Season 3, Episode 2

Host: Matt Hall

Guest: Dr. Daniel Crosby

Matt Hall (00:00): I find myself chronically thinking about why we don't do things we know we should do. Why is there a gap between knowing and doing? If I have a note to myself to make something happen, I do it. If I have a reminder, I often do it. If I have encouragement, I often do it. But why are there so many areas in our lives where we need cues and reminders and pokes and prodding to make the things happen that we know we should be doing. I'm obsessed with this idea of better understanding ourselves and our wiring to make bigger and better decisions. Today I'm joined by Dr. Daniel Crosby, who's going to help us answer some of these key questions.

Matt Hall (00:49): Welcome to Take The Long View with Matt Hall. This is a podcast to reframe the way you think about your money, emotion, and time. The goal? Helping you put the odds of long-term success on your side. Today, I'm joined by Dr. Daniel Crosby, a behavioral finance expert. Dr. Crosby is a psychologist 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. And his second book, The Laws of Wealth, was named Best Investment Book of 2017, by the Axiom Business Book Awards. By the way, that book has an introduction by Morgan Housel, who you heard on this podcast this year. And he himself has an amazing personal finance book. And I think The Laws of Wealth has been translated into seven languages. Dr. Crosby's latest work, The Behavioral Investor, is a comprehensive look at the neurology, physiology, and psychology of sound financial decision-making.

Matt Hall (01:55): And when he is not consulting around market psychology, Daniel enjoys exploring the American South, fanatically following the St. Louis Cardinals Baseball Team, and spending time with his wife and three children. Daniel, welcome.

Dr. Daniel Crosby (02:09): Thank you, it's great to be with you.

Matt Hall (02:11): Yeah. So your expertise fits perfectly with the entire purpose of this podcast. Maybe we can go back to, especially since it's almost graduation time for a lot of people, how'd you arrive at this profession or this mission that I think you're on? How did you decide to dedicate your life and personal energy to what you do for a living?

Dr. Daniel Crosby (02:33): Quite circuitously is as the answer. So I actually trained to be a clinical psychologist, my PhD is in clinical psychology. But I found that about two thirds of the way through my doctoral program, I was burning out on being a clinical practitioner. And so I turned to my father and my sort of defacto career counselor and I said, "Look, all right dad, I love psychology, I love thinking deeply about why people do things that they do, but I don't think I want to do it in a clinical or medical context." And my dad, who is a financial advisor himself, said, "Well, you know that, son, there's a ton of psychology in the markets." And at the time that made no sense to me. You know what I mean? I was whatever 25, 26 years old and I had always thought of my dad as sort of a numbers guy and an analytical guy and didn't understand the psychology of it.

Dr. Daniel Crosby (03:25): And so he turned me on to some books and set me on that path. And long story short, I undertook that as a professional journey after I finished my PhD. I went and did a post-doc at Emory University here in Atlanta, where I could work with business students and get a little bit more exposure to business settings. But it was really love at first sight, having grown up the son of a financial advisor and loving psychology. Once I figured you could put those two worlds together, it was a real natural fit.

Matt Hall (03:56): Yeah, it's interesting, isn't it? Because, I think most investment people think it's all about the numbers. And so much of, I think the great work is done by people who can go beyond the spreadsheets.

Dr. Daniel Crosby (04:07): That's absolutely right. I think once you develop a better understanding of the way that markets work, you understand that it's probably 90% psychology and 10% numbers, and not the reverse, which is how I had sort of thought about it in a very black and white way at a young age. But yeah, that's certainly the case.

Matt Hall (04:26): I watched a TED Talk you did and I liked the title. The title I think is, “You're Not That Great, A Motivational Speech.” Can you talk about the core idea behind that talk? I'm interested in what it means also to how you parent your own children.

Dr. Daniel Crosby (04:43): Yeah. So You're Not That Great was really just, as I began exploring some of the fundamental tenants of behavioral economics, one of the things that comes up, again and again, is that the road to living an exceptional life and the road to becoming an exceptional investor really sort of oddly and paradoxically begins with accepting your own mediocrity and accepting the fact that you and I are, even as investment professionals, are just as biased and just as prone to sort of poor decision making as the next person.

Dr. Daniel Crosby (05:17): And so it's only at such time as you accept your own mediocrity and your own lack of specialness, that you're able to put things in place that allows you to be special. So it's a sort of a weird paradox that in accepting your own lack of specialness, you can put a life in place that is quite special indeed. In terms of how I parent my three children, one of the big things I learned in preparing for that talk was I grew up... I'm 41 now, I grew up in the sort of the gold star generation where self-esteem was sort of the word on the tip of every teacher's tongue and kids were sort of reinforced for candidly, anything, right?

Dr. Daniel Crosby (06:02): Everything was attaboy, attagirl, and everything was a gold star and everyone got a medal. And one of the things that they found when they did meta-analysis of those studies on self-esteem was that it really wasn't predictive of anything. That sort of patting people on the back for every little thing had no effect on self-esteem, and that people have a very finely tuned BS meter and they can tell when they're being patronized and they can tell when they're being rewarded for nothing. So it wasn't predictive of success or academic success or career success or criminality or any of the many things that they measured.

Dr. Daniel Crosby (06:40): And really what they found was the only thing that worked to build self-esteem was doing hard things, taking a risk, failing, learning, growing, and then being complimented genuinely for having achieved something that was genuinely difficult. So I try not to tell my kids that they're special or gifted or different. I try to emphasize sort of fundamental principles, hard work, playing by the rules, the relationship between risk and reward. Because all the research shows that kids who think they're special, sort of all by themselves, they tend to be quitters, they tend to be poor sports, they tend to be cheaters sometimes. So we try to emphasize hard work, getting in line, and doing it the old-fashioned way.

Matt Hall (07:28): You also did another TED Talk called, “Can Being Weird Make You Rich and Happy?”

Dr. Daniel Crosby (07:35): Yeah. So I'm a big believer in sort of leading with your idiosyncrasies. So one of the things that we know from the research is that people who are slightly idiosyncratic tend to be viewed as bigger leaders, right? We don't want to work for someone who is a wholesale departure from the norm, but if someone is say a 20% departure from the norm, we actually really like that and we see that as a source of differentiation and power in leadership.

Dr. Daniel Crosby (08:05): So I think all of us have personal and professional quirks and little hangups that if we sort of own them and lead with them and are honest with them can actually cause us to be seen as more influential in our organizations. And then of course, certainly there's an investment case to be made for contrarianism and doing the difficult thing and sort of swimming against the crowd. So I think both, in the workplace and in markets, contrarianism and sort of flying your own weird flag have big payoffs.

Matt Hall (08:41): Before we started this conversation, I asked you why you're a St. Louis Cardinals baseball fan, even though you live in Atlanta. And we were talking about the power of the radio station that used to send the... That still sends the Cardinals baseball games. The question though I have for you is, I don't know how many years ago Moneyball came out by Michael Lewis, but it was a game changing book in baseball, but there are a lot of translations into the investment world. Did you give any thought to Moneyball, and as a baseball fan, how that connected to other disciplines?

Dr. Daniel Crosby (09:16): Yeah. I think the insights of Moneyball are that the big sexy splashy metrics are not always the ones that are most predictive of success, right? So Moneyball famously found that on base percentage counted more than batting average data. And so things like walks, which are kind of boring, are actually highly predictive of success.

Dr. Daniel Crosby (09:42): So likewise, I think in investing circles, we look for things like big, big returns. But when Morningstar did a study a while back on the best predictors of investment success, the best predictor of a fund or an ETF success, and the single best predictor, and it was not even close, the single best predictor was the fee, right? And so we're always looking at things like returns, which are hard to predict and out of our control, when these decidedly sort of small, quiet, unsexy things like fees are actually far more predictive than many of the splashy or sort of home run type metrics that we look at.

Dr. Daniel Crosby (10:24): I think another example of this that I wrote about in my second book, The Laws of Wealth, I looked at the best performing fund of the early aughts, so from 2000 to 2010, there was a focused mutual fund that got incredible results, like 18 and a half percent a year at a time when the S&P was slightly negative over that 10-year period. And what was fascinating though is the average investor in that fund had negative real returns. So the fund would run up, people would hear about it, they would pile in, they would then take a hit, as all funds inevitably do from time to time, everyone would question their judgment, jump out, it would run up again, everyone pile back in, sort of rinse and repeat. And so things like returns are what get all the press. But things like, is the fee reasonable, is a more salient consideration. Something like, is this the kind of fun that I could live with and actually manage the ride on, is a more important consideration. So I think there's Moneyball effects all over the place really.

Matt Hall (11:30): I have a note sitting on my computer at home that says, "Meditate, journal, exercise." It's a reminder to myself. Why don't I do these things?

Dr. Daniel Crosby (11:41): Well, it turns out you're in good company. So there's something called “the knowing-doing gap”, and it's very pronounced. And we know that desire or even education around knowing you should do something and then actually doing it, there's this huge chasm. So if we look at doctors and nurses, right, doctors and nurses smoke cigarettes at a rate much higher than the general public, even though they went to eight years of school to tell other people not to smoke cigarettes.

Dr. Daniel Crosby (12:12): We know that since the US started labeling food and putting nutrition labels on food in the early '90s, the percentage of obese Americans has doubled and the percentage of morbidly obese Americans has tripled since that time. Because even though we know what we're putting in our bodies now, we have perfect sort of analytical knowledge of that, it's not really an analytical consideration, right?

Dr. Daniel Crosby (12:38): We're not choosing donuts over salad because we have some misgiving about which one is healthier. It's just that when we're stressed out, when we're tired, when our willpower is weak, we choose the sort of the easy expedient thing. So this “knowing-doing gap” is really pronounced. We see that in medicine, only about half of people who get sick go to the doctor, only about half of people who go to the doctor and take their medicine as prescribed, and we know that among the 40% of Americans who get financial advice, less than half of them take that advice. So this is a very, very big problem and a very human problem so you're hardly alone there.

Matt Hall (13:17): Here's ultimately my question. Does education and awareness impact discipline in any meaningful way?

Dr. Daniel Crosby (13:25): Yeah. So I have three Es. I have three Es for changing behavior and I mean, I created these specifically with financial behavior in mind, but I think it works broadly. So the first E is education. Education is necessary, but not sufficient, right? And one of the things that education is good for is what we call meta knowledge which is basically knowing what you don't know, right? I know that I can't fix my car, right? So that's a form of education to know my limitations, to know that if my car breaks, I'm going to take it in. So one of the things that's important about educating yourself with respect to finances is knowing what you can and can't do on your own and when you need to bring in a professional. So education is sort of the base of that pyramid.

Dr. Daniel Crosby (14:16): The second thing there is environment. So environment is a much better predictor of behavior than education. So if you don't want to eat a donut, better than knowing that donuts are bad for you is not going to donut shops, right, not putting yourself in a place where you're going to be tempted to do the wrong thing. So in a financial context, environment looks like having a good portfolio. That's the kind of portfolio you can live with through good times and bad. And then being careful about what you put in your head, not watching sort of hysterical cable financial news reports that are likely to lead you down a fearful path and the like.

Dr. Daniel Crosby (14:58): And then the final piece is encouragement. Encouragement is the coaching aspect, right, the advisory aspect. Even if you're educated on the right things to do, even if you're putting yourself in the right environment, we still all have moments of weakness, and that's where we need the financial advisor or the personal trainer or something to kind of step in and give us that nudge, that personal touch that helps us stay on the path. So I did some pretty extensive research on the effects of working with financial professionals. And we found very consistently that people who worked with financial advisors were happier by an order of magnitude than the general population, they were better prepared for an emergency.

Dr. Daniel Crosby (15:45): And on average, they had 2.73 times the wealth of people who had gone it alone. And that's not candidly because financial advisors are picking the best stocks for them or just putting them in the hottest asset classes, it's because they're giving them that encouragement that keeps them from making a mistake at an inopportune time.

Matt Hall (16:07): Okay. So I like these three Es a lot. Let me use an analogy to dig in even a little bit further. Yesterday, I played golf with a business friend and he said he has an alter ego. It's when he messes up his first shot, he has an angry version of himself that hits the second shot, and the second shot is always better than the first. And he's like, "Why can't I make my normal self be more like my angry second self where I don't care as much and I relax into it and usually have a better result?" Why is that? Why do we sort of get in our own way, whether it's on the practice range, you see people who practice really well but they get in the competition, they can't do as well. What's going on there?

Dr. Daniel Crosby (16:55): Well, there's a couple of things going on. With respect to investing, I mean, God or nature could not have really created a worse investor than you or I. I mean, we are sort of evolutionarily wired for a different place in time. Our brains haven't had an upgrade and creeping on 200,000 years, and we were wired to protect ourselves from physical danger, right? We were wired to protect ourselves from physical danger and that made us risk averse and loss averse, and sort of quick to run away from danger. Well, most of us in the Western world, most of us in developed countries, we now live in a country where more people die from excessive eating than inadequate nutrition, right? More people die from suicide than from war. We live in a whole new milieu now, we live in a whole new context where danger is not as prevalent. The dangers that we face, we're going to face in a place like the market.

Dr. Daniel Crosby (18:01): And we're still wired to run at the first sight of danger, even though we'd no longer live in a world, by and large, that is physically out to get us in any meaningful way. So I mean, I could talk all day about just sort of how mis-wired we are. With respect to the other piece, one of the things that we also see that's kind of consistent with this wiring is, when we get stressed out, our body shunts all of its resources away from anything superfluous, and it gets you ready to throw a punch or to run away. Because our body has no way of differentiating being chased by a bear from seeing a 30% decline in our stock portfolios. The physiological response is identical, your heart races, your pupils dilate, et cetera.

Dr. Daniel Crosby (18:52): And so one of the things that we see is that, we get stupid at the very wrong time. We lose 13% of our cognitive processing power when we're under stress. And so this is why you see things like the yips in baseball, where people who played baseball their whole lives can no longer throw a ball under stress because everything gets pulled away, everything gets focused on just that basic survival instinct. So this need to survive that we've evolved doesn't make you a very good putter and it definitely make you a very good investor.

Matt Hall (19:31): It feels cliche at this point to say, "What have we learned through the pandemic?" But I feel like all the isolation and the disruption and the uncertainty that's happened over the last year and a half or whatever it's been now, there are meaningful lessons that we should be tending to or thinking about. From your perspective, what do you think are the key things we should be observing in ourselves, or even as an investor or just a human, what do you see that maybe has been highlighted or changed through this last year and a half?

Dr. Daniel Crosby (20:05): Probably the biggest takeaway for me is just how social we all are. I live here in Atlanta, I saw something recently that calls to the suicide hotline in Atlanta are up 450% year over year. And I mean, that's just an incredible and a tragic statistic and it's it coincides with research out of the UK that shows that levels of anxiety and depression are up in the UK 400%. And the reason is really because of a lack of social connectedness. The UK and Japan, even pre-COVID instated Ministers of Loneliness because the epidemic of loneliness and social isolation had become so pronounced in those countries that it was having real health impacts. People were literally dying of disconnection.

Dr. Daniel Crosby (20:54): And we know now from recent research that the effects of loneliness are twice as damaging as obesity and are the equivalent to smoking 15 cigarettes a day. And so really, I think what's been driven home for us here is just how much we need each other. And bringing it back to markets, the whole GameStop phenomenon from earlier in the year, I think it's maybe kind of still going on, I think the stock price is still relatively elevated, but the whole GameStop phenomenon we saw early on was a relic of loneliness. This was people looking for a cause, this was people looking for connection and sort of rallying under the banner of, "Look, we can stick it to the man and do this as a unit, as a cohesive whole." I think that is largely driven by the loneliness that we see. So if you could just account for one sort of well-being factor in your life, I think it's social connectedness. And I know my vaccine goes full strength tomorrow and I'm going to just go hug strangers I think because we're all just so lonely after this whole thing.

Matt Hall (22:02): Yeah, it's interesting. Because one of the aspects of retirement that I think sometimes is undervalued is the social connectedness people feel in their work, being around a group that, whether you like everybody you work with or not, it's a group you're around and in some way shape or form knows you. And that separation has certainly been highlighted. And I really like your observation about the GameStop and the loneliness, social connectedness piece. I think in retirement, it's often undervalued. People are excited to move on to the next chapter, but they're also losing a piece of social connection.

Dr. Daniel Crosby (22:38): Yeah. I'd encourage your listeners to check out the PERMA Model. P-E-R-M-A Model of wellness and happiness. This is research out of the University of Pennsylvania about what makes people whole and well and happy and well adjusted. And so the five things are, positive experiences, which is like just having fun, engagement, which is work, relationships, meaning, basically working for something bigger than yourself or part of a bigger team, and advancement, so learning new things, getting better today than you were yesterday.

Dr. Daniel Crosby (23:10): At least four of those things are met at work, right? Engagement, relationships, meaning, advancement, all of these things are prominently featured at work. Work's not always a lot of fun, right? Just in sort of the go to Disney World sort of fun sense, but work does a great deal of good and there's a lot of psychological needs that are met by going to work, and people who are planning for retirement need to plan to meet the five elements of PERMA just as surely as they need to plan for their financial obligations.

Matt Hall (23:42): So in one of my recent episodes, in a letter we sent to clients, we talked about how boring is good and we used a comparison to Las Vegas and how so much of the bells and whistles are there to distract us from the fact that the math has already figured out. What's your take on whether boring is good in investing?

Dr. Daniel Crosby (24:03): I think, I quoted someone saying I'm going to mess up the quote here, but I quoted someone almost exactly to that effect in one of my books. And one of the chapters in The Laws of Wealth, I have sort of my 10 commandments, a reporter once asked me sort of like, "so what are your 10 commandments of wealth creation?" And so I thought about it and then I wrote a whole book about it. But one of the chapters is, If You're Excited, It's Probably a Bad Idea, is the name of one of the chapters because good investing is almost always boring investing. You look at exciting forms of investing, day trading is exciting. And yet we know that the average day trader loses money. We know for research out of Taiwan that only one in 360 day traders show any evidence of skill, but it's exciting, right?

Dr. Daniel Crosby (24:55): IPO investing is exciting. And yet we know that on average, IPOs underperform, the benchmark three years on. So there's just example after example of where many of the most exciting forms of investing are some of the worst for sort of longterm wealth creation. So if you're excited, I think it's probably a bad idea.

Matt Hall (25:15): Yeah. I've heard you say that one of the best things people can do, investors can do, regular people can do for themselves is to automate as much of their financial life as possible. What else can people do? Or what are some of the key tips or tricks or hacks that you think people should be thinking about or be aware of?

Dr. Daniel Crosby (25:33): If I could just give people two things, it would be automate and outsource, automate and work with a professional, I think are the two easiest things. One of the things that people who read books like mine, I think they're like, "Oh we're going to listen to these talks and we're going to read these books and then we're going to outsmart and out will sort of bad behavior and that seldom works for some of the reasons that I talked about earlier. So something like automation is great because it takes a human bias and it makes it work for us, right? We know as human kind, we're kind of lazy, we're kind of status quo prone. And so something like automating a program of saving and investing and escalating that investment over time, it takes this thing that's ostensibly a bad thing being sort of lazy and status quo prone and makes it work for us. So anytime you can take a behavioral bias and make it work in your favor, something you're prone to do anyway, and make it work for you, you're in very good stead.

Matt Hall (26:37): Nice. Okay, I have The Laws of Wealth, your book in front of me and The Behavioral Investor front of me right now. Anyone who's listening, if you would like a copy of one of Dr. Crosby's books, just send me an email and I'll send you one. Daniel, where else can people learn about what you're up to or what you're thinking about? I saw on a Twitter, I think, did you say baklava is the greatest dessert and it's not even close? Is that you?

Dr. Daniel Crosby (27:04): I did make that bold statement. Now I felt like I sold the south out a little bit because I think pecan pie is neck and neck with baklava, but you sound skeptical of my take.

Matt Hall (27:16): No cake, ice cream, pie, baklava in the one spot and it's not even close. I mean, I like your titles, all your titles and your punchy catchphrases I like, but that one stung me a little bit. I don't know. I've had baklava and I don't know if I'd put it in the top spot, but pretty interesting. But you're on Twitter and that's one place where people can find you and find your interesting thinking.

Dr. Daniel Crosby (27:38): That's right. @DanielCrosby on Twitter to come get my bad food takes. I also have a podcast called Standard Deviations, so that's another good way to keep up on all the latest in behavioral finance.

Matt Hall (27:52): Yeah. Well, thank you for your contribution and what you're doing. I'm so obsessed with anything we can do to help ourselves and help the listeners make better decisions, especially in their financial lives and find more meaning and purpose in their lives. So thank you for your work and your effort. And as I said, anyone who wants a copy of the two books that I have anyway, The Behavioral Investor and The Laws of Wealth, we'll be happy to send you a copy. And I look forward to maybe seeing you at a Cardinal game one day or in Atlanta. By the way, a prior guest on the show and the most popular episode I've ever done, Sid and Ann Mashburn, their headquarters are in Atlanta, Georgia. They own a fabulous clothing store in Atlanta if you ever have time to check that out.

Dr. Daniel Crosby (28:32): That's a great store. I'm honored to be on the same podcast as Sid and Ann Mashburn. Great store here.

Matt Hall (28:38): Yeah. Okay, well thank you Daniel and really appreciate your time.

Dr. Daniel Crosby (28:42): Nope. My pleasure, thanks for having me.

Matt Hall (28:44): Take care, have a great day.

Matt Hall (28:51): Are your quirks advantages? Please note, the information shared in this podcast is not intended as advice. The intent is to share meaningful experiences. I am likely not your advisor, nor wealth manager, nor financial planner, and my opinions are my own and not necessarily shared by Hill Investment Group. Investing involves risk. Consult a professional before implementing an investment strategy. Thank you.