1 00:00:05,519 --> 00:00:08,960 Speaker 1: How do we fool ourselves in the stock market? And 2 00:00:09,039 --> 00:00:12,840 Speaker 1: what does neuroscience have to do with investment? And what 3 00:00:12,880 --> 00:00:15,400 Speaker 1: does any of this have to do with Isaac Newton 4 00:00:15,920 --> 00:00:19,120 Speaker 1: or the Dutch East India Company which ran for two 5 00:00:19,200 --> 00:00:23,799 Speaker 1: hundred years, or Kodak or the way that zebras like 6 00:00:23,880 --> 00:00:28,920 Speaker 1: to herd or instincts or emotions and almost two hundred 7 00:00:28,920 --> 00:00:36,640 Speaker 1: different cognitive biases. Welcome to Innercosmos with me David Eagleman. 8 00:00:36,840 --> 00:00:39,800 Speaker 1: I'm a neuroscientist and an author at Stanford and in 9 00:00:39,840 --> 00:00:43,879 Speaker 1: these episodes we dive deeply into our three pound universe 10 00:00:44,320 --> 00:00:48,080 Speaker 1: to uncover some of the most surprising aspects of our lives. 11 00:00:48,400 --> 00:00:52,120 Speaker 1: Today's episode asks what do brains have to do with 12 00:00:52,560 --> 00:00:59,720 Speaker 1: the stock market? So there's this old joke about a 13 00:00:59,760 --> 00:01:03,000 Speaker 1: man who's looking for enlightenment, and he goes on a 14 00:01:03,120 --> 00:01:07,240 Speaker 1: journey to find the wise man, and he hipes snowy 15 00:01:07,280 --> 00:01:11,880 Speaker 1: mountains and fords rivers, and after many months of toil, 16 00:01:12,360 --> 00:01:16,559 Speaker 1: he summits a peak and he finds the wise man 17 00:01:17,080 --> 00:01:20,039 Speaker 1: sitting there cross legged at the top. And the man 18 00:01:20,120 --> 00:01:23,199 Speaker 1: drops to his knees and he says, Oh, wise one, 19 00:01:23,319 --> 00:01:26,440 Speaker 1: what profound words of wisdom can you share? With me, 20 00:01:26,840 --> 00:01:29,800 Speaker 1: and the wise man looks at him and says, by 21 00:01:29,920 --> 00:01:33,280 Speaker 1: low sell Hi. Now, whether you think that that's the 22 00:01:33,319 --> 00:01:36,280 Speaker 1: world's funniest joke, it doesn't matter, because the fascinating part 23 00:01:36,360 --> 00:01:39,199 Speaker 1: is that the joke is stuck around for generations. 24 00:01:39,840 --> 00:01:41,000 Speaker 2: And this is because the. 25 00:01:41,000 --> 00:01:44,960 Speaker 1: Advice is so simple, and yet most people in the 26 00:01:45,000 --> 00:01:49,520 Speaker 1: stock market find it incredibly difficult for their brains to 27 00:01:49,720 --> 00:01:54,120 Speaker 1: stay on track to follow that advice. Instead, they buy 28 00:01:54,160 --> 00:01:57,520 Speaker 1: a stock once it's shot way up and everyone's talking 29 00:01:57,520 --> 00:02:01,360 Speaker 1: about it, and when the stock starts crashing they do 30 00:02:01,400 --> 00:02:04,960 Speaker 1: a panic cell. But of course that kind of bad 31 00:02:05,000 --> 00:02:07,320 Speaker 1: decision making is just the very start of it. We 32 00:02:07,480 --> 00:02:10,720 Speaker 1: humans do all kinds of bad decision making in the 33 00:02:10,760 --> 00:02:14,760 Speaker 1: stock market, or more generally, when we're thinking about how 34 00:02:14,800 --> 00:02:19,280 Speaker 1: to invest our savings. Why, well, it's because we're not 35 00:02:19,960 --> 00:02:22,320 Speaker 1: like mister Spock and star Trek, who knows how to 36 00:02:22,360 --> 00:02:28,359 Speaker 1: make optimal logical decisions. Instead, we are yoked with psychologies 37 00:02:28,480 --> 00:02:32,040 Speaker 1: that have long evolutionary histories, and as a result, they 38 00:02:32,120 --> 00:02:35,520 Speaker 1: have all sorts of flaws in their reasoning, which we 39 00:02:35,680 --> 00:02:40,520 Speaker 1: generally summarize as cognitive biases, which are these patterns that 40 00:02:40,560 --> 00:02:45,440 Speaker 1: you see where we deviate from rationality in our decision making, 41 00:02:45,480 --> 00:02:48,560 Speaker 1: we do things that are often irrational. 42 00:02:49,240 --> 00:02:50,160 Speaker 2: Why do we do this? 43 00:02:50,320 --> 00:02:54,640 Speaker 1: Well, the world is extremely complicated, but your brain is 44 00:02:54,639 --> 00:02:57,359 Speaker 1: always trying to get a grasp on it and have 45 00:02:57,440 --> 00:03:01,960 Speaker 1: some control over what you can do. And so with time, 46 00:03:02,600 --> 00:03:05,120 Speaker 1: like millions of years or sometimes tens of millions of years, 47 00:03:05,560 --> 00:03:10,200 Speaker 1: you develop these mental shortcuts that work much of the time, 48 00:03:10,240 --> 00:03:15,280 Speaker 1: but they're not actually strictly logical. Now, in my book Incognito, 49 00:03:15,400 --> 00:03:18,760 Speaker 1: I wrote about how much of your brain's activity is 50 00:03:18,840 --> 00:03:22,760 Speaker 1: running under the hood, and my analogy was that the 51 00:03:23,000 --> 00:03:26,400 Speaker 1: conscious mind, which is the part of you that flickers 52 00:03:26,440 --> 00:03:28,880 Speaker 1: to life when you wake up in the morning, that's 53 00:03:28,960 --> 00:03:32,359 Speaker 1: like a broom closet in the mansion of the brain. 54 00:03:33,200 --> 00:03:35,920 Speaker 1: Most of what you think and do and act and 55 00:03:35,960 --> 00:03:40,200 Speaker 1: believe you have no access to. As a result, even 56 00:03:40,240 --> 00:03:43,760 Speaker 1: though we typically feel like we are excellent stewards of 57 00:03:43,800 --> 00:03:48,920 Speaker 1: our decision making, there are all kinds of irrationalities that 58 00:03:49,000 --> 00:03:54,000 Speaker 1: humans display. Now. Not being like mister Spock is typically 59 00:03:54,000 --> 00:03:56,960 Speaker 1: not the end of the world, and obviously for our species, 60 00:03:57,120 --> 00:04:00,720 Speaker 1: for all its flaws, we continue to get by. But 61 00:04:00,920 --> 00:04:04,160 Speaker 1: these cognitive biases do show up in a much bigger 62 00:04:04,200 --> 00:04:08,120 Speaker 1: way when we look at how people deal with economics. 63 00:04:08,800 --> 00:04:09,000 Speaker 2: Now. 64 00:04:09,040 --> 00:04:13,360 Speaker 1: Traditionally, economics has been studied in the context of an 65 00:04:13,480 --> 00:04:20,159 Speaker 1: ideal decision maker, often called homoeconomicus and homoeconomicists is perfectly 66 00:04:20,279 --> 00:04:24,560 Speaker 1: rational and not influenced by shiny objects or by what 67 00:04:24,640 --> 00:04:27,800 Speaker 1: his friends are doing. But a new field began to 68 00:04:27,880 --> 00:04:30,400 Speaker 1: blossom a few decades ago, and we now call that 69 00:04:30,920 --> 00:04:37,080 Speaker 1: behavioral economics or neuroeconomics, and the idea is to understand 70 00:04:37,279 --> 00:04:41,360 Speaker 1: how people actually make decisions and what sorts of mistakes 71 00:04:41,400 --> 00:04:45,160 Speaker 1: they actually make. And I spoke about this in episode eight, 72 00:04:45,279 --> 00:04:48,920 Speaker 1: which was about how your brain decides what it's actually 73 00:04:48,920 --> 00:04:52,360 Speaker 1: going to buy, like which car and which restaurant you're 74 00:04:52,400 --> 00:04:55,279 Speaker 1: going to go to, and which ice cream flavor you're 75 00:04:55,279 --> 00:04:58,160 Speaker 1: going to choose. But today I want to hit a 76 00:04:58,279 --> 00:05:02,120 Speaker 1: different facet of this top which is you come home 77 00:05:02,160 --> 00:05:05,080 Speaker 1: from work with your paycheck and you decide I'm going 78 00:05:05,160 --> 00:05:07,960 Speaker 1: to do the smart thing and invest this money, which 79 00:05:08,000 --> 00:05:11,400 Speaker 1: is an important idea, but people often lose tons of 80 00:05:11,440 --> 00:05:14,200 Speaker 1: money in the stock market. I've seen this happen with 81 00:05:14,279 --> 00:05:18,799 Speaker 1: friends of mine, and there's been a proliferation of phone 82 00:05:18,839 --> 00:05:21,679 Speaker 1: apps that let you do trading in a way that's 83 00:05:21,800 --> 00:05:25,320 Speaker 1: like an addictive online gambling game and they lose tons 84 00:05:25,360 --> 00:05:28,960 Speaker 1: of money. But not everyone loses money in the stock market. 85 00:05:29,320 --> 00:05:33,560 Speaker 1: In fact, academics study this and generate whole fields that 86 00:05:33,680 --> 00:05:38,320 Speaker 1: wind Nobel prizes about how to allocate assets. So where's 87 00:05:38,360 --> 00:05:41,560 Speaker 1: the disconnect. Well, it has to do with the brain 88 00:05:41,960 --> 00:05:46,359 Speaker 1: and our psychology and with these cognitive biases. So I 89 00:05:46,440 --> 00:05:50,000 Speaker 1: called up my friend Mark Mattson. Mark is an entrepreneur 90 00:05:50,080 --> 00:05:53,880 Speaker 1: and deeply studies the science of investing. He's been in 91 00:05:53,920 --> 00:05:57,239 Speaker 1: the financial industry his whole life, and more than anyone 92 00:05:57,279 --> 00:05:59,880 Speaker 1: I know, he's seen exactly the way that humans be 93 00:06:00,000 --> 00:06:03,040 Speaker 1: behave and the difference in the way they would behave 94 00:06:03,120 --> 00:06:03,799 Speaker 1: if they were. 95 00:06:03,600 --> 00:06:05,120 Speaker 2: Doing so optimally. 96 00:06:05,720 --> 00:06:08,839 Speaker 1: And he's just written a new book called The American Dream. 97 00:06:09,360 --> 00:06:11,280 Speaker 1: And the part I want to zoom in on today 98 00:06:11,360 --> 00:06:14,840 Speaker 1: is the part about how we make decisions in the 99 00:06:14,880 --> 00:06:23,800 Speaker 1: stock market. So here's my conversation with Mark Mattson. Okay, 100 00:06:23,839 --> 00:06:25,839 Speaker 1: So Mark, one thing I talk about a lot on 101 00:06:25,880 --> 00:06:29,640 Speaker 1: this podcast is this idea of the internal model, which 102 00:06:29,640 --> 00:06:31,320 Speaker 1: has been building up since the. 103 00:06:31,360 --> 00:06:32,159 Speaker 2: Day you were born. 104 00:06:32,720 --> 00:06:35,279 Speaker 1: Your brain is locked in silence and darkness and trying 105 00:06:35,320 --> 00:06:38,440 Speaker 1: to model the world and understand what's out there. Now 106 00:06:38,600 --> 00:06:41,520 Speaker 1: you use a term that I believe was introduced by 107 00:06:41,560 --> 00:06:45,080 Speaker 1: the scholar Kenneth Burke originally that I love, which is 108 00:06:45,120 --> 00:06:49,040 Speaker 1: this idea of a screen or many screens tell us 109 00:06:49,080 --> 00:06:49,520 Speaker 1: about that. 110 00:06:50,240 --> 00:06:54,120 Speaker 3: Yeah, so most people think that they have an objective 111 00:06:54,279 --> 00:06:58,200 Speaker 3: view of the world, and their view is the quote 112 00:06:58,279 --> 00:07:02,600 Speaker 3: unquote right view. What he was talking about was you 113 00:07:02,600 --> 00:07:05,880 Speaker 3: don't really see the world. What you actually see is 114 00:07:06,000 --> 00:07:08,640 Speaker 3: what the screens that you have allow you to see. 115 00:07:09,040 --> 00:07:13,720 Speaker 3: And the screens are created linguistically from out of language. 116 00:07:14,000 --> 00:07:17,080 Speaker 3: So some of these screens are created on purpose. So 117 00:07:17,160 --> 00:07:20,480 Speaker 3: if you're a doctor, you spend many, many years creating 118 00:07:20,520 --> 00:07:24,080 Speaker 3: all the linguistic screens around, you know, being a doctor. 119 00:07:24,440 --> 00:07:27,640 Speaker 3: But we have those screens developing all the time, and 120 00:07:28,040 --> 00:07:29,320 Speaker 3: most of them aren't on purpose. 121 00:07:29,400 --> 00:07:30,640 Speaker 2: They're kind of on accident. 122 00:07:31,560 --> 00:07:35,280 Speaker 3: The experiences we had in life, teachers, we had in life, 123 00:07:36,080 --> 00:07:39,840 Speaker 3: and we are unaware that we actually have a screen, 124 00:07:40,840 --> 00:07:43,560 Speaker 3: which then limits us. A lot of people talk about mindsets, 125 00:07:44,040 --> 00:07:47,320 Speaker 3: but I think mindset seems like something that you can 126 00:07:47,360 --> 00:07:50,560 Speaker 3: easily change. Well, I'll just change my mindset. The screen 127 00:07:50,680 --> 00:07:53,600 Speaker 3: doesn't seem like a screen that you can change. It 128 00:07:53,760 --> 00:07:57,000 Speaker 3: actually seems like the truth, and that locks us into 129 00:07:57,040 --> 00:07:58,760 Speaker 3: the same behaviors. 130 00:07:58,120 --> 00:07:59,720 Speaker 2: Over and over and over again. 131 00:08:00,240 --> 00:08:03,280 Speaker 1: You mean, because we believe whatever our screens are telling us. 132 00:08:03,320 --> 00:08:05,360 Speaker 3: We think that is the world out there. I know 133 00:08:05,440 --> 00:08:09,080 Speaker 3: that to be true. Yeah, well, something will happen. We'll 134 00:08:09,120 --> 00:08:11,200 Speaker 3: make up a story about it, a screen about it. 135 00:08:11,960 --> 00:08:14,480 Speaker 3: In the book, I talk about money demons or negative 136 00:08:14,520 --> 00:08:18,200 Speaker 3: beliefs around money and our relationship to money, and once 137 00:08:18,200 --> 00:08:21,600 Speaker 3: they're formed, they take control. It's kind of like the 138 00:08:21,720 --> 00:08:26,320 Speaker 3: movie Aliens where the alien slams onto somebody's face and 139 00:08:26,360 --> 00:08:28,800 Speaker 3: that's all they can really deal with is the alien. 140 00:08:28,880 --> 00:08:32,600 Speaker 3: It takes over, It has complete control, and we don't 141 00:08:32,600 --> 00:08:33,680 Speaker 3: even realize it's happening. 142 00:08:34,200 --> 00:08:37,120 Speaker 1: So give us some examples these money demons. 143 00:08:38,000 --> 00:08:42,760 Speaker 3: So one money demon kind of like the underlying demon 144 00:08:42,800 --> 00:08:45,880 Speaker 3: of all is I don't have enough. I don't have 145 00:08:46,000 --> 00:08:48,560 Speaker 3: enough to have a successful life. I don't have enough 146 00:08:48,600 --> 00:08:50,640 Speaker 3: to create my business the way I want to. I 147 00:08:50,679 --> 00:08:54,040 Speaker 3: don't have enough to live powerfully. I don't have enough 148 00:08:54,080 --> 00:08:59,199 Speaker 3: to feel fulfilled. So this this kind of a scarcity 149 00:08:59,320 --> 00:09:03,560 Speaker 3: beliefs system them a scarcity screen that money, and it's 150 00:09:03,640 --> 00:09:07,760 Speaker 3: just a screen. Money is hard to make, hard to invest, 151 00:09:08,200 --> 00:09:11,360 Speaker 3: and hard to keep, so it's a screen of suffering 152 00:09:11,400 --> 00:09:15,800 Speaker 3: and struggling. Another's related screen would be a victimhood screen, 153 00:09:16,720 --> 00:09:18,880 Speaker 3: in that I'm a victim and I can't really create 154 00:09:19,240 --> 00:09:21,160 Speaker 3: what I really want to create with my life because 155 00:09:21,160 --> 00:09:25,280 Speaker 3: I'm locked in from some kind of victim mentality, as 156 00:09:25,360 --> 00:09:28,480 Speaker 3: opposed to an American dream screen, which would be through 157 00:09:28,520 --> 00:09:33,520 Speaker 3: hard work, individualism, creativity, focusing on creating value for others. 158 00:09:34,360 --> 00:09:36,880 Speaker 3: And I first became aware of this, you know, with 159 00:09:36,920 --> 00:09:40,840 Speaker 3: a story with my grandfather and my father, and they 160 00:09:40,880 --> 00:09:43,960 Speaker 3: had two In fact, the screens that they had were 161 00:09:44,040 --> 00:09:46,960 Speaker 3: so extreme it was like they weren't even living the 162 00:09:47,000 --> 00:09:50,440 Speaker 3: same world, like it was two different dimensions, and it 163 00:09:50,520 --> 00:09:52,520 Speaker 3: made it very hard for them to communicate and have 164 00:09:52,559 --> 00:09:53,959 Speaker 3: a relationship throughout life. 165 00:09:54,120 --> 00:09:56,559 Speaker 1: Let's double click on that. What were those screens for 166 00:09:56,600 --> 00:09:57,640 Speaker 1: your grandfather and your father? 167 00:09:57,720 --> 00:09:59,960 Speaker 3: Well, so, my grandfather grew up in the coal mines 168 00:10:00,640 --> 00:10:04,200 Speaker 3: and the chemical factories in West Virginia, and he had 169 00:10:04,240 --> 00:10:09,160 Speaker 3: a screen that actually that money was evil and anybody 170 00:10:09,200 --> 00:10:12,400 Speaker 3: that had money actually stole it and took advantage of 171 00:10:12,400 --> 00:10:16,120 Speaker 3: other people, so much so that when he was actually 172 00:10:16,360 --> 00:10:21,440 Speaker 3: offered a raise and to be a foreman at Union Carbide, 173 00:10:21,440 --> 00:10:24,400 Speaker 3: where he worked, he refused to take it because he said, 174 00:10:24,400 --> 00:10:25,720 Speaker 3: I don't want to be the man, and I don't 175 00:10:25,720 --> 00:10:28,080 Speaker 3: want to take advantage of other people. He didn't see 176 00:10:28,120 --> 00:10:31,680 Speaker 3: an opportunity to create wealth for his family, to be 177 00:10:31,720 --> 00:10:34,440 Speaker 3: a foreman and actually create value for the people under him. 178 00:10:35,600 --> 00:10:38,280 Speaker 3: And my dad on the other hand, and he was 179 00:10:38,360 --> 00:10:42,040 Speaker 3: driven by a question that was why am I doomed 180 00:10:42,040 --> 00:10:44,360 Speaker 3: to live in West Virginia and why am I doomed 181 00:10:44,360 --> 00:10:47,360 Speaker 3: to suffer here? And my dad had a different question 182 00:10:47,400 --> 00:10:50,520 Speaker 3: which created a different screen. His question was how can 183 00:10:50,559 --> 00:10:54,400 Speaker 3: I escape this abject poverty and create wealth and prosperity 184 00:10:54,440 --> 00:10:57,920 Speaker 3: for myself and other people? And he saw money as 185 00:10:57,960 --> 00:11:00,840 Speaker 3: a way of creating values for others, and hate believed 186 00:11:00,840 --> 00:11:04,840 Speaker 3: in capitalism, and my grandfather didn't. And those who my 187 00:11:05,000 --> 00:11:10,200 Speaker 3: grandfather died alone of inmphysema from the chemical factory that 188 00:11:10,280 --> 00:11:13,680 Speaker 3: he worked in. People will actually die to keep their screens. 189 00:11:15,240 --> 00:11:21,000 Speaker 1: Now you believe that the investing industry is broken, tell 190 00:11:21,080 --> 00:11:21,600 Speaker 1: us about that. 191 00:11:22,559 --> 00:11:27,880 Speaker 3: Well, the investing industry is seriously broken because it's based 192 00:11:27,920 --> 00:11:30,679 Speaker 3: on a very destructive screen. And that screen is something 193 00:11:30,720 --> 00:11:34,319 Speaker 3: we call investor prediction syndrome. People believe and have been 194 00:11:34,320 --> 00:11:37,679 Speaker 3: fed the idea that you need a forecast, either an 195 00:11:37,679 --> 00:11:41,320 Speaker 3: economic forecast or a political forecast, and then based on 196 00:11:41,360 --> 00:11:44,640 Speaker 3: that forecast, you can foresee the future and then pick 197 00:11:44,679 --> 00:11:47,240 Speaker 3: all the best stocks and get in and out of 198 00:11:47,280 --> 00:11:50,880 Speaker 3: the market at the right time, and or pick the 199 00:11:50,880 --> 00:11:55,439 Speaker 3: best managers. But all the academic research is conclusive that 200 00:11:56,000 --> 00:11:58,880 Speaker 3: all the noble and predictable information about the future is 201 00:11:58,960 --> 00:12:04,199 Speaker 3: already in the price. Therefore, only unknowable, unpredictable events will 202 00:12:04,280 --> 00:12:08,880 Speaker 3: change prices going forward. And so people are gambling and 203 00:12:08,920 --> 00:12:11,560 Speaker 3: speculating with their money and they don't even realize that 204 00:12:11,600 --> 00:12:15,760 Speaker 3: they're doing it. And that screen is so embedded in 205 00:12:15,800 --> 00:12:20,320 Speaker 3: the financial industry that it goes unacknowledged. You turn on 206 00:12:20,360 --> 00:12:22,120 Speaker 3: the TV and they're asking, well, what's going to happen 207 00:12:22,200 --> 00:12:24,680 Speaker 3: with the election, and what's going to happen with inflation? 208 00:12:24,880 --> 00:12:27,440 Speaker 3: And what should I invest in based on this forecast? 209 00:12:28,040 --> 00:12:32,920 Speaker 3: And it doesn't it begs even common sense. I mean, 210 00:12:33,200 --> 00:12:37,240 Speaker 3: obviously no one can predict the future, and if they did, 211 00:12:37,280 --> 00:12:38,720 Speaker 3: they wouldn't tell you on TV. 212 00:12:40,160 --> 00:12:42,000 Speaker 2: So it's crazy, right. 213 00:12:42,080 --> 00:12:44,360 Speaker 1: And one of the things that really struck me in 214 00:12:44,400 --> 00:12:46,880 Speaker 1: your book was you looked at a number of these 215 00:12:46,920 --> 00:12:50,400 Speaker 1: predictions where people said in magazines or on blogs or 216 00:12:50,520 --> 00:12:53,200 Speaker 1: articles or whatever about you know, hey, these are the 217 00:12:53,200 --> 00:12:56,000 Speaker 1: stocks to pick for this year, these are the killer stocks. 218 00:12:56,000 --> 00:12:57,480 Speaker 1: They're going to make you a bunch of money. And 219 00:12:57,559 --> 00:13:00,680 Speaker 1: you went through you analyze what actually became of those 220 00:13:00,960 --> 00:13:03,800 Speaker 1: as compared to let's say the S and P five hundred, 221 00:13:03,840 --> 00:13:04,680 Speaker 1: and what did you find there? 222 00:13:05,440 --> 00:13:11,440 Speaker 3: Well, it's the average investor historically averages trying to do 223 00:13:11,480 --> 00:13:13,880 Speaker 3: asset allocation investor money it earns about two and a 224 00:13:13,880 --> 00:13:17,640 Speaker 3: half three percent and the SMP, for example of clocks 225 00:13:17,679 --> 00:13:22,240 Speaker 3: in around ten percent. So on average, people are throwing 226 00:13:22,280 --> 00:13:25,480 Speaker 3: away three to six percent of their return trying to 227 00:13:25,520 --> 00:13:27,360 Speaker 3: pick the best stocks and trying to get in and 228 00:13:27,400 --> 00:13:29,640 Speaker 3: out of the market. And if you find someone that 229 00:13:29,679 --> 00:13:33,319 Speaker 3: got lucky enough to beat the market, statistics show that 230 00:13:33,320 --> 00:13:36,480 Speaker 3: that was just luck and not skill. So it's it's 231 00:13:36,520 --> 00:13:39,040 Speaker 3: extremely destructive for people that are trying to plan for 232 00:13:39,080 --> 00:13:42,840 Speaker 3: their future and their have their American dream. And it's 233 00:13:43,280 --> 00:13:48,240 Speaker 3: and it's driven by all kinds of biases, mistakes and 234 00:13:48,320 --> 00:13:53,400 Speaker 3: thinking and logic. And for example, one of one of 235 00:13:53,440 --> 00:13:58,679 Speaker 3: the biases that people have is hindsight bias. And they 236 00:13:59,080 --> 00:14:02,000 Speaker 3: maybe they picked twenty or thirty stocks and two or 237 00:14:02,000 --> 00:14:05,520 Speaker 3: three of them do really well, in hindsight, they'll remember 238 00:14:05,559 --> 00:14:08,760 Speaker 3: only the ones that did really well, and they'll forget 239 00:14:08,800 --> 00:14:11,679 Speaker 3: about the ten or twenty that they picked that didn't. 240 00:14:11,440 --> 00:14:13,480 Speaker 1: Do well, and they'll think, I'm pretty good at this, 241 00:14:14,000 --> 00:14:14,520 Speaker 1: and they'll. 242 00:14:14,360 --> 00:14:17,240 Speaker 2: Go, wow, I'm great at picking stocks. 243 00:14:17,679 --> 00:14:21,720 Speaker 3: But they never really calculated their total return and it 244 00:14:21,760 --> 00:14:26,400 Speaker 3: gives them which leads into another bias, which is over 245 00:14:26,440 --> 00:14:27,360 Speaker 3: confidence bias. 246 00:14:28,360 --> 00:14:29,960 Speaker 2: They feel way. 247 00:14:29,720 --> 00:14:34,840 Speaker 3: More confident in their abilities than they actually are. And 248 00:14:34,880 --> 00:14:37,200 Speaker 3: we do a little we do a little game in 249 00:14:37,320 --> 00:14:41,800 Speaker 3: class where we'll have people stand up. You know, what 250 00:14:41,920 --> 00:14:45,120 Speaker 3: de style do you fall in for your driving abilities? 251 00:14:45,520 --> 00:14:47,320 Speaker 3: You know, are you in the bottom. 252 00:14:46,960 --> 00:14:49,040 Speaker 2: Ten percent the top ten percent? 253 00:14:49,600 --> 00:14:52,640 Speaker 3: And if you ask them, ninety five percent of the 254 00:14:52,640 --> 00:14:56,200 Speaker 3: people think they're above average in their driving skills, So 255 00:14:56,640 --> 00:15:03,440 Speaker 3: about forty five percent are seriously delusional. But we make 256 00:15:03,480 --> 00:15:06,040 Speaker 3: the same thing with investing our investing ability. 257 00:15:06,520 --> 00:15:09,280 Speaker 1: Yeah, and in fact, there are many many cognitive biases, 258 00:15:09,440 --> 00:15:13,280 Speaker 1: and psychologists and neuroscience have gone through and named and 259 00:15:13,320 --> 00:15:16,800 Speaker 1: identified us so many of these almost two hundred probably, 260 00:15:16,840 --> 00:15:22,120 Speaker 1: but you point out several besides hindsight and over confidence, 261 00:15:22,200 --> 00:15:24,760 Speaker 1: what are others that affect the way that people invest 262 00:15:24,800 --> 00:15:25,880 Speaker 1: their money? 263 00:15:26,440 --> 00:15:30,360 Speaker 3: One of the worst most destructive is hurting. 264 00:15:30,080 --> 00:15:32,680 Speaker 2: Bias, as in h er D. 265 00:15:33,880 --> 00:15:39,080 Speaker 3: Yeah, yeah, hurting, So, you know, great for Zebra, really 266 00:15:39,160 --> 00:15:45,160 Speaker 3: bad for investors. And the psychology behind is that if 267 00:15:45,240 --> 00:15:50,440 Speaker 3: everybody's doing it, it must be right and it must 268 00:15:50,440 --> 00:15:51,720 Speaker 3: be safe. 269 00:15:51,920 --> 00:15:53,640 Speaker 2: And that's how bubbles happen. 270 00:15:54,400 --> 00:15:57,360 Speaker 3: If you look from like ninety five to two thousand, 271 00:15:57,400 --> 00:15:59,360 Speaker 3: s and P five stocks made twenty two percent for 272 00:15:59,440 --> 00:16:04,680 Speaker 3: five years in a row. Tech stocks made forty five. 273 00:16:03,640 --> 00:16:04,320 Speaker 2: Years in a row. 274 00:16:04,840 --> 00:16:07,680 Speaker 3: So everybody loaded up on tech stocks, loaded up on 275 00:16:08,240 --> 00:16:11,600 Speaker 3: you know, based on this hurting bias if their friends 276 00:16:11,640 --> 00:16:14,960 Speaker 3: are doing it. It's it's almost kind of immature, remember 277 00:16:15,000 --> 00:16:18,600 Speaker 3: like high school, you know, where peer pressure. Everybody's doing 278 00:16:18,640 --> 00:16:20,960 Speaker 3: it, it must be the right thing to do. And then 279 00:16:21,200 --> 00:16:25,200 Speaker 3: people are left, you know, stunned when they lose textlocks 280 00:16:25,200 --> 00:16:28,600 Speaker 3: lost seventy five percent of all their value. These these 281 00:16:28,600 --> 00:16:33,160 Speaker 3: are these are not inconsequential results from these biases. 282 00:16:33,200 --> 00:16:34,120 Speaker 2: They can be severe. 283 00:16:34,960 --> 00:16:49,920 Speaker 1: Yeah, And one of the things that you mentioned that 284 00:16:50,080 --> 00:16:54,000 Speaker 1: really struck me was this issue that no company is 285 00:16:54,040 --> 00:16:55,200 Speaker 1: too big to fail. 286 00:16:55,480 --> 00:16:55,760 Speaker 2: Yeah. 287 00:16:55,800 --> 00:17:01,200 Speaker 3: So another bias that people have is familiarity bias. We 288 00:17:01,280 --> 00:17:05,440 Speaker 3: mistakenly think that the things that we're familiar with are 289 00:17:05,480 --> 00:17:11,359 Speaker 3: safe and our good investments. So every when I go 290 00:17:11,400 --> 00:17:14,480 Speaker 3: around and do different speaking engagements, every town seems like 291 00:17:14,520 --> 00:17:19,040 Speaker 3: it has its own, you know, familiar familiarity bias. In Cincinnati, 292 00:17:19,040 --> 00:17:20,919 Speaker 3: where I used to live, it was Procter and Gamble. 293 00:17:20,960 --> 00:17:21,640 Speaker 2: That was their home. 294 00:17:22,520 --> 00:17:25,320 Speaker 3: And I had, you know, an investor some years ago. 295 00:17:25,359 --> 00:17:28,280 Speaker 3: They were only six months from retirement and there I said, 296 00:17:28,320 --> 00:17:30,080 Speaker 3: you know, you really should just put this in cash, 297 00:17:30,119 --> 00:17:32,119 Speaker 3: wait till you retire and diversify it, because you have 298 00:17:32,160 --> 00:17:35,719 Speaker 3: it all in one once thought, And the answer was, 299 00:17:35,840 --> 00:17:38,960 Speaker 3: oh no, it's I worked there for thirty five years. 300 00:17:39,000 --> 00:17:39,880 Speaker 2: I know the CEO. 301 00:17:40,040 --> 00:17:45,359 Speaker 3: We're internationally diversified, and they knew the academics, which says diverse, 302 00:17:45,440 --> 00:17:49,080 Speaker 3: five diversified, diversify. And six months later they had lost. 303 00:17:49,280 --> 00:17:51,439 Speaker 3: They had a five million dollar portfolio. They lost two 304 00:17:51,480 --> 00:17:55,560 Speaker 3: and a half million dollars. And just because they were familiar. 305 00:17:55,640 --> 00:17:58,240 Speaker 3: I met a man recently in one of our classes 306 00:17:58,280 --> 00:18:02,480 Speaker 3: with well tens of millions in Boeing, and he said, no, 307 00:18:02,560 --> 00:18:03,639 Speaker 3: I'm not going to diversify. 308 00:18:03,680 --> 00:18:06,199 Speaker 2: I know Boeing. I worked there for thirty years. I 309 00:18:06,240 --> 00:18:08,040 Speaker 2: have all my money there, you know. 310 00:18:08,119 --> 00:18:11,639 Speaker 3: And Boeing literally made an airplane that wrecked itself on 311 00:18:11,760 --> 00:18:15,399 Speaker 3: the autopilot came on, and then they had doors flying 312 00:18:15,400 --> 00:18:16,320 Speaker 3: off of their airplanes. 313 00:18:16,359 --> 00:18:18,280 Speaker 2: And then they had violations. 314 00:18:18,280 --> 00:18:23,480 Speaker 3: They had twenty billion dollars of contracts canceled. So what 315 00:18:23,520 --> 00:18:26,480 Speaker 3: I what I tried to coach investors is no matter 316 00:18:26,520 --> 00:18:31,240 Speaker 3: how safe you think that company is, no company is safe. 317 00:18:31,760 --> 00:18:36,000 Speaker 3: No company by itself is impregnable, and. 318 00:18:35,280 --> 00:18:36,840 Speaker 2: And any of them can go bankrupt. 319 00:18:36,880 --> 00:18:39,640 Speaker 3: I know it sounds ludicrous to think Apple could go bankrupt, 320 00:18:39,680 --> 00:18:41,600 Speaker 3: but eventually somebody will take Apple out. 321 00:18:42,920 --> 00:18:46,080 Speaker 1: Yeah. What was the Dutch East India Company? 322 00:18:46,359 --> 00:18:48,439 Speaker 2: Yeah, so it was the Dutch East India Company. 323 00:18:48,480 --> 00:18:52,719 Speaker 3: They had they paid an eighteen percent, dived in for 324 00:18:52,800 --> 00:18:59,120 Speaker 3: two hundred years, and they had their own army. 325 00:18:58,280 --> 00:19:02,200 Speaker 2: They had their own warships, they had their own navy. Uh. 326 00:19:02,280 --> 00:19:04,800 Speaker 3: And then in the seventeen hundreds they just went belly 327 00:19:04,880 --> 00:19:06,480 Speaker 3: up and everybody lost all their money. 328 00:19:06,920 --> 00:19:07,160 Speaker 2: Uh. 329 00:19:07,640 --> 00:19:11,240 Speaker 3: It was bigger than Apple, bigger than Google, bigger than Tesla. 330 00:19:12,040 --> 00:19:14,480 Speaker 2: Uh Uh it was. It was, for its. 331 00:19:14,320 --> 00:19:17,080 Speaker 3: Time and for all age, the the largest company that 332 00:19:17,119 --> 00:19:17,800 Speaker 3: ever existed. 333 00:19:18,040 --> 00:19:20,960 Speaker 1: Right, And people felt at the time there's no possibility 334 00:19:21,080 --> 00:19:23,960 Speaker 1: they were worth than modern dollars over a trillion, right, 335 00:19:24,040 --> 00:19:24,560 Speaker 1: something like seven. 336 00:19:26,000 --> 00:19:29,480 Speaker 2: Yeah, I mean just an incredible amount of value. Uh. 337 00:19:29,520 --> 00:19:31,000 Speaker 2: And then they got they got killed. 338 00:19:31,320 --> 00:19:33,119 Speaker 1: Right, so if they can go out of business, Apple 339 00:19:33,160 --> 00:19:36,160 Speaker 1: could go out of business Google, any of these right 340 00:19:37,040 --> 00:19:38,160 Speaker 1: when I when I grew. 341 00:19:38,040 --> 00:19:43,360 Speaker 4: Up, the big one was, uh was Kodak and they 342 00:19:43,400 --> 00:19:47,320 Speaker 4: had they had remember the drive up you know Kodak, 343 00:19:47,480 --> 00:19:50,600 Speaker 4: you know thing where you get your pictures developed. 344 00:19:50,600 --> 00:19:53,959 Speaker 3: And in one day and they even theyd they even 345 00:19:54,000 --> 00:19:58,280 Speaker 3: invented the digital camera and the CEO said, no, we're 346 00:19:58,280 --> 00:20:00,919 Speaker 3: not going to do that U because we're a paper 347 00:20:00,960 --> 00:20:03,919 Speaker 3: and chemical company. They had ninety five percent of all 348 00:20:03,960 --> 00:20:07,359 Speaker 3: the photo development, they had eighty five percent of all 349 00:20:07,400 --> 00:20:09,680 Speaker 3: the cameras sold, and they went. 350 00:20:09,560 --> 00:20:10,520 Speaker 2: And they went bankrupt. 351 00:20:11,359 --> 00:20:16,040 Speaker 3: Same thing with Blockbuster Netflix Netflix for forty million dollars. 352 00:20:16,080 --> 00:20:19,520 Speaker 3: Tried to get Blockbuster to buy them out, and Blockbuster said, no, 353 00:20:19,560 --> 00:20:21,320 Speaker 3: we're not going to buy you out. You know we 354 00:20:21,760 --> 00:20:25,280 Speaker 3: have we have fifteen hundred brick and mortar buildings and 355 00:20:25,400 --> 00:20:26,600 Speaker 3: that's our business model. 356 00:20:26,680 --> 00:20:30,520 Speaker 2: And of course they went under. Who got it? Okay? 357 00:20:30,560 --> 00:20:34,679 Speaker 1: So foreign investor the idea that hey, everybody's investing in 358 00:20:34,720 --> 00:20:37,200 Speaker 1: this company and it's safe, I should put my money 359 00:20:37,200 --> 00:20:40,240 Speaker 1: in the Dutch East India company or whatever that can't 360 00:20:41,240 --> 00:20:43,840 Speaker 1: that's not a good strategy. And in fact, by the way, 361 00:20:44,560 --> 00:20:49,359 Speaker 1: even very smart people can go wrong here. So Isaac Newton, 362 00:20:50,080 --> 00:20:51,320 Speaker 1: what did he invest in? 363 00:20:51,920 --> 00:20:56,080 Speaker 3: So he he invested in the south Sea bubble, So 364 00:20:56,119 --> 00:21:03,119 Speaker 3: you got Newton massive IQ obviously created discovered gravity, calculated 365 00:21:03,119 --> 00:21:07,639 Speaker 3: the celestial movements through the dynamic laws of motion. But 366 00:21:07,800 --> 00:21:10,440 Speaker 3: he got sucked in because all of his buddies were 367 00:21:10,480 --> 00:21:14,400 Speaker 3: in it. Everybody was investing in the south Sea company. 368 00:21:15,280 --> 00:21:18,760 Speaker 3: And he lost the equivalent of three million dollars in 369 00:21:18,840 --> 00:21:23,439 Speaker 3: today's dollars. And it's not just the money, it's the 370 00:21:23,520 --> 00:21:28,160 Speaker 3: emotional toll that it takes on people. And he too, 371 00:21:28,240 --> 00:21:32,200 Speaker 3: his dying day regretted and had remorse and sadness over 372 00:21:32,240 --> 00:21:34,800 Speaker 3: the fact that he had squandered so much of his wealth. 373 00:21:35,920 --> 00:21:37,880 Speaker 2: And I call this attribution error. 374 00:21:39,119 --> 00:21:41,440 Speaker 3: We think that because we're really good in one thing, 375 00:21:42,560 --> 00:21:47,679 Speaker 3: that skill must transfer to another thing, and especially in investing, 376 00:21:47,720 --> 00:21:51,000 Speaker 3: people think, well, I'm a brain surgeon or I'm a 377 00:21:50,280 --> 00:21:54,600 Speaker 3: neuroscientist or whatever, so you know, I'm going to automatically 378 00:21:54,600 --> 00:21:55,640 Speaker 3: be good at this other thing. 379 00:21:55,680 --> 00:22:00,520 Speaker 2: But I give him the example. No one would if 380 00:22:00,560 --> 00:22:00,800 Speaker 2: you had. 381 00:22:01,000 --> 00:22:04,840 Speaker 3: You know, those movies where the pilots of the plane 382 00:22:05,000 --> 00:22:07,639 Speaker 3: get some kind of stomach problem or whatever, and they 383 00:22:07,680 --> 00:22:10,960 Speaker 3: get this, you know, incapacitated, and they ask for someone 384 00:22:11,000 --> 00:22:13,840 Speaker 3: to come and fly the plane, and then a passenger 385 00:22:14,040 --> 00:22:17,480 Speaker 3: lands the plane. I looked up to statistics. That has 386 00:22:17,840 --> 00:22:24,440 Speaker 3: never happened, not one single time. And if you ask 387 00:22:24,520 --> 00:22:27,560 Speaker 3: pilots what are the odds of that happening, they are zero. 388 00:22:28,000 --> 00:22:30,960 Speaker 3: There is no chance of a person that's not trained 389 00:22:31,000 --> 00:22:34,360 Speaker 3: to land it. But if you ask men could they 390 00:22:34,400 --> 00:22:37,120 Speaker 3: do it? Fifty percent of all men say they could 391 00:22:37,200 --> 00:22:44,600 Speaker 3: land that plane. Yeah, overconfidence and attribution error. 392 00:22:46,000 --> 00:22:48,360 Speaker 1: And what about the necessary lie bias? 393 00:22:49,040 --> 00:22:53,359 Speaker 3: Oh my gosh, this one has massive application, not only 394 00:22:53,400 --> 00:22:58,640 Speaker 3: to investing. So it's the thing that you do, uh, 395 00:22:59,600 --> 00:23:03,480 Speaker 3: before you do something that's imprudent. It's a lie that 396 00:23:03,520 --> 00:23:05,960 Speaker 3: you tell yourself to allow you to do it even 397 00:23:06,000 --> 00:23:10,800 Speaker 3: though you know you shouldn't. So it's like okay, for 398 00:23:10,920 --> 00:23:14,399 Speaker 3: an alcoholic, well just won't one won't hurt, you know, 399 00:23:15,200 --> 00:23:18,320 Speaker 3: one drink won't hurt. Or for a gambler and they're 400 00:23:18,359 --> 00:23:20,960 Speaker 3: in Vegas, well they're down twenty thousand dollars, but I'll 401 00:23:21,000 --> 00:23:24,400 Speaker 3: stop when I get I get I get even, or 402 00:23:24,680 --> 00:23:29,359 Speaker 3: you know, fitness area. You know, I'll you know, I 403 00:23:29,400 --> 00:23:31,760 Speaker 3: really want to lose thirty pounds, but that piece of 404 00:23:31,800 --> 00:23:32,560 Speaker 3: looks really good. 405 00:23:32,600 --> 00:23:34,160 Speaker 2: I'll start my diet tomorrow. 406 00:23:35,320 --> 00:23:38,720 Speaker 3: So it allows a person to take an imprudent behavior 407 00:23:39,240 --> 00:23:41,040 Speaker 3: and justify it with a lie. 408 00:23:42,760 --> 00:23:44,560 Speaker 2: And get away with it. Oh boy. 409 00:23:45,440 --> 00:23:49,119 Speaker 1: And so we're yoked with all these biases. They steer 410 00:23:49,200 --> 00:23:52,159 Speaker 1: our behavior. Even though we tend to think we're like 411 00:23:52,280 --> 00:23:55,639 Speaker 1: mister Spock and Star Trek, we're not at all. And 412 00:23:56,800 --> 00:23:59,800 Speaker 1: every bias comes with a story, right. 413 00:24:00,040 --> 00:24:04,720 Speaker 3: Yeah, it all, It all comes with the story, you know. 414 00:24:05,320 --> 00:24:07,560 Speaker 2: It's it's it's interesting to watch people. 415 00:24:08,000 --> 00:24:10,520 Speaker 3: One of the stories people have and it is the 416 00:24:10,560 --> 00:24:15,880 Speaker 3: perception that they're in control of their thinking. And this 417 00:24:15,960 --> 00:24:18,040 Speaker 3: is one of the exercises in the workshop. I write 418 00:24:18,040 --> 00:24:20,560 Speaker 3: about on the book that we really don't have as 419 00:24:20,640 --> 00:24:24,760 Speaker 3: much control as we think we do. And I got 420 00:24:24,800 --> 00:24:29,679 Speaker 3: a lot of this from your book, you know, but 421 00:24:29,800 --> 00:24:32,320 Speaker 3: for investors, they really feel like they have control. 422 00:24:32,440 --> 00:24:34,040 Speaker 2: And we do a couple exercises. 423 00:24:34,119 --> 00:24:37,840 Speaker 3: One is, you know, for thirty seconds, close your eyes 424 00:24:37,960 --> 00:24:43,000 Speaker 3: and don't think of anything, no self talk, no you know, 425 00:24:43,359 --> 00:24:45,600 Speaker 3: And if people are honest, at the end of the 426 00:24:45,600 --> 00:24:50,120 Speaker 3: thirty seconds, almost everybody has to raise their hand that 427 00:24:50,280 --> 00:24:53,959 Speaker 3: you know, their internal internal voice came back. So I said, well, 428 00:24:53,960 --> 00:24:57,359 Speaker 3: if you can't control even you can't even stop it. 429 00:24:57,440 --> 00:25:01,560 Speaker 3: You're definitely not in control of that inner voice. And 430 00:25:01,600 --> 00:25:04,399 Speaker 3: then it also shows up. It doesn't show up like 431 00:25:04,480 --> 00:25:07,000 Speaker 3: a cheerleader when you wake up in the morning, I'm 432 00:25:07,000 --> 00:25:07,639 Speaker 3: going to take on the. 433 00:25:07,680 --> 00:25:09,440 Speaker 2: Day and I'm going to create unbelievable things. 434 00:25:09,480 --> 00:25:12,560 Speaker 3: It's more like e or oh no, another day, and 435 00:25:13,200 --> 00:25:15,120 Speaker 3: I should work out, but it's raining. 436 00:25:15,200 --> 00:25:16,400 Speaker 2: I think we'll have a donut. 437 00:25:17,440 --> 00:25:19,919 Speaker 3: So and then we talk to ourselves, and that's a 438 00:25:19,920 --> 00:25:21,040 Speaker 3: bizarre thing in itself. 439 00:25:21,040 --> 00:25:23,199 Speaker 2: We debate ourselves and talk to ourselves. 440 00:25:23,280 --> 00:25:25,480 Speaker 3: Who's the person doing the talking and who's the person 441 00:25:25,560 --> 00:25:30,200 Speaker 3: doing the listening. And so people they feel like they 442 00:25:30,240 --> 00:25:33,280 Speaker 3: have all this control over their behavior and actions and investing, 443 00:25:34,040 --> 00:25:35,840 Speaker 3: and the reality is they just don't. 444 00:25:36,680 --> 00:25:36,960 Speaker 2: Okay. 445 00:25:37,000 --> 00:25:40,639 Speaker 1: So we talked about some biases, but even really basic 446 00:25:40,680 --> 00:25:46,200 Speaker 1: stuff like how an investor understands what is meant by 447 00:25:46,240 --> 00:25:49,680 Speaker 1: their average return? What's an example of the way that 448 00:25:49,680 --> 00:25:51,200 Speaker 1: that gets manipulated. 449 00:25:51,640 --> 00:25:53,960 Speaker 3: First of all, most investors have no idea what they've 450 00:25:54,000 --> 00:25:57,560 Speaker 3: actually earned or didn't earn over the last thirty years. 451 00:25:58,000 --> 00:26:02,639 Speaker 3: The best way to cowlate a rate of return is 452 00:26:02,880 --> 00:26:07,000 Speaker 3: time weighted and dollar weighted compound return. 453 00:26:07,119 --> 00:26:09,000 Speaker 2: And I don't expect anyone to understand any of that, 454 00:26:09,920 --> 00:26:13,320 Speaker 2: but what I will say is that it's very easy. 455 00:26:13,000 --> 00:26:18,240 Speaker 3: To misunderstand your rate of return. So let's say you 456 00:26:18,280 --> 00:26:21,000 Speaker 3: have an investment, because most people calculate their average rate 457 00:26:21,000 --> 00:26:21,639 Speaker 3: of return. 458 00:26:21,960 --> 00:26:23,040 Speaker 2: So let's say you start with. 459 00:26:22,960 --> 00:26:26,679 Speaker 3: One hundred thousand, and you get one hundred percent in 460 00:26:26,720 --> 00:26:30,240 Speaker 3: one year, and it goes up to two hundred thousand, 461 00:26:30,480 --> 00:26:34,760 Speaker 3: and then the next year you lose fifty percent and 462 00:26:34,800 --> 00:26:37,840 Speaker 3: it goes back down to one hundred thousand. Well, the 463 00:26:38,000 --> 00:26:41,679 Speaker 3: average rate of return is twenty five percent because you've 464 00:26:41,720 --> 00:26:45,840 Speaker 3: got one hundred minus fifty, which leaves you fifty divided 465 00:26:45,880 --> 00:26:47,960 Speaker 3: by two, which is twenty five percent. 466 00:26:48,760 --> 00:26:50,679 Speaker 2: But your real rate of return is zero. 467 00:26:51,840 --> 00:26:56,200 Speaker 3: And investors try to calculate their average rate of return, 468 00:26:56,480 --> 00:27:02,640 Speaker 3: but it's widely inaccurate and so so that just leads 469 00:27:02,680 --> 00:27:05,800 Speaker 3: to the overconfidence bias and all the other biases as well. 470 00:27:06,400 --> 00:27:10,439 Speaker 3: But in addition to the biases, investors also have to 471 00:27:10,480 --> 00:27:11,440 Speaker 3: deal with their instincts. 472 00:27:13,200 --> 00:27:16,960 Speaker 2: And instincts are for in life. 473 00:27:17,200 --> 00:27:19,800 Speaker 3: A lot of times they give you great signals like 474 00:27:20,280 --> 00:27:22,439 Speaker 3: if I'm out in the water and someone y'all's shark 475 00:27:22,480 --> 00:27:24,479 Speaker 3: and my instinct is to go in, that's, you know, 476 00:27:24,600 --> 00:27:29,000 Speaker 3: probably not a bad instinct. But they're driven by pleasure 477 00:27:29,119 --> 00:27:33,480 Speaker 3: and pain. So some things are pleasurable, Like maybe I 478 00:27:33,600 --> 00:27:36,000 Speaker 3: like chocolate covered peanuts, and if I have a small, 479 00:27:36,000 --> 00:27:38,960 Speaker 3: little handful, fine, But if I eat all who half 480 00:27:39,320 --> 00:27:43,399 Speaker 3: whole half pound bag of peanuts, bad news, chocolate covered peanuts, 481 00:27:43,480 --> 00:27:45,479 Speaker 3: I'm gonna get fat on a cholesterol gonna you know, 482 00:27:45,720 --> 00:27:47,119 Speaker 3: die eventually. 483 00:27:48,560 --> 00:27:50,560 Speaker 2: Same thing with pain. 484 00:27:50,760 --> 00:27:53,200 Speaker 3: Some you know, a lot of people will say exercise 485 00:27:53,320 --> 00:27:56,359 Speaker 3: is painful, and maybe for some people it is, but 486 00:27:56,400 --> 00:27:57,600 Speaker 3: it could also save your life. 487 00:27:57,640 --> 00:28:00,880 Speaker 2: Well, investing instincts are all always wrong. 488 00:28:01,240 --> 00:28:04,560 Speaker 3: When you lose some thirty percent in your equities, that's pain, 489 00:28:04,720 --> 00:28:07,240 Speaker 3: and people want to leave, they want to run, they 490 00:28:07,280 --> 00:28:10,800 Speaker 3: sell it, they go to whatever is high, and they're 491 00:28:10,800 --> 00:28:13,200 Speaker 3: always doing the exact opposite of what they should do. 492 00:28:14,240 --> 00:28:18,119 Speaker 3: They're chasing high returns, they're panicking when things go down, 493 00:28:18,960 --> 00:28:24,000 Speaker 3: and so the instincts are deadly for investors and they 494 00:28:24,720 --> 00:28:27,439 Speaker 3: run in the background and they don't even realize it's happening. 495 00:28:27,920 --> 00:28:32,840 Speaker 1: So what did you learn from the academics about investing. 496 00:28:33,040 --> 00:28:35,119 Speaker 3: The first thing I learned from the academics, and the 497 00:28:35,160 --> 00:28:37,080 Speaker 3: only reason I was willing to accept what they had 498 00:28:37,160 --> 00:28:42,240 Speaker 3: to say, was that I had done the speculating and gambling. 499 00:28:42,440 --> 00:28:44,880 Speaker 3: I actually was part of the problem. I was with 500 00:28:44,960 --> 00:28:47,760 Speaker 3: a broker dealer. They were telling me try to pick 501 00:28:47,800 --> 00:28:50,640 Speaker 3: the best stocks. They were telling me they could time 502 00:28:50,680 --> 00:28:53,000 Speaker 3: the market and get in and out. They were telling 503 00:28:53,000 --> 00:28:55,400 Speaker 3: me they had these great managers that could beat the market. 504 00:28:56,440 --> 00:28:59,720 Speaker 3: And I was investing my money that way, my family's money, 505 00:29:00,040 --> 00:29:03,240 Speaker 3: my client's money, and it wasn't working. And I went 506 00:29:03,240 --> 00:29:05,320 Speaker 3: to the broker dealer and I said, hey, this is broken. 507 00:29:05,400 --> 00:29:09,160 Speaker 3: This is people are getting hurt. And the president of 508 00:29:09,200 --> 00:29:11,600 Speaker 3: the broker dealer said, so what, just sell them something else. 509 00:29:11,720 --> 00:29:13,920 Speaker 2: What's your problem? 510 00:29:14,560 --> 00:29:17,560 Speaker 3: So I heard a debate between Donald Jackman of five 511 00:29:17,560 --> 00:29:21,400 Speaker 3: Star Money Management in Rex Singfeld, who had studied under 512 00:29:21,440 --> 00:29:25,280 Speaker 3: Eugene Fama at the University of Chicago, who's now a 513 00:29:25,320 --> 00:29:28,920 Speaker 3: Nobel Prize winner, and they taught me about. 514 00:29:28,760 --> 00:29:30,000 Speaker 2: Efficient market theory. 515 00:29:30,800 --> 00:29:33,600 Speaker 3: An efficient market theory means that the returns don't come 516 00:29:33,640 --> 00:29:38,239 Speaker 3: from great managers. The returns come from asset classes or 517 00:29:38,360 --> 00:29:43,680 Speaker 3: categories based on the cost of capital, which means a 518 00:29:43,720 --> 00:29:47,000 Speaker 3: company that is more risk long term should have a 519 00:29:47,080 --> 00:29:49,480 Speaker 3: higher return because they have a higher cost of raising 520 00:29:49,520 --> 00:29:53,600 Speaker 3: capital to fund their company. And so if you look historically, 521 00:29:53,640 --> 00:29:58,320 Speaker 3: things like large stocks historically around ten percent, small stocks 522 00:29:58,440 --> 00:30:03,560 Speaker 3: historically twelve percent, small value stocks fourteen percent. So the 523 00:30:03,640 --> 00:30:08,240 Speaker 3: return comes from the market, not the manager. So the 524 00:30:08,280 --> 00:30:11,640 Speaker 3: first job is to eliminate gambling and then focus on 525 00:30:11,680 --> 00:30:15,960 Speaker 3: the academics to develop a portfolio with the highest expector 526 00:30:16,040 --> 00:30:19,880 Speaker 3: return in the lowest amount of volatility. And David, I've 527 00:30:20,360 --> 00:30:24,120 Speaker 3: I've been teaching financial advisors about this for thirty four years. 528 00:30:24,280 --> 00:30:25,800 Speaker 2: And they still don't get it. 529 00:30:26,760 --> 00:30:30,560 Speaker 3: And it's really it's a sad thing, and it's tragic 530 00:30:31,160 --> 00:30:33,560 Speaker 3: because a lot of people say they do it, but 531 00:30:33,680 --> 00:30:38,040 Speaker 3: then their own biases, the advisors biases, and their instincts 532 00:30:38,040 --> 00:30:41,760 Speaker 3: and their emotions take over and it destroys the process. 533 00:30:42,280 --> 00:30:57,200 Speaker 1: Ough, So what are the lessons that come out of 534 00:30:57,480 --> 00:30:59,480 Speaker 1: you look at all this stuff, the Nobel laureates and 535 00:30:59,520 --> 00:31:03,520 Speaker 1: economic and the things they discover, the lessons they learn. 536 00:31:04,000 --> 00:31:05,479 Speaker 1: How do you summarize all that? 537 00:31:06,040 --> 00:31:07,040 Speaker 2: The first thing is. 538 00:31:09,000 --> 00:31:11,840 Speaker 3: Most people, the way they relate to their money, especially 539 00:31:11,960 --> 00:31:16,200 Speaker 3: their portfolios, is through speculating and gambling, and they don't 540 00:31:16,200 --> 00:31:20,160 Speaker 3: really mind because they don't really have a purpose for 541 00:31:20,200 --> 00:31:22,880 Speaker 3: their money that they've acknowledged and they focus on. So 542 00:31:23,000 --> 00:31:26,520 Speaker 3: in the lack of focusing on a purpose, the default 543 00:31:26,560 --> 00:31:27,680 Speaker 3: position is just. 544 00:31:27,760 --> 00:31:29,680 Speaker 2: Getting more money. 545 00:31:30,600 --> 00:31:34,160 Speaker 3: Now, the problem with just getting more money is that 546 00:31:34,440 --> 00:31:39,160 Speaker 3: just getting more money can't make you happy. As a 547 00:31:39,160 --> 00:31:42,280 Speaker 3: matter of fact, as a practitioner working with thousands of people, 548 00:31:43,280 --> 00:31:46,760 Speaker 3: actually getting more money can have the opposite effect. It 549 00:31:46,800 --> 00:31:51,560 Speaker 3: creates more doubt, more fear, more responsibility, jealousy within the family, 550 00:31:53,640 --> 00:31:56,440 Speaker 3: more stress and anxiety about how you're going to invest 551 00:31:56,480 --> 00:32:00,280 Speaker 3: it or what you're gonna do with it. So money 552 00:32:00,280 --> 00:32:02,200 Speaker 3: does not make you happy, and you can think about 553 00:32:02,200 --> 00:32:06,440 Speaker 3: people like Howard Hughes and Elvis Presley and Marilyn Monroe. Obviously, money, 554 00:32:06,480 --> 00:32:10,360 Speaker 3: power and fame doesn't equal happiness. And the reason it 555 00:32:10,400 --> 00:32:13,760 Speaker 3: doesn't is because you might get that temporary thrill from 556 00:32:13,800 --> 00:32:16,880 Speaker 3: that new car or that piece of jewelry or that 557 00:32:16,920 --> 00:32:21,040 Speaker 3: new house, but it's temporary in nature and is not lasting. 558 00:32:22,960 --> 00:32:25,400 Speaker 3: But that's what keeps people gambling with their money because 559 00:32:25,440 --> 00:32:27,240 Speaker 3: they figure if they can take their million and turn 560 00:32:27,280 --> 00:32:29,440 Speaker 3: it into two million, they'll all of a sudden be happy. 561 00:32:29,560 --> 00:32:30,680 Speaker 2: Well, it's not true. 562 00:32:31,320 --> 00:32:34,080 Speaker 3: And I discovered that when I was twenty seven working 563 00:32:34,120 --> 00:32:36,960 Speaker 3: with investors. So I spend my whole life trying to 564 00:32:36,960 --> 00:32:40,280 Speaker 3: help people build their money, and then the net result. 565 00:32:40,000 --> 00:32:44,280 Speaker 2: Is no happiness. It's like, wow, this is darable. 566 00:32:45,440 --> 00:32:49,000 Speaker 3: So one of the things we do is we help 567 00:32:49,040 --> 00:32:51,360 Speaker 3: people break through the no talk rule, because people have 568 00:32:51,440 --> 00:32:54,760 Speaker 3: terrible shame and guild about money also, and they often 569 00:32:54,880 --> 00:32:57,560 Speaker 3: learn the no talk rule about it from their parents, 570 00:32:58,000 --> 00:32:59,080 Speaker 3: and so breaking through. 571 00:32:58,960 --> 00:33:02,000 Speaker 1: That no talk deals the no talk rule is yeah, 572 00:33:02,040 --> 00:33:04,360 Speaker 1: so the no talk. 573 00:33:04,200 --> 00:33:04,720 Speaker 2: Rule is that. 574 00:33:05,240 --> 00:33:08,360 Speaker 3: And usually in families there's there's a no talk rule 575 00:33:08,360 --> 00:33:09,480 Speaker 3: about the no talk rule. 576 00:33:10,160 --> 00:33:11,320 Speaker 2: Uh So, so. 577 00:33:13,560 --> 00:33:16,360 Speaker 3: You know, the next door neighbor gets a new car 578 00:33:16,840 --> 00:33:19,880 Speaker 3: and Johnny says to Mom, well, I wonder how much 579 00:33:19,920 --> 00:33:23,040 Speaker 3: that car cost. I'm gonna go ask them, And they're like, 580 00:33:23,080 --> 00:33:25,760 Speaker 3: don't you do that. Don't you dare ask somebody what 581 00:33:25,800 --> 00:33:29,680 Speaker 3: their car costs? You know, that's that's impolite, that's rude. 582 00:33:29,680 --> 00:33:33,120 Speaker 3: We don't talk about stuff like that. And and so 583 00:33:34,000 --> 00:33:36,520 Speaker 3: normally if you look at look at things that people 584 00:33:36,560 --> 00:33:38,840 Speaker 3: won't talk about, it's usually because they feel shame and 585 00:33:38,880 --> 00:33:42,640 Speaker 3: guilt around it. And so then there's this this this 586 00:33:43,920 --> 00:33:48,240 Speaker 3: the stigma about talking about money, and it's very destructive. 587 00:33:49,240 --> 00:33:51,080 Speaker 3: And people are taught that if you're going to invest, 588 00:33:51,120 --> 00:33:54,240 Speaker 3: you do it alone, either isolated by yourself on a computer, 589 00:33:54,720 --> 00:33:57,600 Speaker 3: or maybe just with one other advisor. It's never ever 590 00:33:57,920 --> 00:34:00,120 Speaker 3: thought of, maybe we should do this as a community, 591 00:34:00,120 --> 00:34:02,560 Speaker 3: have a class in training and workshop and people could 592 00:34:02,840 --> 00:34:05,360 Speaker 3: talk about their life and their money and their experience, 593 00:34:06,360 --> 00:34:09,040 Speaker 3: which I found is actually the most the most powerful 594 00:34:09,080 --> 00:34:13,400 Speaker 3: way so the in the without a lack of purpose, 595 00:34:14,160 --> 00:34:19,719 Speaker 3: then people are are thrown to investing, picking timing, and 596 00:34:19,760 --> 00:34:23,680 Speaker 3: then today you have all these toxic investments like bitcoin 597 00:34:24,160 --> 00:34:29,480 Speaker 3: that people get sucked into gambling with and they it 598 00:34:29,560 --> 00:34:31,480 Speaker 3: in a lot of areas of life. You can make 599 00:34:31,520 --> 00:34:33,880 Speaker 3: a single mistake if you've lost forty pounds and you 600 00:34:33,880 --> 00:34:36,439 Speaker 3: go have a piece of cheesecake at dinner. Okay, fine, 601 00:34:36,520 --> 00:34:38,399 Speaker 3: you're probably not going to have a heart attack that night. 602 00:34:38,800 --> 00:34:41,760 Speaker 3: That's not how investing works. You can make one mistake 603 00:34:41,840 --> 00:34:44,560 Speaker 3: on anyone given day and you can wipe out forty 604 00:34:44,600 --> 00:34:48,560 Speaker 3: five years of hard work and investing. And that's what 605 00:34:48,640 --> 00:34:55,560 Speaker 3: makes all these biases so critical. And if the instincts 606 00:34:55,640 --> 00:34:58,120 Speaker 3: and the biases weren't enough then you also have to 607 00:34:58,120 --> 00:35:02,880 Speaker 3: deal with emotion. So you have this cocktail of emotions, instincts, 608 00:35:02,880 --> 00:35:05,480 Speaker 3: and biases whip sawing you all over the place as 609 00:35:05,520 --> 00:35:10,439 Speaker 3: an investor with no academic understanding of how markets really work, 610 00:35:11,200 --> 00:35:11,680 Speaker 3: and you. 611 00:35:11,640 --> 00:35:14,600 Speaker 2: Can see how it can be so dangerous for people. 612 00:35:15,760 --> 00:35:19,040 Speaker 1: Excellent, by the way, I think, I want to step 613 00:35:19,120 --> 00:35:22,320 Speaker 1: back on one point though, What were the five discoveries 614 00:35:22,320 --> 00:35:24,279 Speaker 1: that you were able to summarize that of. 615 00:35:24,280 --> 00:35:26,000 Speaker 2: All this, Yeah, so. 616 00:35:27,560 --> 00:35:32,360 Speaker 3: Discovery number one. Stock picking in all of its forms 617 00:35:33,200 --> 00:35:37,720 Speaker 3: is destructive behavior. Now, when I coach the coach people 618 00:35:37,920 --> 00:35:40,520 Speaker 3: on this stuff, they have a massive amount of cognitive 619 00:35:40,560 --> 00:35:43,400 Speaker 3: dissonance because they've been doing it for twenty or thirty years, 620 00:35:43,600 --> 00:35:47,280 Speaker 3: so when they first hear it's jarring. So stock picking 621 00:35:47,320 --> 00:35:51,920 Speaker 3: in all of its forms is destructive behavior. Market timing 622 00:35:52,040 --> 00:35:54,399 Speaker 3: trying to get in and out of the market at 623 00:35:54,440 --> 00:35:59,160 Speaker 3: the best timing. That's destructive behavior. It actually increases risk 624 00:36:00,160 --> 00:36:05,240 Speaker 3: invariance in a portfolio. Track record investing trying to find 625 00:36:05,320 --> 00:36:08,000 Speaker 3: the manager that beat the market in the past with 626 00:36:08,080 --> 00:36:10,240 Speaker 3: the hopes that they'll continue to do it in the future. 627 00:36:11,480 --> 00:36:18,200 Speaker 3: Destructive behavior for most experienced investors that have been around 628 00:36:18,200 --> 00:36:20,799 Speaker 3: for a while. I have done one or more of 629 00:36:20,840 --> 00:36:26,160 Speaker 3: these behaviors in the past, and left to my own devices, 630 00:36:26,239 --> 00:36:30,680 Speaker 3: will repeat them without a disciplined discipline coach to help 631 00:36:30,680 --> 00:36:33,680 Speaker 3: me through it. And then finally the Koudo gra I 632 00:36:33,719 --> 00:36:35,400 Speaker 3: always tell people, if you can get this one, you 633 00:36:35,520 --> 00:36:40,279 Speaker 3: automatically get the other ones. It is abjectly absurd to 634 00:36:40,360 --> 00:36:44,760 Speaker 3: speculate and gamble with my money, especially once I've created 635 00:36:44,760 --> 00:36:49,080 Speaker 3: a purpose that's greater than money itself. And those are 636 00:36:49,120 --> 00:36:53,160 Speaker 3: the five discoveries from the academic research that I've been 637 00:36:53,320 --> 00:36:56,160 Speaker 3: able to work with these researchers over the last thirty 638 00:36:56,160 --> 00:36:56,800 Speaker 3: four years. 639 00:36:57,040 --> 00:37:00,719 Speaker 1: You talked about this thing where you ask people to 640 00:37:01,040 --> 00:37:04,200 Speaker 1: pick three stocks that they want to invest in, So 641 00:37:04,239 --> 00:37:05,000 Speaker 1: tell us about that. 642 00:37:06,360 --> 00:37:10,040 Speaker 3: So in the class, I was trying to think of away, 643 00:37:10,560 --> 00:37:14,280 Speaker 3: because you go through these biases, and we have exercises 644 00:37:14,680 --> 00:37:17,960 Speaker 3: and we take people through the biases and the emotions 645 00:37:17,960 --> 00:37:22,080 Speaker 3: and the instincts and the whole thing, say familiarity bias, 646 00:37:22,200 --> 00:37:26,200 Speaker 3: size bias, hindsight bias, hurting bias. And I was trying 647 00:37:26,200 --> 00:37:29,640 Speaker 3: to think, how can I have an example of this working. 648 00:37:30,320 --> 00:37:33,799 Speaker 3: So I have people write down three stocks, write down 649 00:37:33,840 --> 00:37:37,839 Speaker 3: three stocks, and then I and then I have them 650 00:37:37,880 --> 00:37:46,640 Speaker 3: stand up and I read off the five biggest stocks Amazon, Tesla, Meta, Facebook. 651 00:37:47,719 --> 00:37:48,360 Speaker 2: In NA video. 652 00:37:49,000 --> 00:37:52,080 Speaker 3: And when I'm done reading off the list of the 653 00:37:52,120 --> 00:37:57,040 Speaker 3: biggest five, ninety five percent of the people are standing. 654 00:37:58,680 --> 00:38:01,200 Speaker 2: And I said, guys, I just went over there. There 655 00:38:01,239 --> 00:38:06,239 Speaker 2: are over twenty thousand stocks in the US market. You 656 00:38:06,280 --> 00:38:08,480 Speaker 2: could buy. 657 00:38:08,120 --> 00:38:13,760 Speaker 3: Twenty thousand, and you guys still picked the top only five. 658 00:38:15,800 --> 00:38:19,200 Speaker 3: And I tell them it's because you didn't pick the stocks. 659 00:38:20,360 --> 00:38:26,640 Speaker 3: The stocks picked you through your screens and your biases. 660 00:38:26,960 --> 00:38:29,480 Speaker 3: All you could see, even though I spent a day 661 00:38:29,480 --> 00:38:30,520 Speaker 3: and a half. 662 00:38:32,080 --> 00:38:33,960 Speaker 2: Teaching you about this stuff, you. 663 00:38:34,040 --> 00:38:37,879 Speaker 3: Still picked the biggest ones you're the most familiar with 664 00:38:38,320 --> 00:38:40,960 Speaker 3: that are hurting and everybody else is doing the exact 665 00:38:40,960 --> 00:38:41,359 Speaker 3: same thing. 666 00:38:41,800 --> 00:38:43,680 Speaker 2: Right. But now, why is that a problem? 667 00:38:43,760 --> 00:38:46,800 Speaker 1: Because you might say, look, you know what's the problem 668 00:38:46,800 --> 00:38:49,200 Speaker 1: with hurting if I go for this big stock. 669 00:38:49,680 --> 00:38:53,000 Speaker 2: Yeah, the problem is you're not diversified. 670 00:38:54,360 --> 00:38:57,879 Speaker 3: And when we analyze portfolios, I call them Frankenstein portfolios. 671 00:38:58,200 --> 00:39:00,400 Speaker 3: They might have an index fun here and there, then 672 00:39:00,440 --> 00:39:03,480 Speaker 3: they have some active managers and then they're loaded up 673 00:39:03,520 --> 00:39:04,160 Speaker 3: on those. 674 00:39:04,000 --> 00:39:05,560 Speaker 2: Top five stocks. 675 00:39:06,800 --> 00:39:11,040 Speaker 3: And the problem is number Since we discussed that number one, 676 00:39:11,239 --> 00:39:15,440 Speaker 3: any company can fail. I remember two thousand and eight 677 00:39:15,480 --> 00:39:19,279 Speaker 3: to two thousand and nine, trillions of dollars disappeared in 678 00:39:19,320 --> 00:39:23,400 Speaker 3: companies like Enron, WorldCom. Everybody had all their money in 679 00:39:23,440 --> 00:39:26,600 Speaker 3: those big companies. They thought they were a bulletproof. Even 680 00:39:26,640 --> 00:39:29,560 Speaker 3: GM went bankrupt in two thousand and eight. In two 681 00:39:29,640 --> 00:39:33,200 Speaker 3: thousand and nine, so you know, the problem is you 682 00:39:33,200 --> 00:39:37,120 Speaker 3: have massive amounts of risk without any expected additional return 683 00:39:38,280 --> 00:39:41,439 Speaker 3: versus for that part of your portfolio. Maybe you're gonna 684 00:39:41,440 --> 00:39:43,600 Speaker 3: put fifteen percent in large companies. You could just own 685 00:39:43,640 --> 00:39:45,520 Speaker 3: the S and P five hundred and I'll own all 686 00:39:45,600 --> 00:39:49,399 Speaker 3: five hundred, not you know, playing Russian roulette by picking 687 00:39:49,480 --> 00:39:53,000 Speaker 3: out just five and so the damage is, you know, 688 00:39:53,160 --> 00:39:55,759 Speaker 3: like like Newton and showing this. Newton thought he had 689 00:39:55,760 --> 00:39:58,200 Speaker 3: it figure it out too. He was stock picking, he 690 00:39:58,280 --> 00:40:02,200 Speaker 3: was market timing, he was tracked record investing. And I 691 00:40:02,200 --> 00:40:04,480 Speaker 3: don't think anybody in my class is smarter than Newton. 692 00:40:06,239 --> 00:40:08,880 Speaker 1: But it's more than that, isn't it, Because the return 693 00:40:08,960 --> 00:40:12,360 Speaker 1: on those big stocks is much less than the return 694 00:40:12,440 --> 00:40:15,359 Speaker 1: on other stocks in the market as well. Right In 695 00:40:15,360 --> 00:40:18,840 Speaker 1: other words, once you know, hey, everyone's talking about X, 696 00:40:18,880 --> 00:40:21,600 Speaker 1: and you buy it, then it's then it's too late already. 697 00:40:21,880 --> 00:40:24,720 Speaker 3: Yeah, if you look at let's say that you loaded 698 00:40:24,800 --> 00:40:28,279 Speaker 3: up on seven. They call it the Magnificent seven, and 699 00:40:28,360 --> 00:40:31,000 Speaker 3: you're referring to a graph in the book. It says, well, okay, 700 00:40:31,080 --> 00:40:35,600 Speaker 3: these magnificent seven in hindsight, which you can't go back 701 00:40:35,600 --> 00:40:38,480 Speaker 3: in a time machine and buy now. In hindsight, they 702 00:40:38,520 --> 00:40:43,160 Speaker 3: made twenty two percent higher return than the market hypothetically 703 00:40:43,160 --> 00:40:47,319 Speaker 3: over the last three years. So everybody is based on 704 00:40:47,400 --> 00:40:50,280 Speaker 3: recency bias. Another one we didn't talk about yet. Based 705 00:40:50,320 --> 00:40:53,280 Speaker 3: on the recent performance just over the last three years, 706 00:40:53,719 --> 00:40:56,799 Speaker 3: everybody extrapolates that out and says, oh, they're going to 707 00:40:56,800 --> 00:40:58,799 Speaker 3: continue to beat the market the way they have over 708 00:40:58,800 --> 00:41:01,320 Speaker 3: the last three years. But the graph in the book 709 00:41:01,400 --> 00:41:04,439 Speaker 3: shows that on average over the next ten years, those 710 00:41:04,480 --> 00:41:09,759 Speaker 3: stocks that got hot underperform the market dramatically over the 711 00:41:09,800 --> 00:41:12,759 Speaker 3: next ten years. So that three year you can't go 712 00:41:12,840 --> 00:41:14,880 Speaker 3: back at a time machine and buy those three years, 713 00:41:15,680 --> 00:41:18,680 Speaker 3: and if you chase those returns, chances are you'll dramatically 714 00:41:18,760 --> 00:41:19,760 Speaker 3: underperform the market. 715 00:41:19,880 --> 00:41:24,000 Speaker 1: So tell us about the importance of decision control systems. 716 00:41:24,360 --> 00:41:27,239 Speaker 3: We talk about algorithms, and you can have an algorithm 717 00:41:27,719 --> 00:41:31,000 Speaker 3: of how to take all this academic information and build 718 00:41:31,040 --> 00:41:37,160 Speaker 3: portfolios and that's absolutely required. And in addition to that, 719 00:41:37,360 --> 00:41:40,360 Speaker 3: most people don't think of algorithms as something that control 720 00:41:40,480 --> 00:41:44,279 Speaker 3: human behavior. But if you only have one piece of 721 00:41:44,280 --> 00:41:46,520 Speaker 3: the pie, you can have a great engineered portfolio, just 722 00:41:46,520 --> 00:41:49,239 Speaker 3: like you could have a great engineer diet, or you 723 00:41:49,280 --> 00:41:52,719 Speaker 3: could have a great engineered workout program. But if you 724 00:41:52,800 --> 00:41:56,640 Speaker 3: don't have the decision control system that then helps you 725 00:41:56,760 --> 00:42:04,080 Speaker 3: stay committed to that process and discipline over long periods 726 00:42:04,120 --> 00:42:08,759 Speaker 3: of time, it'll fail every single time. So you have 727 00:42:08,840 --> 00:42:12,160 Speaker 3: to have a way to manage your own behavior because 728 00:42:12,200 --> 00:42:16,680 Speaker 3: investing is so easy to destroy the behavior. Even if 729 00:42:16,719 --> 00:42:19,080 Speaker 3: I gave you the perfect mix of the portfolio and 730 00:42:19,120 --> 00:42:21,640 Speaker 3: you went online you bought the mix of the assets. 731 00:42:22,520 --> 00:42:27,239 Speaker 3: Right next to that perfect portfolio is a button that 732 00:42:27,360 --> 00:42:30,120 Speaker 3: you can click on on your cell phone to sell 733 00:42:30,160 --> 00:42:33,080 Speaker 3: it and destroy it or add garbage to it like 734 00:42:33,120 --> 00:42:37,160 Speaker 3: bitcoin or gold er, you know, some exotic new thing 735 00:42:37,200 --> 00:42:41,080 Speaker 3: that comes out. So it is critical to have a 736 00:42:41,160 --> 00:42:44,920 Speaker 3: decision control system to manage and control for human behavior. 737 00:42:45,600 --> 00:42:48,399 Speaker 3: And without that, I've discovered over the last forty years 738 00:42:48,400 --> 00:42:51,720 Speaker 3: the process almost always fails. So what is your decision 739 00:42:51,760 --> 00:42:55,080 Speaker 3: control system? So first of all, I have to I 740 00:42:55,280 --> 00:42:58,080 Speaker 3: have to my wife or mind's myths not always easy 741 00:42:58,080 --> 00:43:02,080 Speaker 3: for me. I have to be humble, and I have 742 00:43:02,160 --> 00:43:04,600 Speaker 3: to recognize what I can do and what I can't do, 743 00:43:04,880 --> 00:43:06,919 Speaker 3: and not live in a fantasy world where I think 744 00:43:06,960 --> 00:43:09,520 Speaker 3: I can predict the future. So I have to have 745 00:43:09,600 --> 00:43:14,520 Speaker 3: people like Eugene Fauma and Nobel Prize winner and Harry Markowitz, 746 00:43:15,440 --> 00:43:19,200 Speaker 3: people like you that remind me that I'm limited in 747 00:43:19,320 --> 00:43:22,480 Speaker 3: my human behavior and that my instincts and emotions could 748 00:43:22,520 --> 00:43:26,279 Speaker 3: take over unless I protect against it. So I defer 749 00:43:26,440 --> 00:43:31,360 Speaker 3: to the academics, and I defer to proof, scientific proof, 750 00:43:32,280 --> 00:43:34,399 Speaker 3: and then I have to stay disciplined no matter what. 751 00:43:35,480 --> 00:43:37,160 Speaker 3: Two thousand and eight, two thousand and nine, the S 752 00:43:37,200 --> 00:43:42,200 Speaker 3: and P drop fifty percent, and investors were begging sell, sell, sell, 753 00:43:42,320 --> 00:43:44,560 Speaker 3: get me out, get me out. It would be easy 754 00:43:44,600 --> 00:43:47,000 Speaker 3: to cave in for a money manager. I've seen sow 755 00:43:47,040 --> 00:43:49,800 Speaker 3: many that did it, to cave into what the investor 756 00:43:49,840 --> 00:43:52,960 Speaker 3: wanted at the time. But we get paid to keep 757 00:43:53,000 --> 00:43:56,920 Speaker 3: people disciplined, not to cave into their instincts, emotions and biases, 758 00:43:57,800 --> 00:44:02,440 Speaker 3: staying true to that. And then for the investor and 759 00:44:02,480 --> 00:44:09,400 Speaker 3: the advisors, you have to create education, workshops, exercises. 760 00:44:08,920 --> 00:44:10,760 Speaker 2: And constant reinforcement. 761 00:44:12,120 --> 00:44:16,480 Speaker 3: Without that constant reinforcement and repetition over and over and 762 00:44:16,520 --> 00:44:20,040 Speaker 3: over again, people will fail at the exact wrong time 763 00:44:20,120 --> 00:44:23,799 Speaker 3: when the stress and anxiety are the highest. So it's 764 00:44:23,840 --> 00:44:27,080 Speaker 3: a whole it's a whole process that people need to 765 00:44:27,120 --> 00:44:29,680 Speaker 3: follow if they're going to help, if they're going to 766 00:44:29,719 --> 00:44:32,320 Speaker 3: have any hopes of staying discipline over a thirty year period, 767 00:44:32,640 --> 00:44:34,240 Speaker 3: which is what it takes to be an investor. 768 00:44:39,120 --> 00:44:40,000 Speaker 2: That was Mark. 769 00:44:39,800 --> 00:44:42,160 Speaker 1: Madson, who runs Matts and Money and has a new 770 00:44:42,200 --> 00:44:45,520 Speaker 1: book out called The American Dream. Now, I just want 771 00:44:45,560 --> 00:44:48,279 Speaker 1: to pick up one point he made about having a 772 00:44:48,560 --> 00:44:52,000 Speaker 1: decision control system, in other words, some way to bind 773 00:44:52,480 --> 00:44:55,279 Speaker 1: your decision making. There are many ways to do this. 774 00:44:55,880 --> 00:45:00,040 Speaker 1: My favorite is the Ulysses contract, which I covered in 775 00:45:00,080 --> 00:45:04,360 Speaker 1: episode nine, so very briefly. You may remember the story 776 00:45:04,360 --> 00:45:07,160 Speaker 1: in the Odyssey, the Greek legend, the hero of the 777 00:45:07,200 --> 00:45:11,080 Speaker 1: Trojan War, Ulysses, is returning home after the war's end 778 00:45:11,600 --> 00:45:15,480 Speaker 1: when he realizes that his ship is going to pass the. 779 00:45:15,440 --> 00:45:17,120 Speaker 2: Island of the Sirens. 780 00:45:17,640 --> 00:45:21,680 Speaker 1: And this presents a wild opportunity because the Sirens are 781 00:45:21,760 --> 00:45:28,040 Speaker 1: known for their mesmerizingly beautiful songs. But these songs are 782 00:45:28,080 --> 00:45:32,680 Speaker 1: so enchanting that they hypnotize any sailors who hear them, 783 00:45:33,000 --> 00:45:35,799 Speaker 1: which causes the sailors to steer their ships towards the 784 00:45:35,800 --> 00:45:39,600 Speaker 1: island and they inevitably crash into the rocks and die. 785 00:45:39,840 --> 00:45:44,360 Speaker 1: And Ulysses knew that he, like any other mortal, would 786 00:45:44,360 --> 00:45:47,840 Speaker 1: be powerless against the sirens song, and he was going 787 00:45:47,920 --> 00:45:49,960 Speaker 1: to meet the same fate if he heard those songs. 788 00:45:49,960 --> 00:45:52,920 Speaker 1: But he really wanted to hear the songs, so he 789 00:45:52,960 --> 00:45:56,560 Speaker 1: devised a plan. He ordered his men to tie him 790 00:45:56,600 --> 00:45:58,719 Speaker 1: to the mast of the ship with ropes, and he 791 00:45:58,800 --> 00:46:02,319 Speaker 1: told them, no matter how much I scream or beg 792 00:46:02,480 --> 00:46:06,520 Speaker 1: or cry, just keep rowing whatever I knew, just keep rowing. 793 00:46:07,120 --> 00:46:09,359 Speaker 1: And then he had his men fill their ears with 794 00:46:09,440 --> 00:46:13,439 Speaker 1: beeswax to block out the sirens song. So he did 795 00:46:13,480 --> 00:46:15,880 Speaker 1: this while they were still far from the island. And 796 00:46:15,920 --> 00:46:19,000 Speaker 1: this was a rational move because he knew that the 797 00:46:19,600 --> 00:46:23,080 Speaker 1: future Ulysses, once they were close to the island, would 798 00:46:23,080 --> 00:46:27,680 Speaker 1: be impulsive and would be unable to resist. 799 00:46:27,239 --> 00:46:28,840 Speaker 2: His short term desires. 800 00:46:29,280 --> 00:46:33,480 Speaker 1: And so, understanding this danger, the rational Ulysses at a 801 00:46:33,520 --> 00:46:38,480 Speaker 1: distance set up safeguards to prevent his future self from 802 00:46:38,560 --> 00:46:42,440 Speaker 1: making a fatal mistake. This was a contract between his 803 00:46:42,600 --> 00:46:46,000 Speaker 1: present self and his future self. His present self who 804 00:46:46,040 --> 00:46:49,719 Speaker 1: was rational, and his future self who was crazed with desire. 805 00:46:50,160 --> 00:46:53,600 Speaker 1: He thought clearly about how he was going to act 806 00:46:53,719 --> 00:46:57,320 Speaker 1: in that future scenario, and he created barriers to protect 807 00:46:57,400 --> 00:46:59,120 Speaker 1: himself from. 808 00:46:59,000 --> 00:47:00,359 Speaker 2: His own behavior. 809 00:47:01,160 --> 00:47:05,680 Speaker 1: So this type of decision where we willingly create constraints 810 00:47:05,760 --> 00:47:08,680 Speaker 1: to bind our future actions, that's what's known as a 811 00:47:09,120 --> 00:47:14,279 Speaker 1: Ulysses contract. It's a pre commitment strategy where you do 812 00:47:14,360 --> 00:47:17,680 Speaker 1: something now to bind yourself to some course of action 813 00:47:17,760 --> 00:47:19,880 Speaker 1: that you know is a good move, but you know 814 00:47:19,960 --> 00:47:22,920 Speaker 1: that your future self isn't going to want to do so. 815 00:47:23,160 --> 00:47:26,520 Speaker 1: In investing, you can set up Ulysses contracts with yourself 816 00:47:26,800 --> 00:47:31,400 Speaker 1: to prevent emotional decision making that leads to a lowsy outcomes. 817 00:47:31,600 --> 00:47:33,920 Speaker 1: There are lots of ways people do this in investing. 818 00:47:34,400 --> 00:47:38,440 Speaker 1: A simple one is automated investments. You set up automatic 819 00:47:38,520 --> 00:47:43,239 Speaker 1: contributions to your investment account and automatic buys of say 820 00:47:43,320 --> 00:47:45,560 Speaker 1: an index fund like the S and P five hundred, 821 00:47:45,880 --> 00:47:48,200 Speaker 1: and then you just sit back and know that this 822 00:47:48,360 --> 00:47:51,319 Speaker 1: is running in the background. This way, you don't need 823 00:47:51,360 --> 00:47:55,759 Speaker 1: to be involved with your ongoing biased decision making, and 824 00:47:55,800 --> 00:48:00,239 Speaker 1: this avoids the temptation to skip contributions when mar kids 825 00:48:00,280 --> 00:48:04,000 Speaker 1: are volatile, or when you feel the itch to spend 826 00:48:04,000 --> 00:48:07,600 Speaker 1: your money elsewhere. You can also set up pre defined 827 00:48:08,040 --> 00:48:11,200 Speaker 1: rules for selling investments. You can set up orders that 828 00:48:11,400 --> 00:48:14,040 Speaker 1: sell a stock if it drops to a certain price 829 00:48:14,200 --> 00:48:17,960 Speaker 1: or hits some predetermined gain, and that prevents the temptation 830 00:48:18,080 --> 00:48:21,239 Speaker 1: to hold on to investments too long or selling too soon. 831 00:48:22,120 --> 00:48:24,399 Speaker 1: This is not an investing podcast, so I'm not gonna 832 00:48:24,640 --> 00:48:26,560 Speaker 1: go into detail on any of this, but you can 833 00:48:26,560 --> 00:48:30,640 Speaker 1: make diversification commitments and then make sure you stick to 834 00:48:30,680 --> 00:48:34,839 Speaker 1: that allocation as a Ulysses contract, and that prevents you 835 00:48:34,920 --> 00:48:39,760 Speaker 1: from overly concentrating in one asset. And depending on your circumstances, 836 00:48:39,800 --> 00:48:44,240 Speaker 1: you can even build barriers to accessing your investment accounts easily. 837 00:48:44,640 --> 00:48:49,200 Speaker 1: Some people will use financial advisors or a separate investment 838 00:48:49,320 --> 00:48:52,480 Speaker 1: platform that requires a lot of effort to make changes. 839 00:48:52,800 --> 00:48:54,920 Speaker 1: And this is something on the opposite end of the 840 00:48:55,000 --> 00:48:58,719 Speaker 1: spectrum from these apps that make it effortless to buy 841 00:48:58,719 --> 00:49:02,120 Speaker 1: and sell stocks like you're playing a video game. Anyway, 842 00:49:02,160 --> 00:49:05,680 Speaker 1: whatever you put into place, this simple idea behind you. 843 00:49:05,800 --> 00:49:11,680 Speaker 1: Lissi's contract is to create systems that prevent bad decision making, 844 00:49:11,880 --> 00:49:15,840 Speaker 1: or emotional decisions or impulsive decisions, and that's probably the 845 00:49:15,920 --> 00:49:19,520 Speaker 1: smartest thing we can do keep our moment to moment 846 00:49:19,600 --> 00:49:23,480 Speaker 1: psychology out of these sorts of decisions. So that's the 847 00:49:23,520 --> 00:49:26,800 Speaker 1: main takeaway lesson from today from the point of view 848 00:49:26,960 --> 00:49:31,320 Speaker 1: of neuroeconomics. No matter how smart you are in other areas, 849 00:49:31,760 --> 00:49:35,480 Speaker 1: there are many influences under the hood that badly bias 850 00:49:35,600 --> 00:49:38,759 Speaker 1: your decision making. So go out and have fun and 851 00:49:38,800 --> 00:49:41,680 Speaker 1: do whatever you want, but figure out what you need 852 00:49:41,719 --> 00:49:46,040 Speaker 1: to do to avoid the sirens song so that you 853 00:49:46,080 --> 00:49:52,760 Speaker 1: can have smooth sailing into the future. Thanks for joining 854 00:49:52,760 --> 00:49:55,239 Speaker 1: me on this journey into our minds. If you enjoyed it, 855 00:49:55,239 --> 00:49:58,160 Speaker 1: don't forget to subscribe. Go to eagleman dot com slash 856 00:49:58,200 --> 00:50:01,400 Speaker 1: podcast for more information and to find further reading, and 857 00:50:01,480 --> 00:50:04,799 Speaker 1: check out and subscribe to Inner Cosmos on YouTube for 858 00:50:04,960 --> 00:50:08,520 Speaker 1: videos of each episode and to leave comments. Until next time, 859 00:50:08,840 --> 00:50:12,040 Speaker 1: stay curious. I'm David Eagleman, and we have been sailing 860 00:50:12,120 --> 00:50:14,200 Speaker 1: through the inner cosmos.