In this episode Dr. Daniel Crosby describes some of the common behavioral mistakes that investors make, and how our biological hard-wiring actually may conspire against our wallets at times. We also discuss the best predictor of investment returns and how to automate financial habits to maximize your likelihood for a favorable financial outcome.
Justin: [00:02] Hello everyone. Welcome to the Anesthesia Success podcast. I’m your host, Justin Harvey. I’m really excited to introduce to you our guest this week, hailing from Atlanta, Georgia. Dr. Daniel Crosby. Daniel is a man of diverse talents as he is a clinical psychologist as well as an expert in the area of behavioral finance and investing. In addition, Daniel is a podcaster, entrepreneur, a TEDX speaker and author of a New York Times best seller and he currently serves as the recently appointed chief behavioral officer at Brinker capital, which is a private investment firm overseeing $23 billion of client funds. I had the pleasure of meeting Daniel last year where he was speaking at an event in Philadelphia and I was really impressed with his ability to take esoteric behavioral and financial principles and turn them into action steps which investors can use to improve outcomes in their own lives. In short, he has a real knack for helping investors to understand their own hardwired behavioral flaws and to preempt those flaws. I’m really excited to welcome to the show Dr. Daniel Crosby. Thank you. Great to be here. so I know that you are a fellow podcaster. I was listening to a couple of recent episodes of yours and I heard in one of those episodes that you’ve written a children’s book and I understand that you wrote a children’s book called everyone you love will die. I was so curious about that. Is that true?
Dr. Crosby: [01:17] This is true. So it was kind of a cool story. I have three children and I like to scare them. I have three children and sometimes when they ask me hard questions, I’ll write a poem or a story to kind of serve as a template for talking with them about, you know, things that they asked me before about, about death, about gay marriage and you know, different, different things that they come, come across and, and want to talk about. I’ve done that about people who are, you know, are not quite like other people they run into. And so, I did that when we had the death, a death in the family. I wrote this poem and I posted it on Facebook. I posted it on Facebook go, you know, for four or five years ago. And a friend of mine who is an artist loved it.
Dr. Crosby: [02:02] And so she illustrated it like, you know, without speaking to me, she just sort of illustrated it and said, hey, I, I sort of illustrated your, your book, what do you think? And I was like, oh my gosh, this is good. And so we are like, well, what the heck? You know, what the heck, let’s put this on a, on Kickstarter. Kickstarter made it their pick of the week and it got funded. It got funded in like 10 hours, you know, just funded enough to like do a couple of hundred copies of the book. And so we actually got picked up by a publisher this year and so it should be published more formally later this year. But yeah, I’m super, I’m super proud of it. It’s, it’s actually ultimately a very hopeful book. Like it’s very, it’s got a sweet message despite the controversial title.
Justin: [02:52] Yeah, that’s very interesting. So I’ve got, I’ve got three other books here on my desk right now that I’m looking at with your name on them. And it’s funny that that’s probably the one that most gets people’s attention, I would imagine. Probably not what you anticipated.
Dr. Crosby: [03:03] No, I, you know what though, if I can be sort of like a depressed shel Silverstein that’s, I’m good with that. I’m good with that.
Justin: [03:11] Oh, I have many fond memories of Shel Silverstein growing up, so I think that is most excellent. Well, I’d love to dive in a little bit to hear about your role at Brinker. Cause I’ve never heard of a, an investment management firm having a position called chief behavioral officer and obviously as the science of investment and investor behavior is continuing to be refined and developed, you know, it seems like this is kind of a cutting edge thing. So talk a little bit about that and how you came to land there.
Dr. Crosby: [03:37] Yeah, Brinker had been my biggest client for six or seven years. you know, I’ve been, I had been on my own for nearly a decade doing behavioral finance consulting. They were just a wonderful client. We always saw eye to eye and got along very well. I had co authored a book on goals based investment management with Brinkers founder, Charles Widger. And so they were looking to sort of formalize the relationship and we are going to be doing so much cool stuff. We’re going to be building out technology to help advisers help their clients. we’re going to be integrating psychology into every piece of it from asset management, to counseling with clients, to sales, to everything else. And so I think, you know, as we’ll discuss today, there’s an increased understanding that the most important thing is not the investments themselves, but what you do with them. And even the best investment in the world, is no good if you can’t take the ride. And so Brinker recognizes that and I think it was very forward thinking of them to put this in place because you’re right, there’s not a lot, there’s, there’s not a lot of me and the world.
Justin: [04:46] Yeah. Yeah. What an exciting opportunity for someone in your position. I got to think that that’s, you’re just absolutely tickled to be able to do something like that and build from scratch and this very innovative and new space. So I’d love to hear a little bit about your background and how you came to be a behavioral finance expert. Cause obviously you started with a background in clinical psychology and then eventually you kind of migrated over to the finance side of things. So just explain a little bit about how that all came to be and, and where your real passion in this field lies.
Dr. Crosby: [05:12] Yeah. So the, the way that it all started, and I think importantly, I am the son of a financial advisor. So I grew up, you know, from a young age steeped in talking about these things. I like to joke, it’s not, it’s not a joke, but in my, in my, in my house, debt was a four letter word. My Dad, who I have to this day never heard say a swear word, would not let us say the word debt because he felt that it was a four letter word just as much as the rest of them. So I grew up, you know, talking about investing at the dinner table, talking about sort of millionaire next door principles and you know, sort of conspicuous consumption, not being a show of wealth but a substitute for wealth. And I got a lot of really good money messages from my dad at a young age.
Dr. Crosby: [06:00] but I, I went into psychology, largely because I, because I was a missionary for my church. I was a missionary for my church in the Philippines couple of years, got some very good sort of boots on the ground humanitarian experience and came out of that experience wanting to do some good in the world. And I felt that being a clinical psychologist was sort of the, the best compromise to wanting to make a decent living and also getting to do good in the world. I started my doctoral program three days after I finished my bachelor’s degree and I found about the third year of my doctoral program that I was, I’m tired of talking to sad people. I was, I was, I was just kind of eaten up by it, you know, it was, I perhaps didn’t have adequate boundaries. I was bringing home my client’s pain with me, to the point that, you know, my wife would want to go out on a weekend or something and I’d be like, you know, how can anyone go dancing when there’s so much pain in the world? And so, it was just very heavy for me. Like it was important work, but I had a hard time not bringing it home. And so I started looking for nonclinical applications of psychology. And you know, long story short, because of the early influence of my father, I think found my way into behavioral economics, after doing some consulting work with a bank and then quickly thereafter when on my own and the rest is history.
Justin: [07:30] Awesome. So you mentioned the millionaire next door and I actually, it sounds like you and I have some similarities in our upbringing because my father is similarly, although he was not a vocational, a financial advisor, he did a lot of unofficial financial counseling. And what we would call it, debt and budget counseling for some friends of ours. And some of my earliest memories from growing up are, you know, seeing my dad in the living room with, you know, one of our friends, maybe like a 20 something, a young lady, a crying as she’s talking about like a budget and he’s saying, you’ve got to do this, you got to pay off these credit cards. And so those roots go deep for me as well. and you mentioned millionaire next door. So for our listeners who aren’t familiar, can you maybe just talk a little bit about what that is, what the book and the study millionaire next door represents?
Dr. Crosby: [08:14] Yeah, so the millionare next door was a, was a book written by a gentleman from right here in Marietta, Georgia. So suburban Atlanta. He actually died a few years ago. Tragically, he was hit by a drunk driver and his daughter, Dr. Sarah Stanley, full law, I believe his name was Thomas Stanley, but, his, his daughter, is continuing his work and his doing fascinating work and has a new book of our own out called the next millionaire next door. but the millionaire next door, he, he did this great deep dive on people who had accumulated wealth, we would call them sort of mass affluent folks in the business. but he looked at this and found some really sort of unexpected findings. Like, you know, they drove, they drove Toyota Camrys, they lived in modest homes. They wore the same three pairs of jeans. I, it was counterintuitive at the time because most people thought that millionaires lived in mansions and drove Bentley’s. And you know, he found that no, you know, the average millionaire has just been wise with her money, has been frugal and, and modest and lives a comfortable but not extravagant life. And I think that was quite a revolutionary message at the time.
Justin: [09:29] Yeah. So I want to pivot a little bit and talk about sort of human psychology and hard wiring and the way that relates to how we approach our money. Cause obviously there’s certain internal mechanisms that have been helpful to us in ages past that when it comes to looking at stock tickers and our brokerage accounts and the things that we are inclined to do because of this hard wiring it doesn’t position us for success to put it mildly. So I’d love to hear a little bit about kind of what is that sort of hard wiring and some of those biases or shortcomings were flaws you might call them. And, and why are they in, they’re in us and how can we even just begin to be aware of those things.
Dr. Crosby: [10:10] One of the themes of my new book, the behavioral investor is just as you said, things that have served us well, evolutionarily don’t currently serve us well as investors. So, you know, one of the things that you could point to would be something like loss of version. Now, if you go back, you know, a couple of tens of thousands of years, homosapiens weren’t the only humanoid species around. There were, you know, there were Denise events, there were a neanderthal is there was a group called the hobbits in Indonesia. And the reason, the reason why we are still around and they aren’t, isn’t necessarily because we were bigger, you know, bigger, better, faster, stronger. It’s because we were more scared. We were more, we were more fearful of loss. And so one of the things that happened is, you know, when, when things were starting to dry up, when things were starting to look dicey, our ancestors, fear of death and fear of loss caused them to pack up and move to a new place, caused them to manage their risks, you know, caused them to do a new thing.
Dr. Crosby: [11:15] And so in a very real sense, we are all the progeny of cowards. And because of this, you know, the reason that we outlasted these other bigger, badder, braver species is because they took stupid risks. So, that’s all good. That’s why we’re here today from an evolutionary perspective. But that steam loss aversion, which scientists now show is two and a half times as pronounced. You know, we have two and a half times the fear of a loss that we do have. the pleasure of a gain causes us to be excessively fearful and markets. And you know, we live longer now than we ever have and the average person is not going to make it to a 9,100 year lifespan with a 30 or 40 year working horizon if they don’t take some risks with their money. And if you look at, you know, if you think, if you look at the market on a daily basis, it’s down on a daily basis, 47% of the time. And remember that those down days field twice as bad as the good days feel good. You know, effectively if you’re checking your account every day, it feels like it’s always going down and you’re not going to take the sort of risk you need to to, to reach those longterm goals. So yeah, loss of version is just one of many examples I give in the book of of something that is preserved us as a species, but that can, that can harm you financially today.
Justin: [12:41] Interesting. So in that context, you know, I work with a lot of young physicians and, and they will often wrestle with these things even if they don’t have a lot of money in the market per se, especially compared to how much they earn. There can still be this tendency to be a, you know, loss averse and you know, it, like you said it, it hurts more on the way down and on the way up. So in that context, how would you recommend that somebody in that position, especially 30 35 40 year old, maybe early forties how would you address this aversion? Would you say, well, we need to just construct a portfolio to deal with it and make it hurt less? Or is there internal work on our psyche that we should try to do to be able to bear it a little more effectively?
Dr. Crosby: [13:21] Well, I think there’s a, there’s things that you can do at a personal level. There’s things we can do at a portfolio level. So broadly speaking, at a portfolio level, we want to diversify across all asset classes and we want to have some sort of buffer in there. you know, bonds or something, something, like a bond or a fixed income instrument that’s going to buffer us from the very, very worst of those draw downs because most people can’t take the whiplash, have a pure equity portfolio. even if they could, it would probably serve them well over a long period of time, but most people need some sort of instrument in there, some sort of safety instrument, at least even in some small degree at a young age that’s going to protect them from the very worst of equity market volatility. The second thing I would say is that we have to manage our expectations.
Dr. Crosby: [14:13] You know, you look at last year and I’m gonna mess up the, the numbers. They’re not going to be quite right, but I think we were down at the s and p about 19% last year, peak to trough. over the last 35 years. The average drawdown in a given year has been 14% and people act like last year it was the worst thing that’s ever happened to financial markets. Like it’s not what they do every year because it’s what they do every year. You know, over the last 100 years we have had more than 100 market corrections, which is a drop of 10% or more. So have to manage your expectations and know that’s, this is the game. Like if you’re a young physician, if you’re 30 years old, like you’re going to get, you know, between now and when you retire at 65, you can count on 35 corrections minimum and you can probably count on five or six full blown nasty bear market.
Dr. Crosby: [15:12] And I don’t think that people understand that that’s the way that things go. And I think that understanding just how volatile markets are is, is key to being able to take the ride. And then the final thing I would say is that there needs to be some sort of self management, right? There needs to be some self management. You need to not tune in to every doomsday forecast. You need to not look at your portfolio every day. You need to automate the best processes so that they happen a sort of sight out of mind. And you just get in a good habit of developing these things. So there’s a, there’s a process by which you can, you know, you can make things better or worse to the degree that you tune in or don’t tune in. And then finally, I think just having, just having outside interests, I think that some people who spend too much time with their nose in the market do much worse because it takes on an outsized importance in their life. So I think learning, you know, what money does, what money doesn’t do what it’s good for, what it’s not good for us so that it takes the appropriate place in your life, that it as a tool, but it’s not everything.
Justin: [16:26] Got It. Makes Sense. So for somebody in that position, you would tell them, number one, think about the historical context because this has happened almost annually for as long as we’ve been tracking these things. And number two, consider getting a hobby.
Dr. Crosby: [16:37] Yeah, I mean, no, no, that’s, that’s absolutely right. I mean, consider getting a hobby. I often say, you know, the biggest detriment to my own investments is the fact that I as an occupational hazard has to keep track of what’s going on in markets because, you know, because I’m going to be called on to speak about it. And it’s like, I wish I didn’t like, I mean, I’d make more money, I’d be a more successful investor, if I were a plumber. And, I think that’s, you know, I think that’s, I think that’s good advice.
Justin: [17:11] Many in this audience are very well educated. Some of the, arguably I would say some of the most well educated people in the world, undergraduate degrees and various graduate degrees and ongoing research and intellectual pursuit. So, anesthesia and pain is a lot of very high pedigree, intellectual types of people. in that context, I’m, I’m interested in curious to know if for people that are this intellectually driven, are there certain, flaws or biases or cognitive issues that you run into when you’re very high functioning like that, that you think that perhaps our audience should be aware of?
Dr. Crosby: [17:44] Yeah, so the, the primary one is that really smart people are actually more prone to bias than, than dump people. And the reason why is that there, you know, first of all, they assume that that success will generalize, right? So they’ll list, they assume the same level of intellect that got them to the top of their class at at 10 is going to lead them to be excellent. Those things are domain specific, right? Like what, what got you there? Won’t get you here, right? Those things are domain specific. What makes you a great physician may not make you a great investor. And the second thing to consider is that really smart people, I’ll give really smart rationalizations. And so, the, the evidence shows that really smart people are actually more effective at snowing themselves. That people who aren’t smart because they have a level of sophistry and education where they can kind of talk themselves into bad ideas. I’ve written too many books. I don’t remember which book this society then, but you know, there’s a, there’s a story I site and one of my last two books about Sir Isaac Newton losing his, his entire fortune and a financial bubble. And he has this great quote. He says, I can calculate the movement of the stars but not the madness of men. So if Sir Isaac Newton can die penniless because he makes stupid financial decisions, visions, then so can you and I,
Justin: [19:10] I read this interesting article the other day. I’d be interested in your thoughts. it talked about the importance of intellectual humility and how is as important as it’s ever been for quote unquote, really smart people to have a, a self awareness that would allow them to continue to understand we don’t know everything about everything. And it was, it’s funny, it was actually in the context of, they took I think a hundred of the most sort of renowned behavioral tests. And tried to replicate them in the way that their original, you know, practitioners had set everything up and produce these results. And what they found was 40% of those tests could not be replicated. And so there was this sort of citadel of knowledge that was being kind of torn down before the eyes of some of these behavioral scientists. The point is, it’s important as important as it’s ever been, especially as the amount of data that we have grows and potentially the certainty of, our conclusions can grow in correlation with that growing data. but, but we’re not always right. And especially as you noted across different domains. We need to be on our guard, would you say?
Dr. Crosby: [20:14] Yeah, absolutely. Well, it’s, you know, anecdotally and I, you know, granted, I work in a, in a field that has a high degree gree of physics, and a field in which we’re never going to come to the sort of, you know, two plus two equals four conclusions that they will in, in the harder science fields. But the more, the more that I learned about human behavior, the more humble I become. And the more that I realize, you know, that it didn’t know much. I mean, I will not lie to you. I felt, I felt like I knew more about human behavior when I started my phd then when I finished because you know, you just, you just learn enough to learn all the exceptions to the rules. Make no mistake about it. Investing. dealing with capital markets is first and foremost a psychological endeavor and it’s an endeavor in which you are pitted against other human beings who are subject to foibles and frailties that we’re all subject to. And so the, the idea that you can figure out markets are that you can rise above this stuff is a hubris stick in the extreme. So I hope that that folks will realize the primacy of behavior and all of this and realized that the, the quicker you can own that, you are subject to all the same mistakes as the next guy. The better off you’ll be.
Justin: [21:36] Yeah, it makes sense. I want to talk a little bit about your new book. So this just came out the behavioral investor, I ordered it on Amazon maybe last week and have really been enjoying, and I wanted to talk about this example that you’ve given this book. and it has to do with a human tendency, a bias toward action in order to kind of placate our conscience. So in the book you give this example of you were at home and there’s a child, your child is sleeping in a crib upstairs and you have to run a 10 minute errand. So instinctively you’re going to take this child with you on the errand, even though from a cold objective, probabilistic standpoint, that child is safer in a crib upstairs, sleeping in a locked house for 10 minutes, then for you to carry them up and down the stairs and put them in the back of a car and drive somewhere and then drive home and then carry them back up the stairs.
Justin: [22:20] So the point that you draw is that it’s more likely for you to regret not doing something then doing something. And that’s sort of the mechanism here that is inaction, I think if I’m interpreting that correctly. Yeah, that’s it. That’s exactly right. And so, you know, there’s a lot of application here in the financial markets and we see, you know, if you have a, you probably have these clients to who they go to their brokerage account page and hit f five f five f five, and they’re just watching the markets and, and looking for an opportunity to quote unquote take action, in order to quote unquote improve their outcome. But frequently that’s just not how it works. So describe how the, how this is going to apply to an investor, how we can take this principle and, and harness it for our own good
Dr. Crosby: [23:01] Action bias and regret aversion are tightly coupled in, in the ways that you just talked about. You know, you gave the child example from my book. I’ll give another example. there’s a, there’s a study that was done on European goalies, like soccer goalies, and they found that 96% of the time, the goalie’s, when there’s a shot on goal, the goalies dive dramatically to the left or to the right. They want to make a, make a scene of having left it all on the pitch. But, you know, they found that the 4% of the time where they stood their stock still, they stopped. They stopped way more, way more shots on goal and then when they made an effort. And so of course you tell these goalies this and it does nothing to impact their behavior because you don’t, you don’t want to be seen to have been complacent when the game was on the line.
Dr. Crosby: [23:51] And I think there’s a lesson in there, you know, you’ll have regrets. And I think there’s a lesson in there for investors. So, you know, I cite research in the book where we look at, you know, Myer Statman, looked across 19 different countries and he found in each case there was a stepwise relationship between, activity and returns that was inversely related. So the more active someone was, the worst they did. And that holds true in every single develop country we’ve ever, you know, eh, that psychologists have looked at. So it’s a crazy, crazy thing. I cite another study that was first set forth by Jim O’shaughnessy in his book what works on Wall Street, but he talks about a study where they looked at the best performing or retail investors and they found that they had one of two things in common, found that they were either dead or that they had forgotten about their account entirely. So, I mean it’s, it’s, it’s crazy and it’s counterintuitive, but the very best thing you can do for your portfolio is tends to be nothing.
Justin: [24:59] Hmm. Fascinating. And, and how utterly humbling. And you know, I’ve, I’ve wondered that about the soccer goalies cause I always see so many times was like, I feel like they just on the penalty kicks, they just kick it straight down the middle and it seems like half the time. Why did the goalies even bother moving? I feel like they’d improve the chances by just standing there. It’s interesting that you cited that study. Your impulse was correct. Excellent. okay. So I want to talk a little bit about your risks. So this is something that, you know, it’s kind of like a behavioral investment buzzword I would say. And I’d love to unpack because this is something that it, although it’s a little bit of a, you know, it sounds kind of like this high level abstract thing. It’s something very functional that we use every day and it’s very applicable to the world of investing and trying to improve outcomes. So let’s talk a little bit about what is a heuristic and, and how do they, why do we use them sort of evolutionarily, and why does our brain default in that direction? Yeah. So rustic
Dr. Crosby: [25:49] is just a fancy word for a cognitive shortcut or a rule of thumb. And so the reason that we use them is because the brain is the most expensive, like the most metabolically expensive piece of our body. So you know, the brain accounts for like two to 3% of your body weight depending on how your New Year’s resolutions are going. and but it accounts for 25% plus of your, of your caloric spend everyday. So your brain, you know, relatives to its size, your brain is incredibly inefficient and it’s very, very hungry, right? So one of the things that we’re always looking to do is to have our bodies go into to energy saver mode and to not quite think as much, like not do as much thinking and not tax our system further than it needs to be taxed. And so that’s how we use these heuristics.
Dr. Crosby: [26:41] Now, you know, 90% of the time in your everyday life, your heuristic is fine. Like, you know, you, you feel an emotion, you follow it, it’s fine. You know, emotions and heuristics were sort of the original risk tolerance questionnaire and they’ve served as well. Again, you know, evolutionarily they’ve served as well and that’s why we’re here. But again, the rules of Wall Street are bizarro world. You know, the rules of Wall Street are topsy turvy from, from almost anything you’d encounter every day. You know, action bias being a good example of that, right? Like if you want to get smarter, you read more books, you know, if you want to get more fit, you lift more heavy things and if you want to get richer, you do nothing. Right. You know, it’s just the, the rules, the rules of the game are flipped and we have to realize that. And so sharistics which service? Well, you know, almost everywhere else, can, can get a sideways in investment management.
Justin: [27:38] So one that I think is uniquely applicable right now. well it’s called the availability heuristic. And, and you discussed this example in your book with words that start with the letter k and you say take 10 seconds list to all the words you can think of that start with the letter k and then you said take another 10 seconds and list all the words you can think of with the third letter as the letter k. And the conclusion of this exercise is, well there’s actually a lot more words that have the third letter as the letter k but our brain finds it easier to reach for the sort of the common ones that we know that that start with the letter k. So I’m interested to hearing your perspective, how does this apply to the current investing environment? And I have my own thoughts, but I’m interested in hearing yours.
Dr. Crosby: [28:19] Yeah. So availability, heuristic, like you said, means that we assess the probability of an event not on its actual probability, but on its ease of recall. So the funniest, the funniest. Well, it’s funny for me, it’s not funny for the people who died. But it’s funny, the funniest example I heard last year is that we had exponentially more people die taking selfies last year then than die of shark attacks. And yet, you know, we, we fear sharks and we, we don’t fear selfies because you’ve got, you know, you’ve got, you’ve got, you’ve got tourists, you know, drunk, drunk and tourists trying to take a selfie and walking into traffic. So, and I think it was like 50 x, you know, the Selfie selfie deaths relative to shark shark attacks. But the reason we are more scared of sharks is because it’s, you know, it’s easy to picture in your mind a vivid and catastrophic situation involving a shark.
Dr. Crosby: [29:12] It’s very hard to picture in your mind, you know, you drunk and walking in front of a Prius in Tokyo or whatever. So as it applies to the current investment situation, the best predictor of longterm investment account performance, it’s the best predictor of all his fees. So that’s the very best predictor is how much of your returns are leaking out the other side and fees. And I can promise you that no one is worried about fees. Like no one’s worried outside of our industry. Nobody’s worried about fees. They’re worried about the next 2008, they’re worried about the next great depression. They’re not worried about stuff like how have I automated good processes, have I automated the process of saving and my budgeting. I like a am I managing my fees and my working with a professional who’s going to keep keep me from being my own worst enemy. Like these are the things that are predictive of financial success and nobody’s worried about them and everybody’s worried about, you know, the next 25% drop of which they will certainly see a handful more if they’re a young person like it’s coming. And so we’re worried about the wrong things. Just the way that we worry about the wrong things, with, with sharks and selfies, we worry about the wrong things when it comes to our money.
Justin: [30:29] Yeah, absolutely. And you know, we’re coming up on the 10 year anniversary here of the bottom of the market and March 7th, 2009 I’m sure you probably remember. And it’s funny, we’ve had almost an unmitigated bull market right? For the last, you know, nine years and change and just so happened that Q four 2018 was a little bit rocky and you know, equity sold off 15% or so and you probably had the same experience come Q one 2019 I have people emailing me saying, hey, you know, what are we doing? How are we positioning ourselves to, you know, deal with this sell off and, and this is the availability sort of bias in action, right? Cause all we can remember is the last three months and we forgot about the nine and a half years before that. And it’s this temptation to action in that context and often, you know, to the detriment of the investor.
Dr. Crosby: [31:11] Yeah. Meanwhile in, you know, what are I, I’m going to mess up the numbers, but it’s, we’re up something like 10% since, since Christmas Eve. You know, it’s like while you were, while you were busy freaking out and you know, the market got good again. So yeah. Yeah. That’s again why, why doing nothing is usually the investors best friend.
Justin: [31:34] Yeah, that makes sense. And you had this other idea that you unpack a little bit in your book and I want to touch on because I think it, it interacts with some other important considerations specifically with how investors interact with the media. And it has to do with this tendency of people to think in terms of stories and anecdotes and not percentages and data. Although, you know, data itself can be misleading, but stories and anecdotes can be very misleading. And this is something that I think the media really capitalizes on too obscure. You know, what is the objective state of things? We’re going to take one little data point and we’re going to blow it up and give it all kinds of color and backing and present it to readers or viewers and use that to potentially manipulate feelings are ultimately just to, you know, drive, advertisement dollars. But how does this function in our society today and what can an investor do to guard against this tendency of we think in stories and anecdotes and were emotionally moved and drawn by them and tempted to action when we see those things. How can we have a buffer between us and those anecdotes?
Dr. Crosby: [32:40] The, the first thing I think you have to do is just lock in a rules based process. You know, you just need to work with your advisor to come up with a set of rules that are going to guide all of your actions from, from here going forward. Because the tricky thing is stories are so seductive. We are almost programmed to feel the wrong way. Like when, when the biggest opportunities are in front of us were, were the most scared and we’re the most confident, you know, at times when we’ve had a long bull market and you know, we’re, we’re feeling good and that’s probably the time we should be most fearful. So stories are so seductive. I cite research in the book out of Princeton that shows when, you know, when two people sit sharing a story effect and they hook their brains up to FMRIs, effectively their brains become sinked.
Dr. Crosby: [33:28] Like it’s almost like you picked up one person’s head and dropped it in the other person’s head. And so when you sit and hear a story about, you know, why the net, you know, the next IPO is the next big deal or why, you know, this 10% dip in the markets just like the great recession or whatever, you know, whatever the story is good or bad, it bypasses rational thought and go straight to the gut and the heart. And that is the enemy of good investing. I mean the behavioral investor is 300 pages of that could be summarized as saying, you know, listening to your, your God is a dumb idea. And so, you know, I think, working with a professional is a good buffer against that. I think automating all of your processes and having a well defined set of rules is another.
Dr. Crosby: [34:12] And the third is just avoiding the storytellers, right? Like, you know, reading more books, fewer articles, you know, more books, fewer, less CNBC. trying to learn about timeless investment principles and worrying less about the moment to moment movements of the markets. There was a, there was an article out this week that said the best financial advice hasn’t changed in the last 300 years. And that’s, and that’s exactly right, like the, the, the fundaments of this thing are, are not going anywhere. So learn about those, those core truths and ignore the moment to moment to moment, drama.
Justin: [34:53] Absolutely. And so you mentioned this idea of rules based process, which I love and, and try to implement myself for my, myself and my clients. I love to hear from you just very tactically, like functionally if somebody said, I want to do a rules based approach to invest in, can you kind of unpack practically how that would work and what that means?
Dr. Crosby: [35:10] Yeah. So, you know Dan Egan, who’s the head of behavioral finance, he’s the other one. He’s the head of behavioral finance at Betterman. He had an article out yesterday talking about how he has automated his, his checking account to avoid lifestyle creep into maximizes investments. So he says a couple of them times a month, he has less than $300 in his checking account, which gives me a little anxiety. But, I sent him a message and I, I showed him how much I had in my checking account. Kind of laughed cause I need a little bit, I need a little bit bigger buffer than that. I have more kids than he does, but so yeah, like automating the savings process is huge. automating the, the fact that you don’t have enough money in your bank account that you can do something stupid with it is huge from an investment perspective.
Dr. Crosby: [36:02] Automating your holdings so that you were exposed within and across asset classes and making sure that you’re truly diversified. You know, one of the things that I talk about in the book is this behavioral bias that I call conservatism, which is our tendency to confuse what we know with what is good or what is safe. And so the average investor in the US tends to be way overweight us stocks. This holds true internationally as well. And it’s even more damage seeing internationally because they’re, their equity markets are not as robust as ours. But yeah, just making sure that in the, in an automated way you have exposure to all asset classes and that you have exposure that’s at the proper levels and that that gets rebalanced every year. Just automating the process of buying and selling and rebalancing and setting aside that money every month from a very tactical perspective to make sure that you’re doing what you should and then you can kind of forget about it. That’s the, you know, that’s the beauty of it. As you can let the rules run themselves.
Justin: [37:04] Yeah, it makes sense. and I have one more item I want to touch on here and then we’ll wrap things up. so we, we talked a lot about investing and a behavioral flaws or challenges there, but obviously even in the process of getting to the point where we can invest, where we have sufficient free cashflow to be able to put money in the market, there’s a whole nother set of behavioral hurdles that we need to overcome or work against. So I’m curious, you know, can you maybe identify one or two of the, the big hurdles where in a lot of it has to do with lifestyle and I think in the millionaire next door, it’s the difference between what they called the under accumulators of wealth and the prodigious accumulators of wealth. Can you maybe unpack that a little bit and say, how can we be a prodigious accumulator and not a prodigious spender in order to give us a lot of financial runway for the future?
Dr. Crosby: [37:53] I think one of the biggest things to avoid, and I’ve been candid about my own lack of avoidance of this is his lifestyle creep. And so there’s a phenomenon in psychology known as the Hedonic treadmill or he donek adaptation that says basically as your earnings power increases, your wants increase in lockstep with us things. And so, you know, when you are a resident and you made 40,000 bucks a year or you were happy with Taco Bell, but you know, now that you’re a doctor and you make $1 million a year, you’re not happy with that. And so one of the things that we can do, I think is to just put money in its proper place and to avoid lifestyle creep. You know, one of the things that I have sort of roasted myself for is buying a big house. You know, this is something we see people who are successful do they make a little money to go, I’m going to go buy a big house.
Dr. Crosby: [38:48] And that’s one of the least effective ways to buy happiness. The research shows, the research shows that I’m spending money on experiences is buys a lot of happiness. Ah, spending money on not doing stuff you hate, like mowing your yard. That buys a lot of happiness. Those are the two best ways, but something like a big house, like a house quickly becomes the backdrop against which you live your life. You know, your house just quickly becomes, you know, where your dirty dishes go and where you throw your dirty socks. And so even if it’s a palace, it just soon like, you know, where are you, where are you fuss it to your kids and where you throw your dirty clothes. Yeah. It’s spending money in ways that are truly conducive to happiness and avoiding things that are expensive and don’t add as much life value in return.
Justin: [39:40] Yeah, it makes perfect sense. one question I want to close with Daniel and thank you for your time today. I, I’d love to close with an anecdote, a story of, I’m sure you’ve got, you’ve probably got a lot of ease with all your experience as a clinical psychologist, but a time when you use your profession to really serve a little part of humanity or maybe a broader swath through some of the, either the books that you’ve written or something like that where you, you were able to reflect on the time that you spent investing in becoming an expert in this particular area and you saw the impact that it had and that made you in that moment really glad that you do what you do.
Dr. Crosby: [40:15] So, you know, for the mass appeal, I think that writing books is the, is the my favorite thing that I do in the most powerful thing that I do. And I, every time I get a message that someone has read one of my books and they made a, made a life change accordingly, it’s just the most gratifying thing to me. But on a, on a more granular level, I was recently able to help a friend. So, Atlanta is home to, you know, a large number of fortune 500 companies. And so as a result, people around here have much of their wealth, oftentimes concentrated in the stock of coke or ups or Aflac or, you know, whoever it is that they work for. And so I had a friend at church who confided in me, kind of like, people used to confide in your dad that he had a large holding in his company stock.
Dr. Crosby: [41:03] And it was, you know, we had millions of dollars and about 80% of his wealth was in the single stock. And so I immediately was like, Whoa, Whoa, whoa. You know, kind of, kind of chastised him, said, hey, look, man, you know, better than this. Like, you know, this isn’t smart. You’re a bright guy. Like, we got to do better than this. And, you know, perhaps not surprisingly, he didn’t respond well to that. I was sort of a condescending and preachy. He didn’t, you know, didn’t respond all of that, and he didn’t make the change. So later I sort of thought about what I had done, thought about my initial reaction, which wasn’t great. And came back to him and said, you know, hey, tell me about, tell me about you and tell me about the emotion effectively behind this outsized holding. You know, he told me like, he had grown up poor on a farm single mom.
Dr. Crosby: [41:55] This company had taken a chance on him at an early age and had made him a wealthy man because he had spent his life working for this company and he was effectively trying to repay them by, holding, they’re holding their stock, never selling it. And so once I understood that I was able to empathize with it and then still say to him that, you know, that’s a beautiful story and it’s still dumb though. Your mind, you know, is, is, is wrapped up this way. And he was able to make a change and the stock quickly plummeted. And you know, you ask, you ask, yeah. Like you ask, you know, people who worked for Enron or GE or you know, whoever you know, name your stock. Some of these were thought to be bulletproof and you know, solid blue chip companies. But it was just a good, you know, I was, I was grateful to have been able to help my friend, but it was also a lesson to me on, you know, the fact that people don’t care as much about your sort of content knowledge as they care about being understood. And it’s, it’s only when someone feels empathized with and listened to that they’re able to do the tough thing usually. So that was a good, you know, dose of my own medicine, something I tell, tell advisors all the time but didn’t initially do myself.
Justin: [43:09] Yeah. How very humbling and what a great reminder, whether you’re a financial planner or a physician or psychologist or anything, you know, if you’re a professional that knows way more than the lay person, they don’t care how much you know, unless they know that you care about their wellbeing and that you can empathize. So I think that’s a really great story. Thank you very much for sharing that. Dr. Daniel Crosby. Thank you very much for being a guest on the anesthesia success podcast. It’s been a pleasure speaking with you today, sir.
Dr. Crosby: [43:34] It was wonderful. Thank you.
Show produced By: Dan Gummel & Justin Harvey Show Music: Great Scott: Don’t Hold Back