Welcome to the season four finale of Don’t Retire… Graduate! We’ve had amazing guests this season and couldn’t be more excited to finish with today’s guest. Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets and explores the way our brains affect our choices when it comes to money. He is here to talk about the way mental biases can affect our decision making and make us uniquely stupid when it comes to money (his words, not ours).
In this episode we’ll talk about:
•Behavioral finance and looking at the role psychology plays in our financial lives
•How people are uniquely stupid when it comes to money and how the brain reacts when thinking about money
•The biases we all can fall victim to that can negatively affect our investments
•Decision making styles applied to money versus everywhere else in our lives
•The performance of Amazon stock over the past twenty years
•Day trading and how active investors tend to underperform
•Action bias, confirmation bias, investing alongside your political party, investing alongside your morals, loss aversion, the house money effect, and mental accounting and how they all affect our financial choices
•The value of a financial advisor versus doing it yourself
•Results of studies on financial advising, including investors working with advisors accumulating far more wealth than those without advisors
•The meaning of the term fiduciary and how it applies to finance and psychology
•Giving up on dreams of professional sports careers
•Positive psychology, PERMA, and Dr. Martin Seligman’s contribution
About Dr. Daniel Crosby
Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby’s first book, Personal Benchmark: Integrating Behavioral Finance and Investment Management, was a New York Times bestseller. His second book, The Laws of Wealth, was named the best investment book of 2017 by the Axiom Business Book Awards and has been translated into 7 languages. His latest work, The Behavioral Investor, is a comprehensive look at the neurology, physiology and psychology of sound financial decision-making.
[00:10:24]Dr. DanielCrosby:Yeah. So it’s, you know, the, the example that you just gave of what psychologists call action bias. You know, we know that when the game is on the line, we, we tend to want to, to do something. And that makes a lot of sense, again, in, in other parts of our lives. You know, if you want to get smarter, you should read more books. If you want to get fitter, you should lift more weight. But then if you want to get richer, you should do nothing is, you know, is, is everything that the research suggests to us. And so that’s where a financial advisor becomes so critical. And, you know, I’ll, I’ll talk about a few of the studies, but here’s one that I found absolutely fascinating. It’s just some, some numbers I ran the other day. If you had invested 50 years ago. Okay. So 50 years ago you invest in a value fund and you invest $10,000 in a value fund. That $10,000 would, would today be worth $2.1 million. If you would put that same $10,000 in a growth fund, it would be about one and three quarters, like $1.75 million. Either result is absolutely incredible. But the average investor turned that $10,000, not into 2 million, not into 1.7 million.They turn that into $285,000. And the way that they did that was by succumbing to fear and greed and trying to timethe market and jumping in and out. And this is where the value of an advisor becomes so enormous. You know another study that, all that I’ll talk about. Probably my favorite that I cite in chapter two of the laws of wealth is it looked at research out of Canada.And the reason why I love this study, it’s called the Canadian value of advice report. But the reason that I love it so much as they did a great job with the statistical stuff, they controlled for group one versus group two across 50 different socioeconomic variables. And they compared groups of people who did receive financial advice to those who did not.But then of course normalized it across things like salary and socioeconomic strata, because of course it’s no fair to compare folks who make a lot of money to folks who make a little money, but they found that, that you know, holding these 50 variables, constant that people who worked with a financial advisor over the longterm had 2.7 times the wealth of their peers.These are their socioeconomic peers. These are their earning peers. And these people had nearly three times as much terminal wealth. And the reason is not because financial advisors know the future. It’s not because financial advisors have access to some incredible product that, that only they have. It’s it’s because at three or four critical junctures in, in March of 2020, When you thought the sky was falling and let’s be honest, had very good reason to think that the sky was falling, like had a, had a heck of a, you know, a, a global crisis, a legitimate global crisis.And if you wanted to sell out at that time, And your advisor kept you invested. You’ll never be able to repay her. You’ll never be able to repay your advisor for that advice because the, thevalue that accrued to you by listening to that advisor is just so enormous. And of course, that value compounds over time.
[00:13:56]Eric Brotman:So the rule you’re referring to in the book is rule number two, you cannot do this alone. And, you know, we spend a fair amount of time figuring out what should you do yourself? And the example you use is essentially, should you be mowing your own lawn? Maybe you love to do that, but in the absence of loving to do that, it may not be the best use of your time if your time can do other things.And that’s just one example, but there’s so many of these types of gems here, but you also go through an interview and it’s interesting because in Don’t Retire… Graduate!, we go through questions, ask your financial advisor and you go through a list of them at that same point because having a financial advisor is it may be important, but having a good financial advisor is darn important because like any other profession, there’s some really terrific advisors out there.And then there’s some hacks for lack of a better term. And unfortunately if you pass an exam, you have a license and that’s true whether it’s medicine,or education ,or finance. But let’s talk about some of these, some of these questions. The number one question that you asked, and I presume these are in some form of order though i, I don’t know that that’s true. The first one is, are you a fiduciary? The word fiduciary has been tossed around Congress, like the word infrastructure. What does it mean in your opinion to be a fiduciary? And, and why is that important? And is it the only way?
[00:15:11]Dr. Daniel Crosby:Yeah, so a fiduciary in my, in my own terms, there may be a legalistic definition that I’m missing care, but in, in my way of thinking, it’s someone who sits on the same side of the table with you, who benefits when you benefit and who has a legal obligation to act in your best interests.So, you know, one of my great frustrations is that you know, the term financial advisor is not protected in any meaningful sense. Like, I, I can call myself a psychologist because I have a PhD in psychology. And if you don’t have a PhD in psychology, you arenot a psychologist. You can not like that as a, that is a legally protected term. People have some understanding of what that means. Financial advisor is not that way. And you know, when, when my wife read this book, you know, I said, “Hey, you know, what, what stuck out to you?” And she said this list of 10 questions to ask your advisor. And I was like, really, like, this is not my, not my favorite part of the book or anything.And she said, “yeah, you know, look, if, if, if you died tomorrow, right. If you died tomorrow and I needed to, you know, find someone to, to help us manage manage the money I’d been left,” she said, “look, I’m, I’m not going to remember all the stuff you wrote in this book. There’s some complicated stuff in there. I’m not going to remember it and implement it all perfectly. But I want to be able to choose someone thoughtfully who can help me with that.” So I think, you know, questions like, like yours and like mine are important to get that process right. Because the value and advisor can provide as immense. But of course the damage that can be done by the, by the wrong advisor is, is equally, is equally dramatic.
[00:16:50]Eric Brotman:And let’s talk about some of the behavioral risks, because there are many. And I, again, I lovethat you didn’t write a textbook, but there’s a few that I think resonate for me anyway, more than some of the others. One of them is this sort of confirmation bias idea. And we live in a world with a 24/7 media cycle where you can pick a channel on television to tell you exactly what you want to hear.And people do that with the news and with politics and with all kinds of other things. When it comes to finance. In some ways you can do the same thing. You can find some analyst somewhere who thinks the stock you just picked is brilliant and someone else who thinks it’s foolish. But we tend to pay more information or more attention to the ones that, that back us up.Is that a fair assessment?
[00:17:34]Dr. Daniel Crosby:Yeah, that’s a very fair assessment. You know, gone, gone are the days of, of Walter Cronkite being sort of like the, you know, the people’s news person. We do, we are able to select into any sort of message we want to hear. And there’s interesting research to show that we, we spend a lot more time with unsurprisingly.We spend about 60% more time listening to messages that that congrue to our opinions. You know, if we, if we encounter an article or a piece on the news that that’s inconsistent with our way of thinking, it’s very, very easy to click onto, to the next thing. One of the most dangerous things that we can do, I think, you know, in, in the spirit of this question though, is to conflate our politics with our investing. You know, if you look at the last couple of political cycles, it’s no secret that the left and the right are finding less and less common ground. This isn’t just. Some impulse, we have this, isn’t just sort of our vague notion.The studies show that the, the center is increasingly barren, and that the pole is to the left and right are getting, are getting further and further out there. And so what we’re seeing is people’s opinions about the economy and the market tend to hinge largely on whoever’s in office. So if if the person you like, if the party you like is an office, you tend to think the market and the economy are doing well.And the reverse is also true. And this is sort of independent of conditions on the ground. So yes, confirmation bias is super dangerous. We can self-select into any Stripe of political or financial reporting that appeals to us and the, you know as a follow on comment, investing alongside your politics is a very, very dangerous and wrong headed way to invest.
[00:19:30]Eric Brotman:It’s funny because there’s more of that happening now than ever, whether it’s in public plans, whether it’s around ESG, whether it’s around this, this idea of used to be called the, the sort of the sin taxes were being implemented. This idea that, that the, that the casino stocks were going to do better than the nutritionist stocks, because it’s, it made people feel good, even though it was bad for them.Is that what you mean by allowing your politics to do that? Or are you thinking even more deliberately when a politician hawks something or, or promotes something?
[00:20:02]Dr. Daniel Crosby:No, no, there’s I, that’s a great follow on. I’m talking about what I, what I have seen is that let’s say someone who’s a Republican. When the Democrats in power might say, you know what Biden’s in power now. Not interested. You know, the other team’s going to wreck the economy and it, it absolutely happens on both sides. You know, I saw plenty of people during the Trump administration say, look, I don’t like this guy. I’m taking my ball and going home. And they missed out on some pretty extraordinary years.And so I think what you’re talking about is socially responsible investing. Values-based investing. Go ahead if that appeals to you. I do think any time you limit your investment universe whether you take away sin stocks oryou know, whatever kind of limitation you’re putting, I think there are trade-offs that happen there, and you have to be realistic about what you’re giving up.But in some ways that’s, that’s a behavioral good. When people invest alongside their values, you know, you think about Catholic, Catholic funds have been around for a very long time. And you, you think about where there’s a market disruption, someone who’s holding the S&P may have no real attachment to the S&P and that may be very easy for them to sell and go to cash.Whereas someone who’s holding, you know, the, the Ave Maria Catholic values fund may have very different opinions about that and feel more wed to it, feel more tied to it than, than perhaps someone in a more generic fund. So I actuallythink there’s some behavioral upside to investing in ways that are consistent with your ethics or your morals.But I do think there’s some profound downside to sitting out periods of time when your non-preferred party is in power, which is something I’ve seen quite a bit of in the last call it 12 to 15 years.
[00:21:54]Eric Brotman:So Daniel, there are about 25 different types of risks and biases and so forth, and they’re all detailed in the book and we certainly don’t have time to do them all.But my, my last one that’s sort of a favorite of mine is the, the idea of loss aversion. The idea that a loss of the same size as a gain is more painful than the gain is pleasurable. And I, you know, I’ve seen that in so many different walks of life and one of theeasy ways to see it as is when you go to a casino for fun and financial advisors using casino references might be, might be foolhardy, but people get it.And that is if you take a hundred dollars to the casino and you win a little bit of money, that’s lovely. But if you take it to the casino and you lose it, you feel really unhappy about it. Even if that’s what you had taken with the idea that that’s what I can play with. That’s what I can afford to lose.There’s also on top of that, a tendency to say, well, I started with a hundred dollars now I have 300. So I’m not really playing with my money. I’m playing with their money. And then you give it all back, which is why they have fountains in their lobbies. When in fact it’s your money, because you could go cash it and go have a steak.
So there’s a reason why casinos are winning and gamblers are losing most of the time. So can you talk about those two phenomenon? I know they’re not both loss aversion by definition, but I think they go hand in hand.
[00:23:11]Dr. Daniel Crosby:Yeah. So we’ll talk about a loss aversion. And the second one is called the house money effect, or it’s a form of mental accounting. So loss aversion really has evolutionary roots. So, I mean, if you think about many thousandsof years ago, when, when life was more nasty, brutish, and short than it is today there’s really an asymmetry between a bad day and a good. Like right. If you, if you have a good day, then hooray. If you, if you have a bad day, you die.Right. So we have we have an asymmetry between how we think about risk and reward. And it’s about two and a half times to your point, you know, losing that hundred dollars. Feels about two and a half times worse than, than winning that that hundred dollars feels good. So that’s loss aversion, and it’s something we always have to be on, on the lookout for because of the 10% up years in the market are sort of easy to forget and the 10% down years hurt quite a lot.And so the, the second related phenomenon that you’re talking about is what we’ll call the house money effect, which is a form of mental accounting. And what mental accounting says is we have these internal buckets or, or labels that we, that we put on money, right? So like, this is my rent money. This is my electric bill.This is my, you know, go get an ice cream sundae money. We sort of mentally label different pots of money, even though money is fungible, right? Like the money I have earmarked. Pay my mortgage can just as easily, you know, buy me new tires or new ice cream sundae or a hundred other things. And so mental accounting has some upside and some downside, right?It can make us sort of unnecessarily inflexible around money. It can cause us to do what you cited in the example and put those pretty fountains infront of the Bellagio, but we can also use it to great effect if we’re intentional about. You know, one of the ways that people overcome this, this loss aversion that you talked about is by having a safety bucket.So, you know, let’s say whatever this looks like for you, let’s say it’s a year of, of sort of income set aside. So. Even if the market’s choppy, even if things are bad, I know I have this sort of mental account for safety so that I’m not going to eat cat food for a year. Even if the market has arough year, we also know that people can label their monies in ways that leads to better.
You know, people who label a, a pot of money with a picture of their children has tended to save more than 200% more than people who were using unlabeled accounts. So there are ways in which sort of naming those dollars as Dave Ramsey calls it, naming these dollars can help us make better decisions. But we have to be careful that it doesn’t get used against us.If there’s say a bonus, you know, an unexpected bonus or a tax refund. These get labeled as, as fun money in a way that you know, perhaps regular W2income does not, and that can be used to our disadvantage. So we have to be thoughtful about our own internal implicit and explicit ways that we’re labeling and thinking about our money, because that’s a really big impact on how that money gets spent or saved or invested.
[00:26:38]Eric Brotman:Well, daniel as advertised. This has been awesome. And I could talk to you for three hours. In fact, I’d like to, at some point, maybe not on air, but I have to ask you because you know, we talk so much about retirement on this show and how much it’s not always a good idea to retire and be idle and and needing a purpose.So what do you want to be when you grow up Daniel? What’s the next what’s next for you?
[00:27:01]Dr. Daniel Crosby:So I really, really wanted to be. The catcher for the St. Louis Cardinals for a really long time. And that didn’t work out. Yadier Molina is going to be a first ballot hall of Famer. And he’s done a much better job than I ever could have.So with that out of the way, I think Eric, Ithink my calling is to teach people about meaning. You know, I, I want I’m working on a book right now, very slowly. I think it’s going to be sort of my life’s work, a book about helping people find and name their life’s purpose and find their life’s work. So something I feel strongly about, it’s a, it’s a journey I’m constantly on and it’s a journey I want to help other people to take.So that’s, that’s what I want to be when I grow up. Someone who, who talks about the meaning of life and writes about themeaning of life.
[00:27:50]Eric Brotman:Fantastic. I will be I will be getting an early copy of that as soon as I’m aware of it, for sure. Because I thoroughly enjoy your writing and that is something I will want to participate in.
If you need a copywriter, I’m not that necessarily, but I’ll be glad to give it a read. So we’re, we’re nearing the end of our show. There’s so much wisdom here and the, the obvious extra credit assignment for every listener right now is to, to go pick up the laws of wealth, psychology and the secret to investing success.Or any of Dr. Crosby’s books. Daniel’s an amazing writer and this is not a textbook. It’s not a boring read. It’s a fun, interesting, thoughtful read. And you will, I think, start to identify some of your ownbehaviors and potentially find some corrective action, whether it’s with a financial advisor or not despite the very compelling evidence that having an advisors is a good thing. But other than that obvious extra credit question, is there anything else youwould suggest folks do to sort of get a handle on their own behavior and how it’s impacting them?[00:28:50]Dr. Daniel Crosby:Yeah, I would, I would encourage folks to go check out a mental model called the, the PERMA model.So that’s P E R M A, and itwas developed by Dr. Martin Seligman and it’s really sort of a checklist for a life well lived. So real quickly. These are the five things. Seligman is a positive psychologist. So instead of studying, you know, what makes people anxious and depressed likeclinical psychologists like me study, he, he sort of studies what makes people great leaders or what makes people well, and the five parts of the PERMA model are positive experiences, engagement, relationships, meaning, and advancement. And there’s a ton of depth around each of those, but basically it’s are you having fun? Are you doing important work? Are you surrounding yourself with people you care about? Are you working for something bigger than yourself? And are you getting better? Are you better today than you were yesterday?And if, if you’re doing these five things, you’re going to have a very rich life. And what we find is that a lot of times when people retire, and this is why I love the name of your podcast, a lot of times, there’s a real dip in happiness and meaning when people retire because so many of these sort of five buckets are met nicely in the workplace.You know, you’ve worked with nice folks. You’re, you’re getting better. You’re learning new things. And when people retire there can be if we’re not intentional about it, there can be a real dip in happiness. So I’d encourage people to go check out you know, in addition to my books and Eric’s book, I would, I would encourage people to read Martin Seligman’s work and and, and get familiar with this PERMA model and pick one of those five pillars where you think you could, could improve a bit.
[00:30:34]Eric Brotman:You know, my book has never been mentioned in better company. Daniel. Thank you for that. Martin Seligman was my professor at Penn when I studied psychology. Yeah. I took an abnormal psychology course with him that we can talk about offline, but of course, like any other psychology student, when you read an abnormal psychology textbook, you identify that you have every single condition so I diagnosed myself with about 47 different ailments at that point during one semester. He’s an incredible, incredible instructor and incredible writer and the PERMA model is awesome and positive psychology, the idea that there is a key to happy does matter, and I’m a firm believer, so great, great suggestion.Amazing extra credit assignment. Folks need to go on and get your book. The, certainly Amazon is an answer. Are there other places to get it or any of the major bookstores or retailers?
[00:31:25]Dr. Daniel Crosby:Any of the major bookstores work, Amazon. I hate to say it. Amazon’s always the easiest. So yeah, just start there. Make, make Besos a little wealthier than he is.
[00:31:34]Eric Brotman:Well, you know, he’s having behavioral financial issues himself I’m sure. They are different than mine and yours. Well, this, this was fantastic. Thank you for being here. I do hope our listeners will check out Daniel’s book and I thank you all for listening. This has been an amazing journey. And,and to complete four seasons of a podcast is not something that I never really thought that was possible.And yet we’ll be talking about a season five kickoff and doing some really neat things this summer when we’re not recording the new episodes to bringback some of our favorite guests over the years. So I hope you’ll continue to check us out every Thursday. Thank you very much for listening to the podcast.Please subscribe to it. We’ll be back with an all new season in the fall. Rate our podcast on Spotify or wherever you listen to your favorite shows, that makes a huge difference. And to check out our books and workbooks and online financial literacy resources, you can go to Brotman media.com for now. This is your host, Eric brotman reminding you: don’tretire. Graduate! And have a phenomenal summer vacation.
[00:32:37]Narrator:From this day forward, let us begin changing the way we view retirement. Today I implore you: don’t retire. Graduate! Visit our website at brotmanmedia.com to subscribe and please like us and post comments on social media.
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