Welcome to Bogleheads on Investing, episode number 56. Today's special guest is Dr. Daniel Crosby, a psychologist and a behavioral finance expert who helps organizations and individuals understand the intersection of mind and markets. Hi everyone, my name is Rick Ferry and I'm the host of Bogleheads on Investing. This episode, as with all episodes, is brought to you by the John C.

Bogle Center for Financial Literacy. A non-profit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net, where you will find a treasure trove of information, including transcripts of these podcasts. Today, our special guest is Dr. Daniel Crosby. Educated at Brigham Young and Emory University, Dr.

Crosby is a psychologist and behavioral finance expert who helps organizations and individuals understand their mind and the markets. He has written several books on behavioral finance. The Laws of Wealth was named one of the best investment books of 2017, and his latest book, The Behavioral Investor, is an in-depth look at how sociology, psychology, and neurology all impact investment decision-making.

So with no further ado, let me introduce Dr. Daniel Crosby. Welcome to the Bogleheads on Investing podcast, Doctor. Yeah, Rick, great to be here, and please just call me Daniel. Daniel, thank you so much. You've got a very deep background in behavioral investing and have written several books and are a noted authority on this topic.

So I'm really happy to have you on the podcast. Although I do say every time I have a behavioral finance person, I feel very inadequate at the end of the podcast. Because all of my mistakes are remembered during the podcast. But tell us a little bit about you, your childhood memories, school.

I mean, how did you get to where you are today? Sure, you got to ask about childhood memories when you have a shrink on, for sure. So great question. So I'm actually a clinical psychologist by education. I wasn't joking about being a shrink. I went to school with the aim of working in clinical psychology, and indeed, that's what my degree is in.

But about three years into what is a five-year program, I began to burn out. I was already seeing 30 or 40 clients a week as part of sort of fulfillment of my doctoral degree. And most of them were what we would call the worried well, folks like me or you who are just like hit a rough patch.

But some of them were court appointed, some of them were criminals, and some of them were acutely suicidal. And I was just candidly had poor boundaries. I was taking my work home with me, and it was just taking a toll on me. I went to my father, who is a financial advisor.

And I said, look, dad, I love human psychology. I love studying the reasons why people do the things that they do. I love the academic pursuit of studying human behavior. But I don't know if this applied medical context is the right one for me. And he said, well, there's a ton of psychology in my work.

And at the time, I started my PhD when I was 23. I don't think I had a real deep understanding of what my dad did. To me, he was a numbers guy and a sales guy. And so I was like, what are you talking about? And he said, no, give it a look.

Now, my dad is a wire house advisor in a midsize town in Alabama. He didn't have an understanding of what behavioral economics or behavioral finance were. But he knew that a big part of his job was counseling his clients. Long story short, this conversation with my dad pointed me in a direction where I went and started looking into the literature around money.

There weren't a lot of resources for folks like my dad. There was this ivory tower, sort of academic research being done. But there wasn't a whole lot of translating that down in applied ways for people on the street and for advisors. And so I've tried to make that my place in the food chain.

And along the way in this journey, you've written five books. The first book, again, to make me feel inadequate, was called You're Not That Great. Could you just tell us what are two sentences about that book? Yeah, that was based on a TEDx talk I did that was really well-received.

And basically, the idea of You're Not That Great is that part of living an extraordinary life is accepting your own personal banality and mediocrity. And I think no one understands that better than Fogelheads. And that's not a diss, right? It's that you understand that, on average, you are pretty average.

And accepting that and owning your own failings is sort of paradoxically a way to enjoy great returns and to have a great life. So it was sort of the perils of overconfidence and the joys of mediocrity is what that book is about. Getting into another topic, another book, the second one you wrote, Everyone You Love Will Die.

OK, so what's this about? Are you sensing a theme here? So yeah, for what it's worth, neither of these books sold very well. So Everyone You Love Will Die is kind of a funny story, believe it or not. I have three children, and we had a close family friend pass away.

And we were going to the funeral. And at the time, my children were very young. And I was writing poetry. And one of the ways that I tried to communicate with my kids was by writing sort of Shel Silverstein-esque poems about difficult topics. And so I wrote this poem that is, believe it or not, kind of sweet.

And the last stanza of the poem is, yes, everyone you love will die, but you're here today and so am I. Very nice. It's just sort of the stoic idea that understanding life's brevity gives it punch and gives it importance and gives you a sense of how you want to spend your time.

And so I wrote this poem. I put it on Facebook. A friend of mine who is an artist really liked it and illustrated it without my knowledge, sort of illustrated each stanza, sent me the drawing. And I said, well, look, now we've got words and pictures. Let's make this a book.

We put it on Kickstarter. Kickstarter made it their editor's pick of the day. And so it got funded in like five hours. And we had enough to print a couple hundred copies and send them out to the people who backed it. So it's actually free on Amazon now. So yeah, go get it for free on Amazon and have a look.

I love that line. Everyone we know will die, but you are here and so am I. That's a great line. Thank you. OK, now we're going to pivot a little bit. And now we're going to get into investing topics. Because your first book seems to be more of kind of an institutional book for advisors.

It's called Personal Benchmark, Integrating Behavioral Finance and Investment Management. So this is your first forte into behavioral investing. So tell us about this book. Personal Benchmark is really about indexing to your life. We know that benchmarks matter. What you choose to measure your life and your performance against has a material impact on your behavior.

There's actually a really robust literature around the idea that benchmarking to things that matter to you can elicit better behavior. People in named accounts are more likely to save. They're less likely to go to cash when markets get turbulent. And so it's sort of the overarching idea is integrate your personal mission, your personal purpose into the way that you think about your wealth, and you'll likely be better at staying the course.

The next book now you're really beginning to dig into this idea is called The Laws of Wealth, Psychology and the Secret to Investing Success. So tell us the main points of this book. Yeah, so The Laws of Wealth came about in an interesting way. In almost every instance, there was some sort of spark that was sort of the genesis for these books.

I was speaking, and I was setting forth this idea to advisors of a behavioral policy statement. So you know, I work primarily with financial advisors, and an advisor will give their clients an investment policy statement. That sort of, these are the rules of the road, right? Like, these are the best practices I will adhere to in the management of your wealth.

But I was advocating for the other side of that, sort of understanding that the advisor-client relationship requires both people pulling in the same direction. And I said, look, it's important that you help manage your client's expectations and let them know that this is a two-way street. So I said, look, you should have a behavioral policy statement that says, I, your advisor, these are the things that I will do.

You, the client, these are sort of my expectations of you. And it's all this stuff you'd expect, remaining long-term, sort of having a proper media diet, things like that. - Well, say that again, a proper media diet? - Yeah, a proper media diet. So like, making sure you're not filling your head with doom-scrolling and unnecessary cataclysmic-- - Oh, you mean watching Jim Cramer.

(laughing) - I will refrain from naming names. (laughing) But yeah, just putting the right ideas in your head, right? Like, and knowing that these can have a material impact on the way you think and act in markets. And so someone quite astutely said, well, what would be on your behavioral policy statement?

And I had never, through the act of putting one together, so I said, give me a minute and I'll get back to you. And so the laws of wealth is really my behavioral policy statement. It's things like, you control what matters most, which is trying to help investors take the power back.

You maybe have a similar experience, but when people find out that I work in finance, I get a host of questions. And it's things like, what's the Fed gonna do? Like, what's Russia gonna do? What's the virus gonna do? And of course, I have no idea. And even if I did know, I wouldn't know how it would impact markets.

And so the first chapter is like, all of the things that matter most about you crossing your financial finish line are within your power. And it's things like maximizing your human capital, saving enough, managing your fees, diversifying. - Sounds like Boglehead principles. We have basically 10 Boglehead principles and it's all the same thing.

Live below your means, keep your fees low, keep taxes low, don't try to time markets, on and on, and so it's the same. Sounds like the same. - Yeah, ideas like this too shall pass. We know that human nature is sort of to project the present moment into the future indefinitely.

Whatever's going on now is how we presume the next three, five, seven years will go. And markets almost work 180 degrees of that, right? I mean, there's short-term persistence and short-term trend, but markets are mean reverting. And so the fact that markets are mean reverting should make us humble in good times and should give us hard and bad times and things like this.

So it's basically my behavioral policy statement. - Very good. Well, thank you for that. It sounds very interesting. A good idea too, I think, a lot of people create an investment policy statement, but they don't have this side of it. You had a couple of chapters in there about forecasting is for weathermen.

And if you're excited, it's probably a bad idea, things like this. Human words there, not clinical words, but human words, so very good. All right, so now the latest book is called "The Behavioral Investor." And basically four parts. Start out with some basics about human psychology. And then you go into the second part, which I call risks or behavioral risks.

And then the third part is how to fix these risks. And then finally, you have some ideas for building a behavioral portfolio. So we're gonna go through the book and spend as much time as you want on each part, but let's start out at the beginning. And I thought this was interesting because I happen to be writing a book and I start the book talking about cavemen and the idea of the hunter-gatherers and that our brain is not wired for saving for retirement 30 years down the road.

So could you start out with the psychological part? - Yeah, so that first part, I wanted to give some coverage to the psychological, the sociological, and even the physiological elements of investing, because all of these things can impinge on our ability to make good, sound financial decisions. And I didn't think that it had been adequately covered in the literature.

So from a psychological, from sort of the caveman perspective, we know that our brains have not had an upgrade in, depending on who you ask, I think there's lots of different ideas about this, but something like 200,000 years. Since our brains sort of had a meaningful upgrade, we're working with sort of the iPhone 1 of brains and we're being called on to make iPhone 14 type decisions.

Capital markets, true stock markets like the ones we trade in now are only a couple of hundred years old. And we're trying to navigate these with brains that haven't had an upgrade in hundreds of thousands of years. And so I think it helps to understand how we're wired. And one of the ways that we're wired, we're wired for ease, we're wired to maintain the status quo, and we're wired to avoid loss.

And we have this profound asymmetry between how we think about upside and how we think about downside. And it's directly tied to these cave people ancestors, where you get one bad day, right? Back then when life was so brutal and so hard, one bad day was all you got, right?

If it was sufficiently bad, that's the end of you. And I mean, I guess that's still the case in many respects. And so we're wired to avoid that one bad day because it can be fatal. Well, if you have a good day, that's nice, but it's not essential from a pure evolutionary, like live long enough to pass on your genes standpoint.

It's not essential that you have a good day, but it is essential that you avoid bad days. And so we see this profound asymmetry and loss aversion and all the things that the behavioral economists talk about. - You talk about humans communicating on a social level in what's called non-real terms, ideas, religion, and so forth, and really not communicating on say a mathematical level.

This also creates an issue. - Yeah, so this is perhaps a little esoteric, but there's this other animals, right? Humans, humans are animals. Other animals communicate in very literal terms. So the idea of something that's metaphysical or bigger than is a uniquely human creation. And so I talk about these functional fictions in the book, the borders of the state of Georgia or Texas, an economy, a fiat currency, all of these things are things that are not real in the strictest sense, the US constitution, our laws, like these things are not real in the strictest most material sense, but the fact that we agree upon them, fact that we sort of collectively agree upon their reality allows us to do great things.

And I mean, it's really the thing that sets us aside from the rest of the animal kingdom is these functional fictions. But what that means is that we are wired to believe in things that are literally not true, and we are wired to reason and think in social terms.

And so I give an example in the book, there's a famous experiment called the Asch experiment, where Solomon Asch, the psychologist, was studying the impact of peer pressure on decision-making. Imagine one line on the left that's of a certain length, and then he shows three lines on the right that are of varying lengths, one of which corresponds directly to the line on the left.

And he says, "Which line on the right "is the same length as the line on the left?" And I mean, a kindergartner could do this, right? It's easy as can be. And when you ask people in isolation, everyone gets it right. But when you ask people in groups, you have confederates of the experiment.

So seven people go before Rick goes, right? And Rick's number eight, and he's the only one who's not in on the joke. The correct answer is C, say, but the seven people ahead of you are sort of prompted to say B. So they say, "Oh, it's definitely B. "It's B, it's B, of course it's B." - Right.

- It comes down to you now. You would never, Rick. I know you're an icon of class and a truth teller. - I've been accused of not working well in a group, by the way. - 76% of the time, people give the wrong answer. They give the peer pressure answer 76% of the time on this really basic thing.

Now, we used to think that that was just a function of peer pressure. We used to think, "Oh, they know the answer is B, "but they're just saying C because everyone else is "and they don't wanna stick out." But what's fascinating now is we can look inside the brain, right, with these fMRI studies, and we can monitor what's going on in the brain.

And the part of the brain that's lighting up when this is going on is actually the part associated with not peer pressure, but sensation and perception. So quite literally, the peer pressure has, in the most literal sense, changed the way you view the line. And so you think about the implications of that for markets and how social consensus can not only pressure us to do things we might not want to do otherwise, but literally, in the most literal sense possible, shape the way that we perceive the world, and it's pretty wild.

So it's this double-edged sword for humankind that functional fictions help us build churches and economies and governments and all these great things, but they also can be our undoing. - So lately, with the demise of Silicon Valley Bank, and now problems at other banks, I've gotten two calls from clients who said, "Should I be taking my money out of my bank?

"Where should I be putting it?" And I said, "No, why would you do that? "I mean, first of all, you have 250,000 of FDIC insurance." And they go, "Yeah, but I'm a little afraid of even that." And I think it gets to what you're talking about. - No, it absolutely does.

And what's so interesting is we have a host of biases that kind of load onto this. One is sort of this collective reasoning that we just talked about. But I think all of this, this most recent banking crisis, if we want to call it that, is exacerbated by the fact that in recent memory, we have another banking crisis.

- Right, true. - So there's a recency bias at play. There's sort of this comparative bias at play, this called representativeness heuristic, that sort of the idea that this thing is like that thing. People go, "Oh, banking crisis. "I know a banking crisis. "I lived through that in 2008, and it was gnarly." So I got to get out of here.

And even the fundaments of those two things are quite different. The brain doesn't parse those kind of distinctions very easily. - In that sense, we can go to the second part of the book. And now I call the second part of the book the behavioral risks. You might call it something else.

But you list out four of them, ego, conservatism, attention, and emotion. So four categories of behavioral risks. So if you could talk about this. - Yeah, so my purpose here was there has been the cataloging of behavioral biases has become a growth industry, right? So there's all these ways in which we've, maybe you've seen this.

There's a sort of a lovely visual called the codex of, the codex of cognitive biases or something. - I have seen that a circle with all of these things. And by the time I get to 1/3 the way around it, or even 1/4 of the way, I just stop.

- No, you gotta stop. Well, and there's something like 200, right? Like I've lost track, but there's something, there's give or take 200 different cognitive biases. And so this sort of rubbed me the wrong way in a couple of ways. So first of all, it's not a very empowering thing to tell the average investor like, "Look, there's 200 ways that you can screw this up." And even your sort of offhanded comment earlier about like, "Oh God, every time a behavioral finance person "comes on here, I feel like crap "because I gotta deal with them." We don't want that.

So what I set out to do was I said, "Look, I know that many of these biases have a common root. "There's some sort of larger meta bias "that underpins a lot of these things "'cause some of them are enormously specific." And so I said, "I wanna sort of set out to see "what are the ones that I consider a meta bias." And so that's what these four are, ego, emotion, attention, and conservatism.

These are my four meta biases, if you will. Because once we have a manageable universe of bias, you can set out to try and set up risk management procedures and things like that to control them. You can control for four biases, you can't control for 200. - So let's go through them, these four biases, starting with ego.

- Yeah, so ego is the various flavors of overconfidence, going back to my "You're Not That Great" book, right? Ego, there's actually a couple of specific types of overconfidence, all of which I think are interesting to bogal heads. We'll call it the "I'm better than you" sort of variety, which is the one that gets the most play.

So it's thinking that I'm better, faster, smarter, stronger. And you see this a lot. It's why people choose not to be bogal heads, because they think, "Yep, on average, market participants underperform, but I'm different." - Let me throw something in on that, because I hear it once in a while.

From what I read, all of these big institutional investors who are doing these big trades, they can't really outperform the market. But me, as an individual investor, because I'm doing little trades and I'm sort of weaving in and out of the market, I have a much higher probability of outperforming than these big institutional investors.

- Yeah, and here's the thing. The devil sort of speaks in half-truths, you know? There is some truth to that sentiment, that yes, an average person managing their own portfolio isn't susceptible to career risk and sort of some of the other external pressures that, say, a big fund manager would be.

But the average investor also does not have access to the same level of education and resources and information. So, I mean, there's some ups and downs. But yeah, it's the stuff that you see everywhere. I cite studies in the laws of wealth. There was one hilarious study. 700 men were interviewed.

95% of them thought they had a better than average sense of humor. 100% of them said that they were friendlier than average. And 94% of them said that they were better looking than average. And it's like this idea that, you know, we're all smarter, funnier, more attractive than average.

It's just not true. And we see that in markets all the time. So that's sort of the first flavor of overconfidence. The second one is thinking that we're luckier than average. We sort of own the optimistic and delegate the dangerous. We know from a base rate perspective that 50% of marriages end in divorce, but not my marriage.

We know that people abstractly get cancer, but not me. And, you know, we know that, yeah, my odds of winning the lottery are long, but I might. We tend to sort of own the optimistic and delegate the dangerous. And then the last sort of major form of overconfidence is over-precision, which is thinking that we know more about the future than we actually do.

So people think that they're better at predicting what's coming, and they can see the future more clearly than they actually can. - So the second one is conservatism. - Yeah. - How did that play in? - So one of the things that must be said about us is that we're what Kahneman and Thaler have referred to as being cognitive misers.

So we want to do as little thinking as possible. So our brains, our brains are small. Well, they're large relative to the animal kingdom, but relative to our body, they're two to 3% of our body weight, but they're like 20 to 25% of our caloric expenditure. And so your body is kind of always looking for ways to think less and to sort of offload some of this thinking.

And so doing what you've always done is a good way to do that. Just sort of sticking with the status quo is a good way to do that. Not taking risk is a good way to do that. Following what other people do is a good way to do that.

So conservatism is our tendency to be kind of status quo prone, lazy, and to confuse what we know with what is good. - All right, third one is called attention. - Yeah, so attention is this tendency to confuse what is loud with what is likely. - Oh, what is loud with what is likely, I like that.

- Yeah, so it's confusing what is loud with what is likely. So there's a couple of funny examples of this. One that I like is you ask people to think about words that begin with the letter K, right? So like list all the words you can that begin with the letter K.

Now in a second column, list all the words that have K as the third letter and like see which list is longer. People have much longer lists of words that begin with K than words in which K is the third letter, but there's three and a half times as many words with K as the third letter as there are the first, but the way that our brain works, we have sort of what's called a primacy effect.

We remember things that come at the first part of the sequence. So the way that our brain is wired, we think there are more words with K as the first letter than the third, but that's not true. The same thing is true of markets. We misremember things all the time.

We have really great memory for all the bad stuff and really bad memory for all the good stuff. I talk in the book about how the brain works extra hard to hang on to scary information. And so when somebody is watching Silicon Valley Bank collapse they have a very vivid, very salient memory of the great financial crisis.

They have a less salient memory of the 10 years in between where they were popping double digit returns every year. Sort of the way that we remember things and the way that things actually are can be quite disconnected. - You talk about the tendency to confuse ease of recall with probability.

- That's right. - How quickly recall something that gets assigned a higher probability, whether it's true or not. - Yeah, there's all kinds of different things here. There's shark attacks and selfies, I think I talk about in the book. Your probability of getting bit by a shark is like one in 300 million.

And yet all these people die every year taking selfies because they stumble into traffic or whatever. But we think of sharks as dangerous and we don't think of taking a selfie as dangerous because one is loud, right? One is loud and dramatic and scary and one is just dumb and bumbling.

And you know, we see this all the time with the news, like things that make it onto the news are there, they're newsworthy because they're rare. And yet we have an awesome recall for things like what's on the news. The things that kill the average portfolio, as you know, are typically things like under diversification and excessive fees, boring, not loud, unsexy, hard to recall.

And it's not stuff like a financial crisis even. - Or Bitcoin, or owning Bitcoin or not owning Bitcoin. - Sure, yeah, totally, great example. The last one then of the four categories is emotion. - Yeah, so emotion's probably the one that's the most self-evident. It's just this tendency to confuse your heart with your head.

And humans have something called the affect heuristic, which is just a fancy way of saying that the emotional state that you find yourself in colors your perception of risk. Someone who's having a good day tends to not see risk anywhere. Someone who's having a bad day tends to see risk everywhere.

And so there's just a host of ways in which emotion can color our views on markets. And it's best to invest in a more or less mechanical way. And we're just not really wired for that. - You mentioned something under emotion, which I found interesting. You talk about intense emotions shorten timelines.

Talk about that. - Again, so much of how we're wired is evolutionary. There's a strong dose of evolutionary psychology here. If someone's in danger, emotion is an early warning detection system for danger, among other things. But if someone is in danger and they're experiencing stress or anxiety or something like that, your body cannot differentiate your worry about Silicon Valley Bank from you being chased by a wild animal, right?

The physiological response to that is identical. You know, your pupils dilate, your heart races, you sweat, blood gets shunted away from your extremities. All the same things happen and you are preparing to defend yourself in a moment of physical harm. And again, the physiological response between a physical danger and an emotional danger, there's no difference.

And so you don't need to think about your future, right? Like you don't need to think about your 80 year old self. If you're getting attacked by a bear, you need to run. And so the same thing happens though when we have a bear market. We become very myopic.

We forget about our future self. We forget about our goals. And so that's one of the most powerful things that we can do is just take a breath and realign our gaze with our goals and sort of remember those long-term goals because we're wired to become very short-term and very immediate in our thinking when we're emotional.

- So now we're gonna go circle back to these four buckets of behavioral risk, ego, conservatism, attention, and emotion. And in your book, you have fixes or how to mitigate these risks. And so we'll go back up to the top. Start out with ego. Give us a quick reminder of what that is and then how do you fix it?

- Yeah, so I mean, there's a couple of ways that I think you can combat ego, which is this tendency to think you're better, to think you're luckier, and to think you're more prescient about the future than you actually are. I think bogal heads understand many of these well.

I think the bogal head mentality is based on a low ego proposition. I'm not going to try and beat the market. I'm just going to be the market. I think the bogal head mentality is sort of lived humility. It's sort of humility embodied. And so I think something as simple as that is a way to combat ego.

I think where appropriate working with a professional to get some help is lived humility as well. One of the most important parts of knowledge is something called meta-knowledge, which is just basically knowing what you don't know, right? Like I'm not handy at all. Like, I mean, I can't hammer a nail.

I can't do anything with a car, but like I know that about myself and I don't try. So I just go get some help. I know there's probably a lot of folks who work with advisors here, a lot of folks who DIY, but where appropriate going to get that help is I think another piece of humility.

- So secondly, conservatism? - Yeah, so conservatism is this tendency to confuse what we know with what is good. And it's our tendency to be sort of lazy and status quo prone. And so I'll take each of these in turn, and maybe at the risk of disagreeing with Jack Bogle, I believe that one of the things that's cool about investing is that it's a way to sort of see the world.

And so one of the things that I do personally is that I diversify my portfolio by geography. We see that there's a huge tendency to engage in something that's called home country bias, but it actually gets a lot more granular than that. So we know that Americans over-invest in American stocks and that Canadians over-index on Canadian stocks and so forth, but we actually see this at a much more granular level.

People in tech tend to over-invest in tech. People tend to over-invest in their own company. People in the Northeast are over-indexed on financials. People on the West Coast are overweight tech. People in the Midwest are overweight agriculture. People in Texas are overweight energy. Like we just see this all over the place that people confuse the stuff they see around them every day with things that are safe or desirable.

And to get beyond this sort of parochial mindset, I think one of the things that we can do is use investing, treat it kind of like a liberal art and use it as a way to learn more about different industries, to learn more about the world and sort of expand our view of what's possible.

So I think overcoming that is tough, but rewarding. And then on sort of the status quo piece, I think this is a good time to talk about wherever possible, these biases that we talk about should be flipped on their head to work to our benefit. We are lazy. We are status quo prone.

That is undeniable, but that can actually work to our advantage. If we automate our saving and investing process, we tend to leave it alone and we tend to do much better than if we try and white-knuckle restraint every two weeks when the paycheck comes in and we go, "Oh God, am I gonna save again this two weeks and have to make the right decision week after week?" So if there's ways to take, look, I'm lazy, I'm status quo prone, but I know that can work in my advantage if I can automate that process.

That's a powerful thing. - And the third one is attention. - Yeah, so we talked earlier about this media diet and I'll kind of draw on my clinical research here a little bit. I actually entered the industry to work with women with eating disorders. That was what brought me to the industry.

Someone I loved had an eating disorder and helping her overcome that was formative in me getting into the industry. When I was working at this inpatient eating disorder treatment center, the very first thing that we did with the women that came in was sort of media training, was helping to make them an informed consumer of the way that women are marketed to, the way women are made to feel small and imperfect and ugly and the way the lighting and Photoshop and all this stuff works.

And by helping them to become an informed consumer of the messages that were targeting them and to understand sort of the motivation beneath that was not virtuous motivation. I mean, it was sort of motivating them to feel like garbage to buy stuff. It empowered them to make different decisions.

And I think that once people understand how the sausage is made with news in general and financial news in specific, you can become an informed consumer of media. And look, I'm not picking on the media. We need a robust media to keep us informed. That's a beautiful part of a functioning democracy.

But media companies are companies that have bottom lines, that have a profit motive and understand that bad news is stickier than good news by a function of about three times and they know. And so they have a desire to report on things that are unusual or scary. And that's not always in the best interest of us making good financial decisions.

So I think controlling that media diet is a powerful hack. - I would also add from my years talking with journalists that they have advertisers in their magazines and they have advertisers on their website and they cannot upset the apple cart too much with what they say, or they're going to get pulled into the editor's office and have a talking to.

- I have one funny story here, if you'll indulge me. I was on a large, promoting this book actually, I was on a large cable financial news program. And when you're on TV, you've got this sort of earpiece in your ear where the producer is talking to you. - Right.

- And you can hear what's going on. Like you can hear what everyone's seeing on the screen, but you can also hear this person and they're kind of counting me down. And I was in my full like psychologist regalia. Like I'm like wearing tweed and tortoise shell glasses and like a bow tie probably or something.

And so looking very academic. And so she's counting me down, like five, four, three, I'm about to go on. Five, four, three, two, give me something good, don't be a nerd, one. And I go on and I laugh at that, but it's so telling, right? I mean, it wasn't give us nuanced commentary that's based in the literature.

It was don't be a nerd, give me something good, right? And it's like, that's what they want. - Yeah, over the last several years since I'm no longer managing money, so I'm no longer a potential client for asset managers who have mutual funds or ETFs or whatever they're trying to sell.

I'm no longer in that environment anymore. I'm just doing an hourly advisory model now, which I don't get invited to speak at any investor conferences anymore, barring the Boglehead conference, which I'm on the investment committee. But no, I mean, all the large conferences I used to go to, I used to be a speaker talking about asset allocation, talking about index investing, all of this.

And now never do I get invited because I'm of no use to the sponsors. - Well, yeah, I mean, look, we know incentives drive behavior. We're not picking on anybody, but that's just what it is. We're all trying to make a living. Incentives drive behavior, and the financial news media has an incentive to get you to look at it.

And they know that you'll look at it when it's bloody. So, I mean, that's just kind of is what it is. - Yeah, I'm not going to bring him any business because what I'm going to say is going to drive business away from those sponsors. And so, well, we'll skip him this year.

Anyway, I understand that. It is the way it is. The last one, fixing our emotional issues. - Yeah, so, you know, I think a lot of these things manage emotion. One of the things that I love about the bogal head type style investing, it's shown that that sort of investor actually stays the course better largely as a function of their expectation.

Your expectations matter, sort of your emotional expectations matter. When you expect that you will be mirroring the market rather than beating it, your expectations are more aligned with your emotions and you make better choices. There's actually a way that we can, again, use emotion to our advantage 'cause there's plenty of ways that emotion can trip us up.

We go back to this idea of the personal benchmark. You know, there was a study out of Canada that I just love that compared a control group to an experimental group that had to look at a picture of their children for five seconds before they made a financial decision and they monitored decisions over this time.

And the people who looked at the picture of their children before they made financial decisions, made better decisions, they saved twice as much money on and on, that's totally irrational, right? Like just from like a purely behavioral standpoint, it's totally irrational. You should just save what you need to save and you should just make the mathematical decisions around that.

But you can bring emotion into your financial life in a positive way. You can recenter yourself on your why, you can recenter yourself on the things that matter to you and use that to propel you forward. So if there's something you really want or a goal you have or a dream, wrap your financial life up in that and you'll make better decisions.

- Okay, now we're gonna get into the fourth part of the book where you list out several different things an investor can do to maybe mitigate some of these behavioral biases. - So in the last part of the book, as you've said, I touch on how to kind of put this all together and what it looks like in a portfolio.

And there's a couple of things that I think are worth mentioning that I would highlight here. So the first of these is fees. I know, look, I'm preaching to the converted on this podcast about the benefits of managing fees, but Morningstar did a study a few years ago where they looked at the drivers of fund performance and the number one driver was fees.

That was the single best predictor of how a fund did, was how expensive it was. It's absolutely in our control. And so when you have something that's so controllable and so predictive, it makes absolute sense to go and get it. You know, the other thing that I talk about is being systematic.

And this one rubs a lot of people the wrong way, but I talked in this book and my other book, there was a meta-analysis that was done on roughly 200 different studies of decision making. And it compares discretionary decision making, like PhD level discretion to just following simple rules.

And what we find is that 94% of the time, simple rules beat or equal PhD level discretion. - Ah, interesting. - Yeah, and that's sort of compelling in and of itself. But the second thing you have to think about is that in markets and in funds, discretion costs, right?

Rules are free, discretion is not. A bunch of PhDs like me in a fund family are gonna charge you for their time. So not only does being systematic have some behavioral upside, it costs less too. And we've talked about the power of fees. The last thing that I'll touch on is I look at some different factors of investment.

So basically we're looking at what sorts of elements of an investment style might be predictive of it being something you should pay attention to. And so I looked at different things and one of the things I found, the first sort of condition that needs to be met is it needs to show up in the research, right?

There needs to be data, there needs to be evidence to support that what you want to do makes sense, okay? The second thing is there needs to be some sort of philosophical underpinning to it. And this is, I think, a little bit less intuitive. Markets are so busy and so noisy that sometimes we will find correlations where none truly exist.

There's the famous Super Bowl indicator. I can't remember if it's the AFC or the NFC, whoever wins is deeply predictive of how markets have done. There was a funny one from a couple years ago where Bangladeshi butter production and movements in the S&P 500 were deeply correlated, like at the 96th percentile.

But if I said, hey, Rick, let's go start a Bangladeshi butter production hedge fund, no one should give us their money because it's, right? Like it doesn't make sense. - There's gotta be a fundamental basis behind it and a business basis behind it in a way. - Yeah, well said, right?

Like there needs to be something fundamental, like why does this make sense? So first of all, does it show up in the data? Second of all, does it make sense? And then third of all, is there a behavioral reason why it will persist, right? This is what gives staying power to something.

We know now a lot more than we did a hundred years ago about nutrition. We know better now than we do a hundred years ago what we ought to be eating, drinking, smoking, not smoking. Not to say we have perfect knowledge, but it's improved over the last hundred years.

And yet our health outcomes are diminished because it is behaviorally difficult to eat salad over a donut. Even though I know the salad's better for me, the donut tastes better. And the same thing is true of markets. So you look at things like value investing, value investing has a behavioral underpinning to it.

It's not always gonna win. There will be long stretches where it doesn't, but I still think it's a sensible way to invest because it shows up in the data, there's a reason it makes sense, and there's something psychological to it that means it's probably gonna stick around for a minute.

So I think this is just sort of a good three-part test for an investment idea to see if it's worth taking seriously. - Okay, very good. Well, thank you for going through the book. It's always humbling to read these books because they come after story after story where I say, yeah, that's me.

Yeah, yeah, that's me. - Yep. - But I do have some other questions for you before I let you go today and things that have been pressing me. First of all, you talk about this concept of never enough. We'd never have enough money. In fact, John Bogle wrote a book called "Enough." And talk about psychologically why that is.

- I'm actually writing a new book right now and something I'm digging deeper into. So I'll have more to say soon. But the basic idea is, first of all, our ability to get enough is, again, fairly recent. Until modern times, you couldn't really stockpile resources in a way that would see you through the next 50 years.

I mean, that is a relatively recent phenomenon. - Right. - And so again, we are wired for inadequacy. We are wired to keep grinding and to keep hunting and to keep pushing because that used to be the truth of how humans lived. Now, it doesn't happen a ton, but now you could sell a business when you're 30 years old and have enough money to never work again.

And yet most people struggle to have enough. And there's all sorts of high-profile examples of people with plenty who act with a scarcity mindset. - Oh, I see that all the time in my business. I mean, if somebody has 2 million, they say, "If I only had 3 million." If somebody has 3 million, they say, "If I only had 5 million." If somebody has 50 million, they say, "If only I have 75 million." I can't get away from it.

We humans, all we can think of is getting through the winter with enough food supply. I mean, this idea of saving for 10, 15, 20 years down the road, I mean, that doesn't compute. - Yeah, so I talk in the "Laws of Wealth." Gallup did a study a while back that looked at people at different income levels and it showed exactly what you just said.

It said, "How much money would you need to be happy?" And the people who made 50 grand a year needed 75. The people who made 100 needed 150. The people who made half a million needed 600. At every income bracket, it was just out of reach. The psychological tendency is called the hedonic treadmill.

We quickly adapt to whatever our reality is. A house is one of the worst ways that you can buy happiness because I have a beautiful home. When I bought it eight years ago, it was beyond my wildest dreams. Like, the first time I saw it, I couldn't believe this was mine.

I couldn't believe I could afford it. And now it's just where I throw my dirty socks. We quickly become habituated to things. And the hedonic treadmill is whatever level of wealth you attain becomes your new reality. And then you're always running. And so it's imperative that we avoid lifestyle creep, that we study the literature around positive psychology and try and do things that truly sate us, like focusing on relationships, focusing on new experiences and new knowledge and new learning, and not just being more acquisitive.

It's a pitcher that will never be filled. - The last thing is through our lives, as we get to older age, these cognitive or behavioral issues change. And I particularly wanna talk about as we move from our accumulation years to our retirement years and then to our golden years, how we change.

- Yeah, so we'll speak first from the bias perspective. There's actually, there's good news as we age. The level of bias tends to diminish and life has a way of teaching us things about our own exceptionalism. So, what we see in the research is that the older people are, the less overconfident they are, the more humble they are, or sort of the more sort of equally calibrated they are.

So I think this really conforms to our popular conception as youthful hubris, but we do learn and markets will teach us that we're not as great as we thought we were. So a lot of the biases that we've talked about today can kind of diminish, at least overconfidence can.

But I think what we're seeing a lot of now, and I saw a heartbreaking story shared about on Twitter about this yesterday, was we're getting into sort of the happiness research with retirement. And a lot of people have put so much focus on preparing for their financial lives in retirement and very little focus on their personal lives.

And what we see is that work checks a lot of boxes in terms of what makes people happy. So, you know, Martin Seligman has this great sort of five-part process, five-part model for what makes us happy called the PERMA model. The P in PERMA is for positive experiences. So this is having fun, going to a ball game, eating an ice cream cone, whatever.

- Being with your grandkids. - Yeah, arguably work gets in the way of that, right? So in retirement, you have more positive experiences. You have more leisure time. The E though is for engagement. And this is doing deep, meaningful work. And a lot of people who are bought into sort of this old school idea of like, I'm just gonna hit the links and sit on a beach somewhere, they find that it's not fulfilling.

We need that deep, meaningful work. - Oh, by the way, the work doesn't have to be for money. It could be nonprofit. - 100%, it could be volunteerism. - Like what I'm doing here. - Sure, it could be a hobby. I'm sitting here looking at my guitars, right? It just needs to be something that engages you.

The R in PERMA is for relationships. A lot of our closest relationships are with people we work with. Work is a real source of relationships. The M is for meaning, working for something larger than yourself, whether it's religion, spirituality, charitable giving, philanthropy. Like work helps us be part of a team, work for something bigger.

And then the A is for advancement. We are wired to wanna be better today than we were yesterday. And work gives us that. Work gives us opportunity for growth. So I mean, you could argue that's four of the five things that make people truly happy are itches that are scratched by work, right?

I know enough bogleheads to know how fastidiously they prepare for retirement in many cases, but we have to be equally attentive just making sure our personal and our psychological lives are locked down because there's a lot that work does that I don't think we commonly recognize. - Well, Dan, it's been great having you on today.

Are there any last words that you have for us? - Yeah, I hope this podcast will just encourage people to think about some of the things that we just talked about with those five pillars of happiness. And I hope if you read my books or other books on behavioral economics and behavioral finance, I hope you'll do it with an eye to just improving your life holistically.

One of the cool things about studying this is it can make you a better market participant for sure, but I think it can make you a better wife, brother, grandfather, son, whatever. I think it can make you a better human as you're more thoughtful. So that's why I love this work.

It can make you money, sure, but it can also make a difference in your life. So I think it's powerful for that reason. - Thanks, Dan, for being on "Bogleheads on Investing." Great comments, good insight. I don't feel bad about myself, which is a good thing. - That was my goal.

Thank you for having me. - This concludes this episode of "Bogleheads on Investing." Join us each month as we interview a new guest on a new topic. In the meantime, visit boglcenter.net, bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter. Listen live each week to "Bogleheads Live" on Twitter Spaces, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit.

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