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Speaker 1: I'm Barry Ridults, and I'm excited to tell you about

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Speaker 1: my new podcast, At the Money. Each week, I'm going

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Speaker 1: to spend about ten minutes or so diving deep into

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Speaker 1: a specific topic that affects you and your money, acquiring it,

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Speaker 1: spending it, and most of all, investing it. We'll talk

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Speaker 1: about things like portfolio construction, why fees matter, how to

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Speaker 1: build a set of bond holdings, why it matters so

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Speaker 1: much to manage your own behavior as an investor. Strap

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Speaker 1: in for At the Money, starting right now.

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Speaker 2: The psychology and behavior of some of your customers. The

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Speaker 2: wall of worry is now fully rebuilt.

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Speaker 1: Bad news is good news, and good news is bad news,

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Speaker 1: and sometimes no news is welcome news.

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Speaker 2: It's a tricky time. We're looking for fullbacks, we're looking

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Speaker 2: for opportunity, really to get more positive on the market.

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Speaker 2: There is this reflexive move when there's a sell off

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Speaker 2: to buy. At what point does that? By the turn

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Speaker 2: and the psychology can change.

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Speaker 1: Have you ever wondered why investing is so hard? Why

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Speaker 1: is it that your instincts always lead you astray? Why

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Speaker 1: are stories so compelling but probabilities leave us cold? Why

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Speaker 1: do you join the crowd buying in at the top

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Speaker 1: and then panic sell at the bottom. As it turns out,

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Speaker 1: you're just not built for this. I'm Barry Ridults, and

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Speaker 1: on today's edition of At the Money, we're going to

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Speaker 1: discuss evolutionary psychology and what it means for your portfolios.

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Speaker 1: To help us unpack all of this, let's bring in

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Speaker 1: Brian Portnoy. His firm Shaping Wealth helps financial professionals with

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Speaker 1: both money and meaning. So Brian, welcome to At the Money.

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Speaker 1: It turns out that investing is hard for a reason.

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Speaker 1: Tell us about that.

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Speaker 2: Yeah, thanks, Barry. We weren't wired for this. The brain

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Speaker 2: between our ears is more more than one hundred thousand

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Speaker 2: years old, all right, so we're working with pretty old machinery. Money,

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Speaker 2: which we probably take for granted, is a relatively new invention.

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Speaker 2: Let's just call it, to make it easy, three thousand

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Speaker 2: years old. The brain's one hundred thousand years old. Money's

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Speaker 2: three thousand years old. The way we evolved was not

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Speaker 2: to spend and save wisely or to invest using modern

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Speaker 2: portfolio theory. Now we are wired to survive in a

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Speaker 2: wild and dangerous environment where money was not even a thing.

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Speaker 2: So money and brains tend not to work very well together.

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Speaker 1: So let's take some examples. Where does this evolutionary baggage

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Speaker 1: that we're all stuck with, how does it lead us astray?

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Speaker 1: Give us some examples.

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Speaker 2: Well, let's talk about time now versus later. So we are,

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Speaker 2: as humans really the only species that, in a sophisticated way,

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Speaker 2: can mental time travel. We've got the future, we've got

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Speaker 2: the past, we've got the present. And you know, we

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Speaker 2: were raised. We grew up as a species in an

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Speaker 2: immediate return environment, so there was a distant future. But

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Speaker 2: when you're out on the savannah and you're trying to

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Speaker 2: kill that animal and you're trying not to be eaten,

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Speaker 2: you're really focused on the here and now. Well, if

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Speaker 2: someone says, hey, you know, you're thirty five or forty

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Speaker 2: years old and we're going to put together a thirty

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Speaker 2: year portfolio for you, that literally doesn't make any sense

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Speaker 2: to who we are as a human species.

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Speaker 1: So let's talk a little bit about words and numbers.

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Speaker 1: Why is it that we love a great story, but

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Speaker 1: when we start thinking about probabilities and odds and numbers,

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Speaker 1: our brains turned to mush.

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Speaker 2: Yeah, it's just true that we were born as storytellers.

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Speaker 2: And not as calculators. We're not particularly numerative. If I

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Speaker 2: say two plus two, you don't calculate that, you just

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Speaker 2: know it's for. But if I give you something even

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Speaker 2: slightly more complicated, we begin to stammer over, well, what

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Speaker 2: would the answer be versus the way that we as

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Speaker 2: a tribal species developed many many years ago, thousands of

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Speaker 2: years ago, which was sharing stories. So the brain has

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Speaker 2: evolved to love and cherish stories. It's the way that

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Speaker 2: we live our lives. In fact, as we listen to

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Speaker 2: new information, we watch TV or read the internet, we

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Speaker 2: are processing enormous amounts of information and picking and choosing

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Speaker 2: the bits that map to the stories that we already believe.

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Speaker 2: Some psychologists might call this confirmation bias numbers. They don't

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Speaker 2: really compute literally and figuratively.

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Speaker 1: So you talked about telling stories as a group. Let's

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Speaker 1: talk a little bit about humans as social primates and

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Speaker 1: the tendency to do what the crowd does. Why is

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Speaker 1: that a problem when it comes to stocks and bonds.

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Speaker 2: Well, there's a word for that, it's called hurting. But

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Speaker 2: why do we heard to begin with? Well, you know

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Speaker 2: you asked me at the start, you know what happened

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Speaker 2: to get us going in this direction. Well, one was

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Speaker 2: a focus on the here and now. Another was to

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Speaker 2: focus on your local tribe, meaning that was a source

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Speaker 2: of safety first and foremost, but it also became a

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Speaker 2: source of meaning and identity and community. So humans, you know,

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Speaker 2: we might think of ourselves as sovereign individuals, but in

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Speaker 2: some ways, before we become sovereign individuals, we are born

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Speaker 2: into tribal societies, tribal cultures. Our identities are formed through

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Speaker 2: those affiliations, and as a result, we want to be

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Speaker 2: with everybody else. It's really uncomfortable to go against the grain.

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Speaker 2: So fast forward a few thousand years to twenty four

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Speaker 2: to seven, fast moving capital markets. When you see people

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Speaker 2: running for the door or running into this room where

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Speaker 2: something interesting is taking place, and you're going to be like, huh,

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Speaker 2: maybe I should go with them, because there is safety

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Speaker 2: in numbers, at least from a genetic wiring point of view.

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Speaker 1: So funny you say that. As a kid, I grew

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Speaker 1: up watching Mutual of Omaha's Wild Kingdom, Yeah, and the

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Speaker 1: marlinul Shada, the Savannah and just thousands of will to beast,

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Speaker 1: and they would always zoom in on that one limping

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Speaker 1: will to beast on the edge of the herd, and

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Speaker 1: you just knew that guy was about to get separated

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Speaker 1: from the crowd and it wasn't going to be good

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Speaker 1: for him.

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Speaker 2: It was not he was going to lose the race.

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Speaker 2: I mean, we are wired for a dynamic that I

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Speaker 2: simply called survive and thrive. Job number one every day

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Speaker 2: is to stay alive. You don't necessarily need to thrive

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Speaker 2: every day. You don't need to hit the jackpot every day,

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Speaker 2: but you certainly need to stay alive because you get one.

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Speaker 2: You got a one punch ticket, and you got to

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Speaker 2: stick around. So veering from the crowd from a historical,

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Speaker 2: from an evolutionary, from a psychological point of view, feels

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Speaker 2: uncomfortable for a reason because our ancestors who did veer

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Speaker 2: from the crowd, they're not really around to pass on

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Speaker 2: their genes to us, right.

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Speaker 1: The ones that the lines culled from the herd, That

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Speaker 1: genetic line ends there.

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Speaker 2: That's the way evolution works. We are an adaptive species.

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Speaker 2: So there are certain genes and instincts that are more

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Speaker 2: by luck than by design. They land well in the world,

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Speaker 2: and those are the ones that get replicated. Those are

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Speaker 2: the genes that profligate through our system our biological systems,

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Speaker 2: and as a result, the human condition is what it is.

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Speaker 1: So let's talk a bit about emotion. I'm a big

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Speaker 1: fan of Danny Kanneman's book Thinking Fast and Slow. Why

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Speaker 1: is it that our instinctual first reaction is this often

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Speaker 1: over the top emotional reaction that gets our heart pumping,

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Speaker 1: our breath quick, we begin to sweat. Why do we

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Speaker 1: react that way?

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Speaker 2: I mean, it comes back to this survival instinct, Barry.

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Speaker 2: It's this hardwiring that we need to survive. We are

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Speaker 2: so good, if you think about it, so good at

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Speaker 2: sensing danger. If you walk into a room, could be

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Speaker 2: in your home or in the office, or if you're

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Speaker 2: socializing with friends. If there's something in that environment that

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Speaker 2: feels slightly off, you are so finely attuned to it

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Speaker 2: you are going to react. It's just who we are.

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Speaker 2: And so when you talk about Danny Kanneman, one of

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Speaker 2: my all time heroes, writer of Thinking Fast and Slow,

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Speaker 2: inventor of behavioral finance, with almost Tabsky, you absolutely have

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Speaker 2: that quickening heart rate, the pulses going up. You're sweating

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Speaker 2: a little bit, because that is a natural biological reaction

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Speaker 2: to a threatening environment. And the thing is a line

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Speaker 2: on the savannah and a red line on a stock

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Speaker 2: chart actually trigger us in the exact same way. At

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Speaker 2: some level, danger is danger is danger.

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Speaker 1: Huh. So when we look at how humans have evolved

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Speaker 1: and adapted, it seems life on the savannah was hard,

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Speaker 1: and our emotions get us excited, and that leads us

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Speaker 1: to a fight or flight response, and that affects us

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Speaker 1: in the modern capital markets. Tell us what this means

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Speaker 1: for us today.

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Speaker 2: One thing I'd want to stress is that you sometimes hear, well,

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Speaker 2: let's take the emotions out of investing. Well, it's sort

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Speaker 2: of like saying let's take gravity out of space. There's

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Speaker 2: no way to get around it. We are emotional creatures.

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Speaker 2: Emotions are actually sources of information so that we can

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Speaker 2: navigate the world better. So there's nothing wrong with having

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Speaker 2: an emotional reaction. Hey, my portfolio is declining in value.

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Speaker 2: Am I still going to be able to retire comfortably?

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Speaker 2: Those are totally natural, normal reactions. But what I'd stress

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Speaker 2: is that we get away from thinking of ourselves as irrational.

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Speaker 2: By the way, irrational is an economist's word for stupid.

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Speaker 2: We're not stupid. Richard Thaylor, one of the other pioneers

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Speaker 2: in behavioral finance, has said that people aren't dumb. The

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Speaker 2: world is hard. The world is very hard. We're processing

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Speaker 2: a lot of information. It is complicated times. So let's

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Speaker 2: not think of ourselves as irrational. Let's think of emotions

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Speaker 2: as a source of information and strength and think, well,

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Speaker 2: we are normal. We are adaptive for a reason. It

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Speaker 2: might land us in a difficult spot, but we can

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Speaker 2: pull back from that and with a little bit of

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Speaker 2: self awareness, make better decisions.

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Speaker 1: So let me bring up something that Danny Conneman said

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Speaker 1: that I found so fascinating. He said, even I full

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Speaker 1: prey to my own cognitive biases and emotional reactions. If

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Speaker 1: someone as knowledgeable and just a pioneer in the space

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Speaker 1: as Danny Kahneman is susceptible to emotions leading him astray,

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Speaker 1: what hope do the rest of us have?

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Speaker 2: We have a ton of hope, Barry, a ton of

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Speaker 2: hope because we're not supposed to be automatons. It's an

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Speaker 2: awesome thing that we are emotional. It makes life rich

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Speaker 2: and colorful. It's just that we want to make sure

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Speaker 2: that we appreciate that emotion is a language with vocabulary,

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Speaker 2: and as we navigate markets, as we navigate our financial lives,

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Speaker 2: these feelings of greed, joy, fear, envy, anger. One they

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Speaker 2: are normal, and two we can use those as a

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Speaker 2: jumping off spot to understanding how we want to approach

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Speaker 2: a situation and make things better. When Danny Conyman says, hey,

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Speaker 2: I can't get rid of my biases, he's opening actually

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Speaker 2: a really fantastic door for all of us to appreciate

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Speaker 2: that this is just the way that we are. So

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Speaker 2: the job here is not to change human nature. It's

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Speaker 2: to understand human nature in ways that help us make

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Speaker 2: better decisions in a very complicated world.

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Speaker 1: So I love the way you're framing that. So let's

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Speaker 1: take what's probably one of the two most damaging emotions

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Speaker 1: in finance, which is fear. So we're recording this. Markets

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Speaker 1: have been a little wobbly the past couple of weeks.

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Speaker 1: After a good run from the lows in twenty twenty two,

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Speaker 1: things have kind of stumbled a bit. And the genuine

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Speaker 1: risk for investors is after this goes on for a

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Speaker 1: few weeks or even months, they just throw their hands

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Speaker 1: up and say, I'm not sleeping, I'm not comfortable. Get

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Speaker 1: me out. Everybody who works with clients has heard that phrase,

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Speaker 1: I can't take it anymore, get me out. Usually it's

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Speaker 1: a great buying signal. Why is it that at Low's

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Speaker 1: our panic reaches a crescendo.

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Speaker 2: Well, it gets back to the fear instinct. The reason

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Speaker 2: we feel fear is that we sense danger. We sense

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Speaker 2: a threat to our security. It might not be our

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Speaker 2: physical lives way back in the day, but our financial

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Speaker 2: lives if they are under threat, well, maybe we can't

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Speaker 2: afford to eat, maybe we can't afford our mortgage. These

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Speaker 2: feel very uncomfortable. They are legitimate emotions. One thing I'd add, though,

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Speaker 2: is that if we think of investing broadly less as

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Speaker 2: a game or a casino something to be won, but

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Speaker 2: as a tool in reaching our goals, we actually dampen

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Speaker 2: down some of those harsher emotions that we might feel

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Speaker 2: because we no longer are asking the question am I

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Speaker 2: am I holding the right investments? How much money am

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Speaker 2: I losing? We pivot to a more constructive question of

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Speaker 2: am I closer to or further away from my goals?

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Speaker 2: And the goals actually serve as a really fantastic bridge

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Speaker 2: from a cognitive point of view. From an emotional point

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Speaker 2: of view where you can really have a better conversation

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Speaker 2: in your own mind, with your partner, with your financial advisor.

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Speaker 2: It provides a context so that you're not being whipsawed

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Speaker 2: by the daily machinations of the market. If you're paying

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Speaker 2: too close of attention to that, you're probably not playing

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Speaker 2: the game that you should be in terms of long

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Speaker 2: term financial well being.

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Speaker 1: Really really intriguing. So if I get this right, emotions

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Speaker 1: are natural. Doesn't mean we're dom or stupid. It's part

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Speaker 1: of who we are. But allowing your emotions to affect

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Speaker 1: your thought to lead to bad decisions that could cause

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Speaker 1: bad investments, bad timing, and bad behavior, and that leads

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Speaker 1: to bad results. But at the very least, if you're

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Speaker 1: aware of your emotions and put them into some context

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Speaker 1: and don't allow them to overly affect your decision making process,

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Speaker 1: hey you're halfway there to a successful financial result. The

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Speaker 1: bottom line, don't allow your emotions to get the better

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Speaker 1: of you. That's just your wet wear, that's just how

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Speaker 1: you're built. You can listen to At the Money every week,

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Speaker 1: find it in our masters and business feed at Bloomberg

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Speaker 1: dot com, Apple Podcasts and Spotify Each week, we'll be

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Speaker 1: here to discuss the issues that matter most to you

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Speaker 1: as an investor. I'm Barry Redults you've been listening to

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Speaker 1: At the Money on Bloomberg Radio. He sa