeing 30 or

00:02:58.960 | 40 clients a week as part of sort of fulfillment of my doctoral degree.

00:03:05.160 | And most of them were what we would call the worried well,

00:03:09.320 | folks like me or you who are just like hit a rough patch.

00:03:12.960 | But some of them were court appointed, some of them were criminals, and

00:03:17.840 | some of them were acutely suicidal.

00:03:21.200 | And I was just candidly had poor boundaries.

00:03:25.680 | I was taking my work home with me, and it was just taking a toll on me.

00:03:30.640 | I went to my father, who is a financial advisor.

00:03:35.240 | And I said, look, dad, I love human psychology.

00:03:39.400 | I love studying the reasons why people do the things that they do.

00:03:43.080 | I love the academic pursuit of studying human behavior.

00:03:46.960 | But I don't know if this applied medical context is the right one for me.

00:03:52.800 | And he said, well, there's a ton of psychology in my work.

00:03:57.160 | And at the time, I started my PhD when I was 23.

00:04:01.160 | I don't think I had a real deep understanding of what my dad did.

00:04:05.040 | To me, he was a numbers guy and a sales guy.

00:04:08.240 | And so I was like, what are you talking about?

00:04:10.600 | And he said, no, give it a look.

00:04:12.600 | Now, my dad is a wire house advisor in a midsize town in Alabama.

00:04:17.800 | He didn't have an understanding of what behavioral economics or

00:04:21.200 | behavioral finance were.

00:04:22.800 | But he knew that a big part of his job was counseling his clients.

00:04:27.240 | Long story short, this conversation with my dad pointed me in a direction

00:04:31.880 | where I went and started looking into the literature around money.

00:04:36.320 | There weren't a lot of resources for folks like my dad.

00:04:39.560 | There was this ivory tower, sort of academic research being done.

00:04:42.840 | But there wasn't a whole lot of translating that down in applied ways

00:04:47.320 | for people on the street and for advisors.

00:04:49.960 | And so I've tried to make that my place in the food chain.

00:04:53.720 | And along the way in this journey, you've written five books.

00:04:59.520 | The first book, again, to make me feel inadequate,

00:05:02.880 | was called You're Not That Great.

00:05:05.800 | Could you just tell us what are two sentences about that book?

00:05:09.680 | Yeah, that was based on a TEDx talk I did that was really well-received.

00:05:14.320 | And basically, the idea of You're Not That Great

00:05:17.720 | is that part of living an extraordinary life

00:05:20.680 | is accepting your own personal banality and mediocrity.

00:05:25.080 | And I think no one understands that better than Fogelheads.

00:05:28.040 | And that's not a diss, right?

00:05:29.400 | It's that you understand that, on average, you are pretty average.

00:05:34.040 | And accepting that and owning your own failings

00:05:38.160 | is sort of paradoxically a way to enjoy great returns

00:05:41.440 | and to have a great life.

00:05:42.640 | So it was sort of the perils of overconfidence

00:05:45.640 | and the joys of mediocrity is what that book is about.

00:05:49.800 | Getting into another topic, another book, the second one you wrote,

00:05:54.600 | Everyone You Love Will Die.

00:05:56.880 | OK, so what's this about?

00:05:59.560 | Are you sensing a theme here?

00:06:01.160 | So yeah, for what it's worth, neither of these books sold very well.

00:06:07.080 | So Everyone You Love Will Die is kind of a funny story, believe it or not.

00:06:10.720 | I have three children, and we had a close family friend pass away.

00:06:15.920 | And we were going to the funeral.

00:06:17.480 | And at the time, my children were very young.

00:06:19.960 | And I was writing poetry.

00:06:23.000 | And one of the ways that I tried to communicate with my kids

00:06:26.040 | was by writing sort of Shel Silverstein-esque poems

00:06:29.760 | about difficult topics.

00:06:31.520 | And so I wrote this poem that is, believe it or not, kind of sweet.

00:06:37.520 | And the last stanza of the poem is, yes, everyone you love will die,

00:06:41.960 | but you're here today and so am I.

00:06:44.200 | Very nice.

00:06:45.040 | It's just sort of the stoic idea that understanding life's brevity

00:06:49.400 | gives it punch and gives it importance and gives you a sense of how

00:06:53.400 | you want to spend your time.

00:06:55.440 | And so I wrote this poem.

00:06:57.120 | I put it on Facebook.

00:06:59.320 | A friend of mine who is an artist really liked it and illustrated it

00:07:04.000 | without my knowledge, sort of illustrated each stanza,

00:07:07.880 | sent me the drawing.

00:07:09.800 | And I said, well, look, now we've got words and pictures.

00:07:12.800 | Let's make this a book.

00:07:13.840 | We put it on Kickstarter.

00:07:15.440 | Kickstarter made it their editor's pick of the day.

00:07:18.240 | And so it got funded in like five hours.

00:07:21.200 | And we had enough to print a couple hundred copies

00:07:24.080 | and send them out to the people who backed it.

00:07:26.080 | So it's actually free on Amazon now.

00:07:29.080 | So yeah, go get it for free on Amazon and have a look.

00:07:31.880 | I love that line.

00:07:32.960 | Everyone we know will die, but you are here and so am I.

00:07:36.480 | That's a great line.

00:07:38.040 | Thank you.

00:07:39.360 | OK, now we're going to pivot a little bit.

00:07:41.320 | And now we're going to get into investing topics.

00:07:43.880 | Because your first book seems to be more of kind

00:07:46.080 | of an institutional book for advisors.

00:07:48.920 | It's called Personal Benchmark, Integrating Behavioral Finance

00:07:54.000 | and Investment Management.

00:07:55.400 | So this is your first forte into behavioral investing.

00:07:59.680 | So tell us about this book.

00:08:01.160 | Personal Benchmark is really about indexing to your life.

00:08:04.800 | We know that benchmarks matter.

00:08:06.600 | What you choose to measure your life and your performance

00:08:09.480 | against has a material impact on your behavior.

00:08:13.120 | There's actually a really robust literature around the idea

00:08:16.320 | that benchmarking to things that matter to you

00:08:19.520 | can elicit better behavior.

00:08:21.560 | People in named accounts are more likely to save.

00:08:24.960 | They're less likely to go to cash

00:08:26.480 | when markets get turbulent.

00:08:28.720 | And so it's sort of the overarching idea

00:08:31.160 | is integrate your personal mission, your personal purpose

00:08:35.400 | into the way that you think about your wealth,

00:08:37.600 | and you'll likely be better at staying the course.

00:08:42.120 | The next book now you're really beginning to dig into this idea

00:08:45.760 | is called The Laws of Wealth, Psychology and the Secret

00:08:49.800 | to Investing Success.

00:08:52.120 | So tell us the main points of this book.

00:08:55.040 | Yeah, so The Laws of Wealth came about in an interesting way.

00:08:59.040 | In almost every instance, there was some sort of spark

00:09:02.120 | that was sort of the genesis for these books.

00:09:04.520 | I was speaking, and I was setting forth this idea

00:09:08.240 | to advisors of a behavioral policy statement.

00:09:12.200 | So you know, I work primarily with financial advisors,

00:09:14.800 | and an advisor will give their clients

00:09:16.920 | an investment policy statement.

00:09:19.200 | That sort of, these are the rules of the road, right?

00:09:21.160 | Like, these are the best practices

00:09:22.800 | I will adhere to in the management of your wealth.

00:09:27.120 | But I was advocating for the other side of that,

00:09:31.000 | sort of understanding that the advisor-client relationship

00:09:33.960 | requires both people pulling in the same direction.

00:09:37.600 | And I said, look, it's important that you help manage

00:09:40.040 | your client's expectations and let them know

00:09:42.200 | that this is a two-way street.

00:09:44.040 | So I said, look, you should have a behavioral policy statement

00:09:46.680 | that says, I, your advisor,

00:09:48.240 | these are the things that I will do.

00:09:50.040 | You, the client, these are sort of my expectations of you.

00:09:53.280 | And it's all this stuff you'd expect,

00:09:55.720 | remaining long-term, sort of having a proper media diet,

00:09:59.560 | things like that.

00:10:01.120 | - Well, say that again, a proper media diet?

00:10:03.920 | - Yeah, a proper media diet.

00:10:05.520 | So like, making sure you're not filling your head

00:10:08.900 | with doom-scrolling and unnecessary cataclysmic--

00:10:12.680 | - Oh, you mean watching Jim Cramer.

00:10:14.640 | (laughing)

00:10:15.560 | - I will refrain from naming names.

00:10:17.480 | (laughing)

00:10:18.320 | But yeah, just putting the right ideas in your head, right?

00:10:22.200 | Like, and knowing that these can have a material impact

00:10:25.200 | on the way you think and act in markets.

00:10:27.880 | And so someone quite astutely said,

00:10:30.400 | well, what would be on your behavioral policy statement?

00:10:33.480 | And I had never, through the act of putting one together,

00:10:36.380 | so I said, give me a minute and I'll get back to you.

00:10:39.680 | And so the laws of wealth

00:10:41.400 | is really my behavioral policy statement.

00:10:44.480 | It's things like, you control what matters most,

00:10:47.860 | which is trying to help investors take the power back.

00:10:51.760 | You maybe have a similar experience,

00:10:53.680 | but when people find out that I work in finance,

00:10:56.840 | I get a host of questions.

00:10:58.960 | And it's things like, what's the Fed gonna do?

00:11:02.360 | Like, what's Russia gonna do?

00:11:04.080 | What's the virus gonna do?

00:11:05.700 | And of course, I have no idea.

00:11:07.520 | And even if I did know,

00:11:09.080 | I wouldn't know how it would impact markets.

00:11:12.200 | And so the first chapter is like,

00:11:14.520 | all of the things that matter most

00:11:16.240 | about you crossing your financial finish line

00:11:18.540 | are within your power.

00:11:19.980 | And it's things like maximizing your human capital,

00:11:23.660 | saving enough, managing your fees, diversifying.

00:11:27.380 | - Sounds like Boglehead principles.

00:11:29.140 | We have basically 10 Boglehead principles

00:11:31.740 | and it's all the same thing.

00:11:33.300 | Live below your means, keep your fees low,

00:11:36.140 | keep taxes low, don't try to time markets,

00:11:40.140 | on and on, and so it's the same.

00:11:41.580 | Sounds like the same.

00:11:42.460 | - Yeah, ideas like this too shall pass.

00:11:44.940 | We know that human nature is sort of to project

00:11:48.720 | the present moment into the future indefinitely.

00:11:52.100 | Whatever's going on now is how we presume

00:11:55.260 | the next three, five, seven years will go.

00:11:58.420 | And markets almost work 180 degrees of that, right?

00:12:02.180 | I mean, there's short-term persistence and short-term trend,

00:12:05.860 | but markets are mean reverting.

00:12:07.620 | And so the fact that markets are mean reverting

00:12:10.220 | should make us humble in good times

00:12:13.340 | and should give us hard and bad times

00:12:15.380 | and things like this.

00:12:16.780 | So it's basically my behavioral policy statement.

00:12:20.340 | - Very good.

00:12:21.180 | Well, thank you for that.

00:12:22.020 | It sounds very interesting.

00:12:23.420 | A good idea too, I think, a lot of people

00:12:26.060 | create an investment policy statement,

00:12:28.260 | but they don't have this side of it.

00:12:30.060 | You had a couple of chapters in there

00:12:32.940 | about forecasting is for weathermen.

00:12:35.340 | And if you're excited, it's probably a bad idea,

00:12:39.740 | things like this.

00:12:41.300 | Human words there, not clinical words,

00:12:43.900 | but human words, so very good.

00:12:46.020 | All right, so now the latest book is called

00:12:49.500 | "The Behavioral Investor."

00:12:52.500 | And basically four parts.

00:12:55.540 | Start out with some basics about human psychology.

00:13:00.180 | And then you go into the second part,

00:13:02.340 | which I call risks or behavioral risks.

00:13:05.780 | And then the third part is how to fix these risks.

00:13:10.100 | And then finally, you have some ideas

00:13:12.020 | for building a behavioral portfolio.

00:13:13.940 | So we're gonna go through the book

00:13:15.580 | and spend as much time as you want on each part,

00:13:18.380 | but let's start out at the beginning.

00:13:21.260 | And I thought this was interesting

00:13:22.900 | because I happen to be writing a book

00:13:24.300 | and I start the book talking about cavemen

00:13:26.460 | and the idea of the hunter-gatherers

00:13:29.860 | and that our brain is not wired

00:13:31.980 | for saving for retirement 30 years down the road.

00:13:34.940 | So could you start out with the psychological part?

00:13:37.580 | - Yeah, so that first part,

00:13:40.260 | I wanted to give some coverage to the psychological,

00:13:43.580 | the sociological, and even the physiological

00:13:47.380 | elements of investing, because all of these things

00:13:51.260 | can impinge on our ability

00:13:53.580 | to make good, sound financial decisions.

00:13:55.820 | And I didn't think that it had been adequately covered

00:13:58.700 | in the literature.

00:14:00.100 | So from a psychological,

00:14:02.100 | from sort of the caveman perspective,

00:14:04.820 | we know that our brains have not had an upgrade

00:14:08.740 | in, depending on who you ask,

00:14:11.020 | I think there's lots of different ideas about this,

00:14:13.540 | but something like 200,000 years.

00:14:16.460 | Since our brains sort of had a meaningful upgrade,

00:14:20.220 | we're working with sort of the iPhone 1 of brains

00:14:23.740 | and we're being called on to make iPhone 14 type decisions.

00:14:28.740 | Capital markets, true stock markets

00:14:31.540 | like the ones we trade in now

00:14:32.900 | are only a couple of hundred years old.

00:14:35.060 | And we're trying to navigate these with brains

00:14:37.740 | that haven't had an upgrade in hundreds

00:14:39.700 | of thousands of years.

00:14:41.620 | And so I think it helps to understand how we're wired.

00:14:45.980 | And one of the ways that we're wired,

00:14:49.060 | we're wired for ease,

00:14:51.460 | we're wired to maintain the status quo,

00:14:54.260 | and we're wired to avoid loss.

00:14:56.700 | And we have this profound asymmetry

00:15:00.100 | between how we think about upside

00:15:02.060 | and how we think about downside.

00:15:04.020 | And it's directly tied to these cave people ancestors,

00:15:08.940 | where you get one bad day, right?

00:15:12.860 | Back then when life was so brutal and so hard,

00:15:16.180 | one bad day was all you got, right?

00:15:18.700 | If it was sufficiently bad, that's the end of you.

00:15:21.380 | And I mean, I guess that's still the case in many respects.

00:15:24.540 | And so we're wired to avoid that one bad day

00:15:28.620 | because it can be fatal.

00:15:30.300 | Well, if you have a good day, that's nice,

00:15:33.340 | but it's not essential from a pure evolutionary,

00:15:37.220 | like live long enough to pass on your genes standpoint.

00:15:40.580 | It's not essential that you have a good day,

00:15:42.620 | but it is essential that you avoid bad days.

00:15:45.580 | And so we see this profound asymmetry and loss aversion

00:15:50.180 | and all the things that the behavioral economists

00:15:52.820 | talk about.

00:15:54.300 | - You talk about humans communicating

00:15:58.060 | on a social level in what's called non-real terms,

00:16:02.780 | ideas, religion, and so forth,

00:16:04.660 | and really not communicating on say a mathematical level.

00:16:08.500 | This also creates an issue.

00:16:10.420 | - Yeah, so this is perhaps a little esoteric,

00:16:14.100 | but there's this other animals, right?

00:16:16.420 | Humans, humans are animals.

00:16:18.340 | Other animals communicate in very literal terms.

00:16:22.340 | So the idea of something that's metaphysical

00:16:25.860 | or bigger than is a uniquely human creation.

00:16:30.620 | And so I talk about these functional fictions in the book,

00:16:34.820 | the borders of the state of Georgia or Texas,

00:16:38.660 | an economy, a fiat currency,

00:16:42.020 | all of these things are things that are not real

00:16:45.540 | in the strictest sense,

00:16:47.700 | the US constitution, our laws,

00:16:50.500 | like these things are not real

00:16:52.380 | in the strictest most material sense,

00:16:55.540 | but the fact that we agree upon them,

00:16:58.220 | fact that we sort of collectively agree upon their reality

00:17:02.460 | allows us to do great things.

00:17:06.060 | And I mean, it's really the thing that sets us aside

00:17:09.020 | from the rest of the animal kingdom

00:17:11.340 | is these functional fictions.

00:17:14.140 | But what that means is that we are wired to believe

00:17:17.660 | in things that are literally not true,

00:17:20.460 | and we are wired to reason and think in social terms.

00:17:24.460 | And so I give an example in the book,

00:17:26.900 | there's a famous experiment called the Asch experiment,

00:17:30.540 | where Solomon Asch, the psychologist,

00:17:32.860 | was studying the impact of peer pressure on decision-making.

00:17:37.140 | Imagine one line on the left that's of a certain length,

00:17:40.620 | and then he shows three lines on the right

00:17:43.020 | that are of varying lengths,

00:17:44.540 | one of which corresponds directly to the line on the left.

00:17:48.420 | And he says, "Which line on the right

00:17:50.780 | "is the same length as the line on the left?"

00:17:53.020 | And I mean, a kindergartner could do this, right?

00:17:55.580 | It's easy as can be.

00:17:57.420 | And when you ask people in isolation,

00:17:59.900 | everyone gets it right.

00:18:01.820 | But when you ask people in groups,

00:18:04.740 | you have confederates of the experiment.

00:18:06.940 | So seven people go before Rick goes, right?

00:18:11.700 | And Rick's number eight,

00:18:12.940 | and he's the only one who's not in on the joke.

00:18:15.980 | The correct answer is C, say,

00:18:18.900 | but the seven people ahead of you

00:18:20.820 | are sort of prompted to say B.

00:18:23.820 | So they say, "Oh, it's definitely B.

00:18:25.740 | "It's B, it's B, of course it's B."

00:18:28.500 | - Right.

00:18:29.340 | - It comes down to you now.

00:18:30.980 | You would never, Rick.

00:18:33.620 | I know you're an icon of class and a truth teller.

00:18:37.340 | - I've been accused of not working well

00:18:38.820 | in a group, by the way.

00:18:40.020 | - 76% of the time, people give the wrong answer.

00:18:44.940 | They give the peer pressure answer 76% of the time

00:18:48.900 | on this really basic thing.

00:18:51.020 | Now, we used to think that that was just a function

00:18:54.780 | of peer pressure.

00:18:56.060 | We used to think, "Oh, they know the answer is B,

00:18:59.860 | "but they're just saying C because everyone else is

00:19:02.300 | "and they don't wanna stick out."

00:19:04.140 | But what's fascinating now is we can look inside the brain,

00:19:07.540 | right, with these fMRI studies,

00:19:09.380 | and we can monitor what's going on in the brain.

00:19:12.340 | And the part of the brain that's lighting up

00:19:14.300 | when this is going on

00:19:16.140 | is actually the part associated with not peer pressure,

00:19:20.660 | but sensation and perception.

00:19:22.780 | So quite literally,

00:19:26.380 | the peer pressure has, in the most literal sense,

00:19:30.540 | changed the way you view the line.

00:19:33.420 | And so you think about the implications of that for markets

00:19:36.740 | and how social consensus can not only pressure us

00:19:40.900 | to do things we might not want to do otherwise,

00:19:44.300 | but literally, in the most literal sense possible,

00:19:47.860 | shape the way that we perceive the world,

00:19:50.500 | and it's pretty wild.

00:19:51.940 | So it's this double-edged sword for humankind

00:19:54.900 | that functional fictions help us build churches

00:19:57.740 | and economies and governments and all these great things,

00:20:00.580 | but they also can be our undoing.

00:20:03.540 | - So lately, with the demise of Silicon Valley Bank,

00:20:07.740 | and now problems at other banks,

00:20:11.060 | I've gotten two calls from clients who said,

00:20:13.900 | "Should I be taking my money out of my bank?

00:20:16.940 | "Where should I be putting it?"

00:20:18.540 | And I said, "No, why would you do that?

00:20:21.300 | "I mean, first of all, you have 250,000 of FDIC insurance."

00:20:24.860 | And they go, "Yeah, but I'm a little afraid of even that."

00:20:28.740 | And I think it gets to what you're talking about.

00:20:31.300 | - No, it absolutely does.

00:20:33.340 | And what's so interesting is we have a host of biases

00:20:36.780 | that kind of load onto this.

00:20:38.020 | One is sort of this collective reasoning

00:20:40.540 | that we just talked about.

00:20:42.100 | But I think all of this,

00:20:44.540 | this most recent banking crisis, if we want to call it that,

00:20:47.580 | is exacerbated by the fact that in recent memory,

00:20:51.540 | we have another banking crisis.

00:20:53.180 | - Right, true.

00:20:54.020 | - So there's a recency bias at play.

00:20:56.780 | There's sort of this comparative bias at play,

00:20:59.380 | this called representativeness heuristic,

00:21:01.820 | that sort of the idea that this thing is like that thing.

00:21:04.860 | People go, "Oh, banking crisis.

00:21:06.740 | "I know a banking crisis.

00:21:08.180 | "I lived through that in 2008, and it was gnarly."

00:21:11.380 | So I got to get out of here.

00:21:13.780 | And even the fundaments of those two things

00:21:16.580 | are quite different.

00:21:17.740 | The brain doesn't parse those kind of distinctions

00:21:20.340 | very easily.

00:21:22.140 | - In that sense, we can go to the second part of the book.

00:21:25.260 | And now I call the second part of the book

00:21:27.260 | the behavioral risks.

00:21:29.020 | You might call it something else.

00:21:30.820 | But you list out four of them,

00:21:34.020 | ego, conservatism, attention, and emotion.

00:21:38.260 | So four categories of behavioral risks.

00:21:43.260 | So if you could talk about this.

00:21:45.860 | - Yeah, so my purpose here was there has been

00:21:50.460 | the cataloging of behavioral biases

00:21:53.380 | has become a growth industry, right?

00:21:55.780 | So there's all these ways in which we've,

00:21:59.980 | maybe you've seen this.

00:22:00.900 | There's a sort of a lovely visual called the codex of,

00:22:04.860 | the codex of cognitive biases or something.

00:22:07.380 | - I have seen that a circle with all of these things.

00:22:10.580 | And by the time I get to 1/3 the way around it,

00:22:12.900 | or even 1/4 of the way, I just stop.

00:22:14.980 | - No, you gotta stop.

00:22:16.780 | Well, and there's something like 200, right?

00:22:19.500 | Like I've lost track, but there's something,

00:22:21.140 | there's give or take 200 different cognitive biases.

00:22:24.620 | And so this sort of rubbed me the wrong way

00:22:26.980 | in a couple of ways.

00:22:28.220 | So first of all, it's not a very empowering thing

00:22:31.180 | to tell the average investor like,

00:22:33.060 | "Look, there's 200 ways that you can screw this up."

00:22:36.140 | And even your sort of offhanded comment earlier about like,

00:22:41.140 | "Oh God, every time a behavioral finance person

00:22:44.140 | "comes on here, I feel like crap

00:22:45.700 | "because I gotta deal with them."

00:22:48.860 | We don't want that.

00:22:50.100 | So what I set out to do was I said,

00:22:52.460 | "Look, I know that many of these biases have a common root.

00:22:56.540 | "There's some sort of larger meta bias

00:22:58.820 | "that underpins a lot of these things

00:23:01.100 | "'cause some of them are enormously specific."

00:23:03.980 | And so I said, "I wanna sort of set out to see

00:23:06.660 | "what are the ones that I consider a meta bias."

00:23:09.500 | And so that's what these four are,

00:23:11.380 | ego, emotion, attention, and conservatism.

00:23:13.820 | These are my four meta biases, if you will.

00:23:17.420 | Because once we have a manageable universe of bias,

00:23:21.300 | you can set out to try and set up risk management procedures

00:23:25.500 | and things like that to control them.

00:23:27.100 | You can control for four biases, you can't control for 200.

00:23:30.900 | - So let's go through them, these four biases,

00:23:33.020 | starting with ego.

00:23:34.820 | - Yeah, so ego is the various flavors of overconfidence,

00:23:38.700 | going back to my "You're Not That Great" book, right?

00:23:41.460 | Ego, there's actually a couple

00:23:43.180 | of specific types of overconfidence,

00:23:45.220 | all of which I think are interesting to bogal heads.

00:23:48.620 | We'll call it the "I'm better than you" sort of variety,

00:23:52.460 | which is the one that gets the most play.

00:23:54.980 | So it's thinking that I'm better, faster, smarter, stronger.

00:23:59.180 | And you see this a lot.

00:24:00.380 | It's why people choose not to be bogal heads,

00:24:03.300 | because they think, "Yep, on average,

00:24:05.020 | market participants underperform, but I'm different."

00:24:08.460 | - Let me throw something in on that,

00:24:09.620 | because I hear it once in a while.

00:24:12.260 | From what I read, all of these big institutional investors

00:24:16.060 | who are doing these big trades,

00:24:17.660 | they can't really outperform the market.

00:24:19.940 | But me, as an individual investor,

00:24:21.900 | because I'm doing little trades

00:24:25.100 | and I'm sort of weaving in and out of the market,

00:24:27.180 | I have a much higher probability of outperforming

00:24:29.700 | than these big institutional investors.

00:24:32.780 | - Yeah, and here's the thing.

00:24:34.180 | The devil sort of speaks in half-truths, you know?

00:24:37.700 | There is some truth to that sentiment,

00:24:40.140 | that yes, an average person managing their own portfolio

00:24:44.500 | isn't susceptible to career risk

00:24:47.100 | and sort of some of the other external pressures

00:24:49.700 | that, say, a big fund manager would be.

00:24:52.380 | But the average investor also does not have access

00:24:55.900 | to the same level of education

00:24:57.500 | and resources and information.

00:24:59.340 | So, I mean, there's some ups and downs.

00:25:01.100 | But yeah, it's the stuff that you see everywhere.

00:25:03.940 | I cite studies in the laws of wealth.

00:25:05.820 | There was one hilarious study.

00:25:07.860 | 700 men were interviewed.

00:25:10.260 | 95% of them thought they had a better

00:25:13.700 | than average sense of humor.

00:25:15.500 | 100% of them said that they were friendlier than average.

00:25:19.860 | And 94% of them said

00:25:22.100 | that they were better looking than average.

00:25:24.380 | And it's like this idea that, you know,

00:25:26.420 | we're all smarter, funnier, more attractive than average.

00:25:29.620 | It's just not true.

00:25:31.260 | And we see that in markets all the time.

00:25:33.820 | So that's sort of the first flavor of overconfidence.

00:25:37.420 | The second one is thinking that we're luckier than average.

00:25:41.500 | We sort of own the optimistic and delegate the dangerous.

00:25:45.020 | We know from a base rate perspective

00:25:47.540 | that 50% of marriages end in divorce, but not my marriage.

00:25:51.540 | We know that people abstractly get cancer, but not me.

00:25:56.060 | And, you know, we know that,

00:25:57.820 | yeah, my odds of winning the lottery are long, but I might.

00:26:01.620 | We tend to sort of own the optimistic

00:26:03.620 | and delegate the dangerous.

00:26:05.140 | And then the last sort of major form

00:26:07.100 | of overconfidence is over-precision,

00:26:09.780 | which is thinking that we know more

00:26:12.060 | about the future than we actually do.

00:26:14.660 | So people think that they're better

00:26:16.940 | at predicting what's coming,

00:26:19.180 | and they can see the future more clearly

00:26:21.460 | than they actually can.

00:26:22.780 | - So the second one is conservatism.

00:26:25.620 | - Yeah.

00:26:26.620 | - How did that play in?

00:26:27.940 | - So one of the things that must be said about us

00:26:30.540 | is that we're what Kahneman and Thaler have referred

00:26:33.620 | to as being cognitive misers.

00:26:36.220 | So we want to do as little thinking as possible.

00:26:41.220 | So our brains, our brains are small.

00:26:44.140 | Well, they're large relative to the animal kingdom,

00:26:46.660 | but relative to our body,

00:26:48.580 | they're two to 3% of our body weight,

00:26:51.420 | but they're like 20 to 25% of our caloric expenditure.

00:26:55.740 | And so your body is kind of always looking

00:26:58.660 | for ways to think less

00:27:00.620 | and to sort of offload some of this thinking.

00:27:03.580 | And so doing what you've always done

00:27:07.060 | is a good way to do that.

00:27:08.580 | Just sort of sticking with the status quo

00:27:10.780 | is a good way to do that.

00:27:12.780 | Not taking risk is a good way to do that.

00:27:14.940 | Following what other people do is a good way to do that.

00:27:18.060 | So conservatism is our tendency

00:27:21.020 | to be kind of status quo prone, lazy,

00:27:23.940 | and to confuse what we know with what is good.

00:27:27.420 | - All right, third one is called attention.

00:27:30.060 | - Yeah, so attention is this tendency

00:27:33.540 | to confuse what is loud with what is likely.

00:27:37.180 | - Oh, what is loud with what is likely, I like that.

00:27:40.060 | - Yeah, so it's confusing what is loud with what is likely.

00:27:43.620 | So there's a couple of funny examples of this.

00:27:46.620 | One that I like is you ask people to think about words

00:27:50.220 | that begin with the letter K, right?

00:27:52.380 | So like list all the words you can

00:27:54.220 | that begin with the letter K.

00:27:55.780 | Now in a second column,

00:27:57.340 | list all the words that have K as the third letter

00:28:00.940 | and like see which list is longer.

00:28:03.220 | People have much longer lists of words that begin with K

00:28:06.900 | than words in which K is the third letter,

00:28:09.420 | but there's three and a half times as many words

00:28:11.740 | with K as the third letter as there are the first,

00:28:14.940 | but the way that our brain works,

00:28:16.660 | we have sort of what's called a primacy effect.

00:28:19.260 | We remember things that come

00:28:20.980 | at the first part of the sequence.

00:28:22.880 | So the way that our brain is wired,

00:28:24.880 | we think there are more words

00:28:26.340 | with K as the first letter than the third,

00:28:28.220 | but that's not true.

00:28:29.760 | The same thing is true of markets.

00:28:31.980 | We misremember things all the time.

00:28:34.540 | We have really great memory for all the bad stuff

00:28:38.380 | and really bad memory for all the good stuff.

00:28:41.380 | I talk in the book about how the brain works extra hard

00:28:45.540 | to hang on to scary information.

00:28:48.380 | And so when somebody is watching Silicon Valley Bank collapse

00:28:53.380 | they have a very vivid, very salient memory

00:28:56.860 | of the great financial crisis.

00:28:59.040 | They have a less salient memory of the 10 years in between

00:29:02.940 | where they were popping double digit returns every year.

00:29:06.980 | Sort of the way that we remember things

00:29:09.660 | and the way that things actually are

00:29:11.900 | can be quite disconnected.

00:29:14.180 | - You talk about the tendency

00:29:16.700 | to confuse ease of recall with probability.

00:29:20.540 | - That's right.

00:29:21.380 | - How quickly recall something

00:29:23.380 | that gets assigned a higher probability,

00:29:25.340 | whether it's true or not.

00:29:26.840 | - Yeah, there's all kinds of different things here.

00:29:29.220 | There's shark attacks and selfies,

00:29:31.940 | I think I talk about in the book.

00:29:33.380 | Your probability of getting bit by a shark

00:29:35.620 | is like one in 300 million.

00:29:37.980 | And yet all these people die every year taking selfies

00:29:41.740 | because they stumble into traffic or whatever.

00:29:44.620 | But we think of sharks as dangerous

00:29:46.420 | and we don't think of taking a selfie as dangerous

00:29:48.860 | because one is loud, right?

00:29:51.220 | One is loud and dramatic and scary

00:29:53.940 | and one is just dumb and bumbling.

00:29:56.700 | And you know, we see this all the time with the news,

00:29:58.960 | like things that make it onto the news are there,

00:30:02.400 | they're newsworthy because they're rare.

00:30:05.300 | And yet we have an awesome recall

00:30:07.820 | for things like what's on the news.

00:30:10.580 | The things that kill the average portfolio, as you know,

00:30:14.460 | are typically things like under diversification

00:30:16.860 | and excessive fees, boring, not loud, unsexy,

00:30:21.860 | hard to recall.

00:30:23.700 | And it's not stuff like a financial crisis even.

00:30:27.380 | - Or Bitcoin, or owning Bitcoin or not owning Bitcoin.

00:30:30.100 | - Sure, yeah, totally, great example.

00:30:33.220 | The last one then of the four categories is emotion.

00:30:38.180 | - Yeah, so emotion's probably the one

00:30:39.940 | that's the most self-evident.

00:30:41.380 | It's just this tendency to confuse your heart with your head.

00:30:46.180 | And humans have something called the affect heuristic,

00:30:50.140 | which is just a fancy way of saying

00:30:53.020 | that the emotional state that you find yourself in

00:30:56.060 | colors your perception of risk.

00:30:58.620 | Someone who's having a good day

00:31:01.580 | tends to not see risk anywhere.

00:31:04.220 | Someone who's having a bad day

00:31:05.660 | tends to see risk everywhere.

00:31:07.860 | And so there's just a host of ways

00:31:10.100 | in which emotion can color our views on markets.

00:31:14.660 | And it's best to invest in a more or less mechanical way.

00:31:19.460 | And we're just not really wired for that.

00:31:22.100 | - You mentioned something under emotion,

00:31:24.420 | which I found interesting.

00:31:25.740 | You talk about intense emotions shorten timelines.

00:31:30.380 | Talk about that.

00:31:32.500 | - Again, so much of how we're wired is evolutionary.

00:31:37.500 | There's a strong dose of evolutionary psychology here.

00:31:41.300 | If someone's in danger,

00:31:42.980 | emotion is an early warning detection system for danger,

00:31:47.100 | among other things.

00:31:48.660 | But if someone is in danger

00:31:50.100 | and they're experiencing stress or anxiety

00:31:53.020 | or something like that,

00:31:54.420 | your body cannot differentiate your worry

00:31:58.660 | about Silicon Valley Bank

00:32:00.740 | from you being chased by a wild animal, right?

00:32:04.140 | The physiological response to that is identical.

00:32:07.740 | You know, your pupils dilate,

00:32:09.660 | your heart races, you sweat,

00:32:11.580 | blood gets shunted away from your extremities.

00:32:13.940 | All the same things happen

00:32:16.140 | and you are preparing to defend yourself

00:32:19.420 | in a moment of physical harm.

00:32:23.020 | And again, the physiological response

00:32:25.140 | between a physical danger and an emotional danger,

00:32:29.140 | there's no difference.

00:32:30.700 | And so you don't need to think about your future, right?

00:32:34.340 | Like you don't need to think about your 80 year old self.

00:32:36.780 | If you're getting attacked by a bear, you need to run.

00:32:40.060 | And so the same thing happens though

00:32:42.180 | when we have a bear market.

00:32:43.980 | We become very myopic.

00:32:45.940 | We forget about our future self.

00:32:47.980 | We forget about our goals.

00:32:50.220 | And so that's one of the most powerful things

00:32:52.180 | that we can do is just take a breath

00:32:54.660 | and realign our gaze with our goals

00:32:58.020 | and sort of remember those long-term goals

00:33:01.180 | because we're wired to become very short-term

00:33:04.180 | and very immediate in our thinking when we're emotional.

00:33:08.180 | - So now we're gonna go circle back

00:33:09.900 | to these four buckets of behavioral risk,

00:33:14.540 | ego, conservatism, attention, and emotion.

00:33:18.300 | And in your book, you have fixes

00:33:20.780 | or how to mitigate these risks.

00:33:24.020 | And so we'll go back up to the top.

00:33:26.180 | Start out with ego.

00:33:28.140 | Give us a quick reminder of what that is

00:33:30.900 | and then how do you fix it?

00:33:32.780 | - Yeah, so I mean, there's a couple of ways

00:33:34.500 | that I think you can combat ego,

00:33:36.860 | which is this tendency to think you're better,

00:33:40.340 | to think you're luckier,

00:33:41.620 | and to think you're more prescient about the future

00:33:44.060 | than you actually are.

00:33:45.580 | I think bogal heads understand many of these well.

00:33:48.060 | I think the bogal head mentality

00:33:50.100 | is based on a low ego proposition.

00:33:53.180 | I'm not going to try and beat the market.

00:33:54.900 | I'm just going to be the market.

00:33:56.500 | I think the bogal head mentality is sort of lived humility.

00:33:59.900 | It's sort of humility embodied.

00:34:02.140 | And so I think something as simple as that

00:34:04.340 | is a way to combat ego.

00:34:06.500 | I think where appropriate working with a professional

00:34:09.540 | to get some help is lived humility as well.

00:34:13.420 | One of the most important parts of knowledge

00:34:18.340 | is something called meta-knowledge,

00:34:20.060 | which is just basically knowing what you don't know, right?

00:34:23.060 | Like I'm not handy at all.

00:34:25.140 | Like, I mean, I can't hammer a nail.

00:34:27.180 | I can't do anything with a car,

00:34:29.180 | but like I know that about myself and I don't try.

00:34:32.460 | So I just go get some help.

00:34:36.140 | I know there's probably a lot of folks

00:34:37.700 | who work with advisors here, a lot of folks who DIY,

00:34:40.540 | but where appropriate going to get that help

00:34:43.140 | is I think another piece of humility.

00:34:45.820 | - So secondly, conservatism?

00:34:47.980 | - Yeah, so conservatism is this tendency

00:34:51.140 | to confuse what we know with what is good.

00:34:54.780 | And it's our tendency to be sort of lazy

00:34:57.060 | and status quo prone.

00:34:58.820 | And so I'll take each of these in turn,

00:35:00.900 | and maybe at the risk of disagreeing with Jack Bogle,

00:35:04.020 | I believe that one of the things that's cool about investing

00:35:08.460 | is that it's a way to sort of see the world.

00:35:11.140 | And so one of the things that I do personally

00:35:13.060 | is that I diversify my portfolio by geography.

00:35:16.460 | We see that there's a huge tendency

00:35:18.380 | to engage in something that's called home country bias,

00:35:22.100 | but it actually gets a lot more granular than that.

00:35:25.980 | So we know that Americans over-invest in American stocks

00:35:30.100 | and that Canadians over-index

00:35:31.820 | on Canadian stocks and so forth,

00:35:34.100 | but we actually see this at a much more granular level.

00:35:36.900 | People in tech tend to over-invest in tech.

00:35:39.580 | People tend to over-invest in their own company.

00:35:42.700 | People in the Northeast are over-indexed on financials.

00:35:46.140 | People on the West Coast are overweight tech.

00:35:48.980 | People in the Midwest are overweight agriculture.

00:35:51.540 | People in Texas are overweight energy.

00:35:54.020 | Like we just see this all over the place

00:35:56.420 | that people confuse the stuff they see around them every day

00:36:00.860 | with things that are safe or desirable.

00:36:03.500 | And to get beyond this sort of parochial mindset,

00:36:07.340 | I think one of the things that we can do is use investing,

00:36:10.380 | treat it kind of like a liberal art

00:36:12.860 | and use it as a way to learn more about different industries,

00:36:17.020 | to learn more about the world

00:36:18.580 | and sort of expand our view of what's possible.

00:36:21.820 | So I think overcoming that is tough, but rewarding.

00:36:26.620 | And then on sort of the status quo piece,

00:36:30.180 | I think this is a good time to talk about wherever possible,

00:36:34.860 | these biases that we talk about

00:36:37.380 | should be flipped on their head to work to our benefit.

00:36:40.900 | We are lazy.

00:36:42.020 | We are status quo prone.

00:36:43.420 | That is undeniable,

00:36:45.180 | but that can actually work to our advantage.

00:36:47.700 | If we automate our saving and investing process,

00:36:52.140 | we tend to leave it alone and we tend to do much better

00:36:55.620 | than if we try and white-knuckle restraint

00:36:59.740 | every two weeks when the paycheck comes in and we go,

00:37:02.620 | "Oh God, am I gonna save again this two weeks

00:37:06.460 | and have to make the right decision week after week?"

00:37:08.980 | So if there's ways to take,

00:37:10.940 | look, I'm lazy, I'm status quo prone,

00:37:13.340 | but I know that can work in my advantage

00:37:15.620 | if I can automate that process.

00:37:17.100 | That's a powerful thing.

00:37:18.500 | - And the third one is attention.

00:37:23.660 | - Yeah, so we talked earlier about this media diet

00:37:26.380 | and I'll kind of draw on my clinical research

00:37:29.940 | here a little bit.

00:37:30.780 | I actually entered the industry

00:37:33.180 | to work with women with eating disorders.

00:37:35.420 | That was what brought me to the industry.

00:37:37.420 | Someone I loved had an eating disorder

00:37:40.060 | and helping her overcome that was formative

00:37:44.340 | in me getting into the industry.

00:37:46.460 | When I was working

00:37:47.380 | at this inpatient eating disorder treatment center,

00:37:50.700 | the very first thing that we did with the women that came in

00:37:53.740 | was sort of media training,

00:37:55.180 | was helping to make them an informed consumer

00:37:59.220 | of the way that women are marketed to,

00:38:01.620 | the way women are made to feel small

00:38:04.060 | and imperfect and ugly

00:38:05.580 | and the way the lighting and Photoshop

00:38:08.140 | and all this stuff works.

00:38:09.940 | And by helping them to become an informed consumer

00:38:13.180 | of the messages that were targeting them

00:38:15.700 | and to understand sort of the motivation beneath that

00:38:18.700 | was not virtuous motivation.

00:38:20.380 | I mean, it was sort of motivating them

00:38:22.700 | to feel like garbage to buy stuff.

00:38:25.380 | It empowered them to make different decisions.

00:38:27.620 | And I think that once people understand

00:38:30.700 | how the sausage is made with news in general

00:38:33.660 | and financial news in specific,

00:38:35.940 | you can become an informed consumer of media.

00:38:38.220 | And look, I'm not picking on the media.

00:38:40.500 | We need a robust media to keep us informed.

00:38:43.420 | That's a beautiful part of a functioning democracy.

00:38:46.500 | But media companies are companies that have bottom lines,

00:38:50.220 | that have a profit motive

00:38:51.540 | and understand that bad news is stickier than good news

00:38:55.460 | by a function of about three times and they know.

00:38:59.660 | And so they have a desire to report on things

00:39:03.420 | that are unusual or scary.

00:39:06.500 | And that's not always in the best interest

00:39:09.140 | of us making good financial decisions.

00:39:10.900 | So I think controlling that media diet is a powerful hack.

00:39:15.180 | - I would also add from my years talking with journalists

00:39:19.140 | that they have advertisers in their magazines

00:39:23.540 | and they have advertisers on their website

00:39:25.420 | and they cannot upset the apple cart too much

00:39:29.620 | with what they say,

00:39:30.580 | or they're going to get pulled into the editor's office

00:39:33.100 | and have a talking to.

00:39:34.740 | - I have one funny story here, if you'll indulge me.

00:39:37.340 | I was on a large, promoting this book actually,

00:39:41.620 | I was on a large cable financial news program.

00:39:45.500 | And when you're on TV,

00:39:47.020 | you've got this sort of earpiece in your ear

00:39:49.420 | where the producer is talking to you.

00:39:51.900 | - Right. - And you can hear

00:39:52.740 | what's going on.

00:39:53.580 | Like you can hear what everyone's seeing on the screen,

00:39:55.660 | but you can also hear this person

00:39:56.940 | and they're kind of counting me down.

00:39:59.140 | And I was in my full like psychologist regalia.

00:40:02.460 | Like I'm like wearing tweed and tortoise shell glasses

00:40:05.580 | and like a bow tie probably or something.

00:40:08.060 | And so looking very academic.

00:40:10.580 | And so she's counting me down,

00:40:13.020 | like five, four, three, I'm about to go on.

00:40:16.220 | Five, four, three, two, give me something good,

00:40:19.460 | don't be a nerd, one.

00:40:22.140 | And I go on and I laugh at that,

00:40:26.740 | but it's so telling, right?

00:40:29.100 | I mean, it wasn't give us nuanced commentary

00:40:32.500 | that's based in the literature.

00:40:33.820 | It was don't be a nerd, give me something good, right?

00:40:37.660 | And it's like, that's what they want.

00:40:39.940 | - Yeah, over the last several years

00:40:42.420 | since I'm no longer managing money,

00:40:44.260 | so I'm no longer a potential client for asset managers

00:40:47.780 | who have mutual funds or ETFs

00:40:50.380 | or whatever they're trying to sell.

00:40:51.740 | I'm no longer in that environment anymore.

00:40:53.820 | I'm just doing an hourly advisory model now,

00:40:56.620 | which I don't get invited to speak

00:40:59.260 | at any investor conferences anymore,

00:41:01.940 | barring the Boglehead conference,

00:41:03.900 | which I'm on the investment committee.

00:41:05.820 | But no, I mean, all the large conferences I used to go to,

00:41:09.420 | I used to be a speaker talking about asset allocation,

00:41:11.980 | talking about index investing, all of this.

00:41:14.700 | And now never do I get invited

00:41:18.780 | because I'm of no use to the sponsors.

00:41:21.540 | - Well, yeah, I mean, look,

00:41:23.620 | we know incentives drive behavior.

00:41:25.780 | We're not picking on anybody,

00:41:27.380 | but that's just what it is.

00:41:29.980 | We're all trying to make a living.

00:41:31.340 | Incentives drive behavior,

00:41:32.580 | and the financial news media has an incentive

00:41:35.220 | to get you to look at it.

00:41:37.900 | And they know that you'll look at it when it's bloody.

00:41:41.460 | So, I mean, that's just kind of is what it is.

00:41:43.980 | - Yeah, I'm not going to bring him any business

00:41:45.660 | because what I'm going to say

00:41:46.500 | is going to drive business away from those sponsors.

00:41:48.940 | And so, well, we'll skip him this year.

00:41:52.020 | Anyway, I understand that.

00:41:53.380 | It is the way it is.

00:41:54.820 | The last one, fixing our emotional issues.

00:41:59.380 | - Yeah, so, you know,

00:42:00.460 | I think a lot of these things manage emotion.

00:42:03.220 | One of the things that I love

00:42:04.980 | about the bogal head type style investing,

00:42:08.860 | it's shown that that sort of investor

00:42:11.300 | actually stays the course better

00:42:13.300 | largely as a function of their expectation.

00:42:16.580 | Your expectations matter,

00:42:19.380 | sort of your emotional expectations matter.

00:42:21.660 | When you expect that you will be mirroring the market

00:42:24.300 | rather than beating it,

00:42:25.900 | your expectations are more aligned with your emotions

00:42:28.380 | and you make better choices.

00:42:29.980 | There's actually a way that we can, again,

00:42:31.860 | use emotion to our advantage

00:42:33.700 | 'cause there's plenty of ways that emotion can trip us up.

00:42:37.020 | We go back to this idea of the personal benchmark.

00:42:41.260 | You know, there was a study out of Canada that I just love

00:42:44.260 | that compared a control group to an experimental group

00:42:48.300 | that had to look at a picture of their children

00:42:50.340 | for five seconds before they made a financial decision

00:42:54.300 | and they monitored decisions over this time.

00:42:57.340 | And the people who looked at the picture of their children

00:43:00.060 | before they made financial decisions,

00:43:02.420 | made better decisions,

00:43:03.460 | they saved twice as much money on and on,

00:43:06.660 | that's totally irrational, right?

00:43:08.540 | Like just from like a purely behavioral standpoint,

00:43:11.140 | it's totally irrational.

00:43:12.660 | You should just save what you need to save

00:43:14.900 | and you should just make

00:43:16.060 | the mathematical decisions around that.

00:43:18.300 | But you can bring emotion into your financial life

00:43:20.980 | in a positive way.

00:43:22.060 | You can recenter yourself on your why,

00:43:24.380 | you can recenter yourself on the things that matter to you

00:43:27.500 | and use that to propel you forward.

00:43:30.580 | So if there's something you really want

00:43:32.500 | or a goal you have or a dream,

00:43:34.660 | wrap your financial life up in that

00:43:36.460 | and you'll make better decisions.

00:43:38.300 | - Okay, now we're gonna get into the fourth part of the book

00:43:41.420 | where you list out several different things

00:43:44.740 | an investor can do to maybe mitigate

00:43:47.940 | some of these behavioral biases.

00:43:50.140 | - So in the last part of the book, as you've said,

00:43:52.220 | I touch on how to kind of put this all together

00:43:54.860 | and what it looks like in a portfolio.

00:43:56.500 | And there's a couple of things that I think

00:43:58.060 | are worth mentioning that I would highlight here.

00:44:00.380 | So the first of these is fees.

00:44:02.300 | I know, look, I'm preaching to the converted on this podcast

00:44:06.020 | about the benefits of managing fees,

00:44:08.300 | but Morningstar did a study a few years ago

00:44:10.580 | where they looked at the drivers of fund performance

00:44:12.900 | and the number one driver was fees.

00:44:15.180 | That was the single best predictor of how a fund did,

00:44:18.300 | was how expensive it was.

00:44:20.140 | It's absolutely in our control.

00:44:22.820 | And so when you have something that's so controllable

00:44:25.300 | and so predictive, it makes absolute sense to go and get it.

00:44:29.540 | You know, the other thing that I talk about

00:44:31.900 | is being systematic.

00:44:34.060 | And this one rubs a lot of people the wrong way,

00:44:37.500 | but I talked in this book and my other book,

00:44:39.620 | there was a meta-analysis that was done

00:44:42.380 | on roughly 200 different studies of decision making.

00:44:47.060 | And it compares discretionary decision making,

00:44:50.780 | like PhD level discretion to just following simple rules.

00:44:55.780 | And what we find is that 94% of the time,

00:45:01.620 | simple rules beat or equal PhD level discretion.

00:45:06.900 | - Ah, interesting.

00:45:08.820 | - Yeah, and that's sort of compelling in and of itself.

00:45:12.940 | But the second thing you have to think about

00:45:14.980 | is that in markets and in funds, discretion costs, right?

00:45:19.660 | Rules are free, discretion is not.

00:45:22.660 | A bunch of PhDs like me in a fund family

00:45:26.060 | are gonna charge you for their time.

00:45:27.900 | So not only does being systematic

00:45:30.340 | have some behavioral upside, it costs less too.

00:45:33.860 | And we've talked about the power of fees.

00:45:36.540 | The last thing that I'll touch on

00:45:37.980 | is I look at some different factors of investment.

00:45:41.180 | So basically we're looking at what sorts of elements

00:45:45.620 | of an investment style might be predictive

00:45:48.980 | of it being something you should pay attention to.

00:45:52.220 | And so I looked at different things

00:45:54.340 | and one of the things I found,

00:45:55.740 | the first sort of condition that needs to be met

00:45:58.140 | is it needs to show up in the research, right?

00:46:00.820 | There needs to be data, there needs to be evidence

00:46:03.260 | to support that what you want to do makes sense, okay?

00:46:08.260 | The second thing is there needs to be

00:46:10.540 | some sort of philosophical underpinning to it.

00:46:14.180 | And this is, I think, a little bit less intuitive.

00:46:17.500 | Markets are so busy and so noisy

00:46:21.740 | that sometimes we will find correlations

00:46:24.420 | where none truly exist.

00:46:25.900 | There's the famous Super Bowl indicator.

00:46:28.220 | I can't remember if it's the AFC or the NFC,

00:46:31.420 | whoever wins is deeply predictive of how markets have done.

00:46:35.740 | There was a funny one from a couple years ago

00:46:38.700 | where Bangladeshi butter production

00:46:42.100 | and movements in the S&P 500 were deeply correlated,

00:46:45.760 | like at the 96th percentile.

00:46:48.180 | But if I said, hey, Rick,

00:46:49.820 | let's go start a Bangladeshi butter production hedge fund,

00:46:52.980 | no one should give us their money because it's, right?

00:46:56.620 | Like it doesn't make sense.

00:46:58.820 | - There's gotta be a fundamental basis behind it

00:47:00.940 | and a business basis behind it in a way.

00:47:02.860 | - Yeah, well said, right?

00:47:04.480 | Like there needs to be something fundamental,

00:47:06.220 | like why does this make sense?

00:47:07.740 | So first of all, does it show up in the data?

00:47:10.220 | Second of all, does it make sense?

00:47:12.260 | And then third of all,

00:47:13.500 | is there a behavioral reason why it will persist, right?

00:47:18.260 | This is what gives staying power to something.

00:47:21.820 | We know now a lot more than we did

00:47:25.740 | a hundred years ago about nutrition.

00:47:28.540 | We know better now than we do a hundred years ago

00:47:31.500 | what we ought to be eating, drinking, smoking, not smoking.

00:47:35.620 | Not to say we have perfect knowledge,

00:47:37.140 | but it's improved over the last hundred years.

00:47:40.180 | And yet our health outcomes are diminished

00:47:43.420 | because it is behaviorally difficult

00:47:45.700 | to eat salad over a donut.

00:47:47.940 | Even though I know the salad's better for me,

00:47:50.800 | the donut tastes better.

00:47:52.640 | And the same thing is true of markets.

00:47:54.500 | So you look at things like value investing,

00:47:58.380 | value investing has a behavioral underpinning to it.

00:48:03.060 | It's not always gonna win.

00:48:04.680 | There will be long stretches where it doesn't,

00:48:07.420 | but I still think it's a sensible way to invest

00:48:10.560 | because it shows up in the data,

00:48:12.720 | there's a reason it makes sense,

00:48:14.980 | and there's something psychological to it

00:48:17.280 | that means it's probably gonna stick around for a minute.

00:48:20.020 | So I think this is just sort of a good three-part test

00:48:22.660 | for an investment idea

00:48:24.520 | to see if it's worth taking seriously.

00:48:27.900 | - Okay, very good.

00:48:28.740 | Well, thank you for going through the book.

00:48:30.940 | It's always humbling to read these books

00:48:32.620 | because they come after story after story

00:48:34.620 | where I say, yeah, that's me.

00:48:35.680 | Yeah, yeah, that's me.

00:48:37.260 | - Yep.

00:48:38.100 | - But I do have some other questions for you

00:48:39.480 | before I let you go today

00:48:40.540 | and things that have been pressing me.

00:48:42.580 | First of all, you talk about this concept of never enough.

00:48:47.580 | We'd never have enough money.

00:48:48.820 | In fact, John Bogle wrote a book called "Enough."

00:48:51.380 | And talk about psychologically why that is.

00:48:54.300 | - I'm actually writing a new book right now

00:48:56.100 | and something I'm digging deeper into.

00:48:57.660 | So I'll have more to say soon.

00:48:59.100 | But the basic idea is, first of all,

00:49:03.460 | our ability to get enough is, again, fairly recent.

00:49:08.460 | Until modern times,

00:49:10.820 | you couldn't really stockpile resources in a way

00:49:15.820 | that would see you through the next 50 years.

00:49:18.500 | I mean, that is a relatively recent phenomenon.

00:49:21.820 | - Right.

00:49:22.660 | - And so again, we are wired for inadequacy.

00:49:26.340 | We are wired to keep grinding and to keep hunting

00:49:29.180 | and to keep pushing

00:49:31.100 | because that used to be the truth of how humans lived.

00:49:36.020 | Now, it doesn't happen a ton,

00:49:38.420 | but now you could sell a business when you're 30 years old

00:49:41.460 | and have enough money to never work again.

00:49:44.100 | And yet most people struggle to have enough.

00:49:47.980 | And there's all sorts of high-profile examples

00:49:52.380 | of people with plenty who act with a scarcity mindset.

00:49:57.380 | - Oh, I see that all the time in my business.

00:49:59.340 | I mean, if somebody has 2 million,

00:50:01.700 | they say, "If I only had 3 million."

00:50:03.660 | If somebody has 3 million,

00:50:05.020 | they say, "If I only had 5 million."

00:50:06.820 | If somebody has 50 million,

00:50:08.000 | they say, "If only I have 75 million."

00:50:09.780 | I can't get away from it.

00:50:11.540 | We humans, all we can think of

00:50:13.140 | is getting through the winter with enough food supply.

00:50:15.780 | I mean, this idea of saving for 10, 15, 20 years

00:50:20.460 | down the road, I mean, that doesn't compute.

00:50:22.740 | - Yeah, so I talk in the "Laws of Wealth."

00:50:25.100 | Gallup did a study a while back

00:50:26.980 | that looked at people at different income levels

00:50:29.460 | and it showed exactly what you just said.

00:50:31.820 | It said, "How much money would you need to be happy?"

00:50:34.620 | And the people who made 50 grand a year needed 75.

00:50:38.100 | The people who made 100 needed 150.

00:50:40.300 | The people who made half a million needed 600.

00:50:43.740 | At every income bracket, it was just out of reach.

00:50:48.300 | The psychological tendency is called the hedonic treadmill.

00:50:51.700 | We quickly adapt to whatever our reality is.

00:50:56.180 | A house is one of the worst ways that you can buy happiness

00:50:59.940 | because I have a beautiful home.

00:51:01.980 | When I bought it eight years ago,

00:51:03.740 | it was beyond my wildest dreams.

00:51:05.860 | Like, the first time I saw it,

00:51:07.820 | I couldn't believe this was mine.

00:51:09.380 | I couldn't believe I could afford it.

00:51:11.340 | And now it's just where I throw my dirty socks.

00:51:14.740 | We quickly become habituated to things.

00:51:17.340 | And the hedonic treadmill is

00:51:19.580 | whatever level of wealth you attain

00:51:21.860 | becomes your new reality.

00:51:23.700 | And then you're always running.

00:51:25.740 | And so it's imperative that we avoid lifestyle creep,

00:51:29.900 | that we study the literature around positive psychology

00:51:33.060 | and try and do things that truly sate us,

00:51:36.260 | like focusing on relationships,

00:51:38.580 | focusing on new experiences

00:51:40.260 | and new knowledge and new learning,

00:51:42.140 | and not just being more acquisitive.

00:51:44.300 | It's a pitcher that will never be filled.

00:51:47.620 | - The last thing is through our lives,

00:51:51.460 | as we get to older age,

00:51:54.340 | these cognitive or behavioral issues change.

00:51:58.500 | And I particularly wanna talk about

00:52:00.940 | as we move from our accumulation years

00:52:04.260 | to our retirement years and then to our golden years,

00:52:08.260 | how we change.

00:52:10.460 | - Yeah, so we'll speak first from the bias perspective.

00:52:14.820 | There's actually, there's good news as we age.

00:52:17.820 | The level of bias tends to diminish

00:52:20.940 | and life has a way of teaching us things

00:52:24.220 | about our own exceptionalism.

00:52:26.340 | So, what we see in the research

00:52:29.380 | is that the older people are,

00:52:31.100 | the less overconfident they are,

00:52:32.740 | the more humble they are,

00:52:34.460 | or sort of the more sort of equally calibrated they are.

00:52:37.540 | So I think this really conforms

00:52:39.700 | to our popular conception as youthful hubris,

00:52:43.100 | but we do learn and markets will teach us

00:52:45.740 | that we're not as great as we thought we were.

00:52:48.260 | So a lot of the biases that we've talked about today

00:52:51.100 | can kind of diminish, at least overconfidence can.

00:52:54.580 | But I think what we're seeing a lot of now,

00:52:58.300 | and I saw a heartbreaking story shared about on Twitter

00:53:01.740 | about this yesterday,

00:53:03.220 | was we're getting into sort of

00:53:05.060 | the happiness research with retirement.

00:53:08.100 | And a lot of people have put so much focus

00:53:11.700 | on preparing for their financial lives in retirement

00:53:16.460 | and very little focus on their personal lives.

00:53:20.740 | And what we see is that work checks a lot of boxes

00:53:25.620 | in terms of what makes people happy.

00:53:27.460 | So, you know, Martin Seligman has this great

00:53:30.140 | sort of five-part process, five-part model

00:53:33.260 | for what makes us happy called the PERMA model.

00:53:36.660 | The P in PERMA is for positive experiences.

00:53:39.340 | So this is having fun,

00:53:41.020 | going to a ball game, eating an ice cream cone, whatever.

00:53:43.860 | - Being with your grandkids.

00:53:44.980 | - Yeah, arguably work gets in the way of that, right?

00:53:48.300 | So in retirement, you have more positive experiences.

00:53:51.100 | You have more leisure time.

00:53:52.860 | The E though is for engagement.

00:53:55.420 | And this is doing deep, meaningful work.

00:53:58.620 | And a lot of people who are bought into

00:54:00.380 | sort of this old school idea of like,

00:54:02.220 | I'm just gonna hit the links and sit on a beach somewhere,

00:54:05.460 | they find that it's not fulfilling.

00:54:07.100 | We need that deep, meaningful work.

00:54:09.020 | - Oh, by the way, the work doesn't have to be for money.

00:54:10.980 | It could be nonprofit.

00:54:12.380 | - 100%, it could be volunteerism.

00:54:15.140 | - Like what I'm doing here.

00:54:17.020 | - Sure, it could be a hobby.

00:54:18.940 | I'm sitting here looking at my guitars, right?

00:54:20.940 | It just needs to be something that engages you.

00:54:24.140 | The R in PERMA is for relationships.

00:54:26.820 | A lot of our closest relationships

00:54:28.660 | are with people we work with.

00:54:30.540 | Work is a real source of relationships.

00:54:33.060 | The M is for meaning,

00:54:34.780 | working for something larger than yourself,

00:54:37.140 | whether it's religion, spirituality,

00:54:39.580 | charitable giving, philanthropy.

00:54:41.860 | Like work helps us be part of a team,

00:54:44.420 | work for something bigger.

00:54:46.100 | And then the A is for advancement.

00:54:47.860 | We are wired to wanna be better today

00:54:50.780 | than we were yesterday.

00:54:52.460 | And work gives us that.

00:54:53.980 | Work gives us opportunity for growth.

00:54:56.300 | So I mean, you could argue that's four of the five things

00:54:59.300 | that make people truly happy

00:55:00.900 | are itches that are scratched by work, right?

00:55:03.780 | I know enough bogleheads to know how fastidiously

00:55:07.100 | they prepare for retirement in many cases,

00:55:09.580 | but we have to be equally attentive

00:55:12.100 | just making sure our personal

00:55:13.500 | and our psychological lives are locked down

00:55:16.940 | because there's a lot that work does

00:55:18.540 | that I don't think we commonly recognize.

00:55:21.420 | - Well, Dan, it's been great having you on today.

00:55:23.060 | Are there any last words that you have for us?

00:55:25.260 | - Yeah, I hope this podcast will just encourage people

00:55:29.020 | to think about some of the things that we just talked about

00:55:31.100 | with those five pillars of happiness.

00:55:33.460 | And I hope if you read my books

00:55:35.020 | or other books on behavioral economics

00:55:36.860 | and behavioral finance,

00:55:38.660 | I hope you'll do it with an eye

00:55:40.060 | to just improving your life holistically.

00:55:42.780 | One of the cool things about studying this

00:55:44.860 | is it can make you a better market participant for sure,

00:55:48.100 | but I think it can make you a better wife,

00:55:50.180 | brother, grandfather, son, whatever.

00:55:52.660 | I think it can make you a better human

00:55:54.560 | as you're more thoughtful.

00:55:55.620 | So that's why I love this work.

00:55:57.340 | It can make you money, sure,

00:55:59.060 | but it can also make a difference in your life.

00:56:01.180 | So I think it's powerful for that reason.

00:56:03.420 | - Thanks, Dan, for being on "Bogleheads on Investing."

00:56:05.580 | Great comments, good insight.

00:56:08.140 | I don't feel bad about myself, which is a good thing.

00:56:10.860 | - That was my goal.

00:56:12.620 | Thank you for having me.

00:56:14.500 | - This concludes this episode of "Bogleheads on Investing."

00:56:18.580 | Join us each month as we interview a new guest

00:56:21.340 | on a new topic.

00:56:22.380 | In the meantime, visit boglcenter.net, bogleheads.org,

00:56:26.660 | the Bogleheads Wiki, Bogleheads Twitter.

00:56:29.140 | Listen live each week to "Bogleheads Live"

00:56:31.380 | on Twitter Spaces, the Bogleheads YouTube channel,

00:56:34.100 | Bogleheads Facebook, Bogleheads Reddit.

00:56:37.020 | Join one of your local "Bogleheads" chapters

00:56:39.940 | and get others to join.

00:56:41.260 | Thanks for listening.

00:56:42.260 | (upbeat music)

00:56:44.840 | (upbeat music)

00:56:47.420 | (upbeat music)

00:56:50.000 | (upbeat music)

Bogleheads® on Investing Podcast 056: Dr. Daniel Crosby on the behavioral investor, host Rick Ferri

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