WEBVTT - At the Money: Here's Why Investing Is So Hard

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<v Speaker 1>I'm Barry Ridults, and I'm excited to tell you about

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

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<v Speaker 1>to spend about ten minutes or so diving deep into

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<v Speaker 1>a specific topic that affects you and your money, acquiring it,

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<v Speaker 1>spending it, and most of all, investing it. We'll talk

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<v Speaker 1>about things like portfolio construction, why fees matter, how to

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<v Speaker 1>build a set of bond holdings, why it matters so

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<v Speaker 1>much to manage your own behavior as an investor. Strap

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<v Speaker 1>in for At the Money, starting right now.

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<v Speaker 2>The psychology and behavior of some of your customers. The

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<v Speaker 2>wall of worry is now fully rebuilt.

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<v Speaker 1>Bad news is good news, and good news is bad news,

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<v Speaker 1>and sometimes no news is welcome news.

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

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<v Speaker 2>for opportunity, really to get more positive on the market.

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<v Speaker 2>There is this reflexive move when there's a sell off

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<v Speaker 2>to buy. At what point does that? By the turn

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<v Speaker 2>and the psychology can change.

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<v Speaker 1>Have you ever wondered why investing is so hard? Why

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<v Speaker 1>is it that your instincts always lead you astray? Why

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<v Speaker 1>are stories so compelling but probabilities leave us cold? Why

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<v Speaker 1>do you join the crowd buying in at the top

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<v Speaker 1>and then panic sell at the bottom. As it turns out,

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

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

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<v Speaker 1>discuss evolutionary psychology and what it means for your portfolios.

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<v Speaker 1>To help us unpack all of this, let's bring in

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<v Speaker 1>Brian Portnoy. His firm Shaping Wealth helps financial professionals with

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<v Speaker 1>both money and meaning. So Brian, welcome to At the Money.

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<v Speaker 1>It turns out that investing is hard for a reason.

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<v Speaker 1>Tell us about that.

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

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<v Speaker 2>between our ears is more more than one hundred thousand

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

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<v Speaker 2>which we probably take for granted, is a relatively new invention.

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<v Speaker 2>Let's just call it, to make it easy, three thousand

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<v Speaker 2>years old. The brain's one hundred thousand years old. Money's

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<v Speaker 2>three thousand years old. The way we evolved was not

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<v Speaker 2>to spend and save wisely or to invest using modern

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<v Speaker 2>portfolio theory. Now we are wired to survive in a

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<v Speaker 2>wild and dangerous environment where money was not even a thing.

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<v Speaker 2>So money and brains tend not to work very well together.

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<v Speaker 1>So let's take some examples. Where does this evolutionary baggage

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

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<v Speaker 1>Give us some examples.

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

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<v Speaker 2>as humans really the only species that, in a sophisticated way,

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<v Speaker 2>can mental time travel. We've got the future, we've got

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<v Speaker 2>the past, we've got the present. And you know, we

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<v Speaker 2>were raised. We grew up as a species in an

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<v Speaker 2>immediate return environment, so there was a distant future. But

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<v Speaker 2>when you're out on the savannah and you're trying to

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<v Speaker 2>kill that animal and you're trying not to be eaten,

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

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<v Speaker 2>someone says, hey, you know, you're thirty five or forty

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<v Speaker 2>years old and we're going to put together a thirty

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<v Speaker 2>year portfolio for you, that literally doesn't make any sense

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<v Speaker 2>to who we are as a human species.

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<v Speaker 1>So let's talk a little bit about words and numbers.

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<v Speaker 1>Why is it that we love a great story, but

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<v Speaker 1>when we start thinking about probabilities and odds and numbers,

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<v Speaker 1>our brains turned to mush.

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

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<v Speaker 2>And not as calculators. We're not particularly numerative. If I

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<v Speaker 2>say two plus two, you don't calculate that, you just

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<v Speaker 2>know it's for. But if I give you something even

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<v Speaker 2>slightly more complicated, we begin to stammer over, well, what

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<v Speaker 2>would the answer be versus the way that we as

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<v Speaker 2>a tribal species developed many many years ago, thousands of

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<v Speaker 2>years ago, which was sharing stories. So the brain has

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<v Speaker 2>evolved to love and cherish stories. It's the way that

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<v Speaker 2>we live our lives. In fact, as we listen to

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<v Speaker 2>new information, we watch TV or read the internet, we

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<v Speaker 2>are processing enormous amounts of information and picking and choosing

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<v Speaker 2>the bits that map to the stories that we already believe.

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<v Speaker 2>Some psychologists might call this confirmation bias numbers. They don't

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<v Speaker 2>really compute literally and figuratively.

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<v Speaker 1>So you talked about telling stories as a group. Let's

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<v Speaker 1>talk a little bit about humans as social primates and

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<v Speaker 1>the tendency to do what the crowd does. Why is

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<v Speaker 1>that a problem when it comes to stocks and bonds.

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

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<v Speaker 2>why do we heard to begin with? Well, you know

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<v Speaker 2>you asked me at the start, you know what happened

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<v Speaker 2>to get us going in this direction. Well, one was

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<v Speaker 2>a focus on the here and now. Another was to

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<v Speaker 2>focus on your local tribe, meaning that was a source

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<v Speaker 2>of safety first and foremost, but it also became a

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<v Speaker 2>source of meaning and identity and community. So humans, you know,

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<v Speaker 2>we might think of ourselves as sovereign individuals, but in

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<v Speaker 2>some ways, before we become sovereign individuals, we are born

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<v Speaker 2>into tribal societies, tribal cultures. Our identities are formed through

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<v Speaker 2>those affiliations, and as a result, we want to be

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

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<v Speaker 2>So fast forward a few thousand years to twenty four

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<v Speaker 2>to seven, fast moving capital markets. When you see people

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<v Speaker 2>running for the door or running into this room where

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

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<v Speaker 2>maybe I should go with them, because there is safety

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<v Speaker 2>in numbers, at least from a genetic wiring point of view.

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<v Speaker 1>So funny you say that. As a kid, I grew

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<v Speaker 1>up watching Mutual of Omaha's Wild Kingdom, Yeah, and the

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<v Speaker 1>marlinul Shada, the Savannah and just thousands of will to beast,

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<v Speaker 1>and they would always zoom in on that one limping

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<v Speaker 1>will to beast on the edge of the herd, and

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<v Speaker 1>you just knew that guy was about to get separated

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<v Speaker 1>from the crowd and it wasn't going to be good

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<v Speaker 1>for him.

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<v Speaker 2>It was not he was going to lose the race.

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<v Speaker 2>I mean, we are wired for a dynamic that I

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<v Speaker 2>simply called survive and thrive. Job number one every day

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<v Speaker 2>is to stay alive. You don't necessarily need to thrive

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<v Speaker 2>every day. You don't need to hit the jackpot every day,

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<v Speaker 2>but you certainly need to stay alive because you get one.

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<v Speaker 2>You got a one punch ticket, and you got to

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<v Speaker 2>stick around. So veering from the crowd from a historical,

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<v Speaker 2>from an evolutionary, from a psychological point of view, feels

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<v Speaker 2>uncomfortable for a reason because our ancestors who did veer

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<v Speaker 2>from the crowd, they're not really around to pass on

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<v Speaker 2>their genes to us, right.

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<v Speaker 1>The ones that the lines culled from the herd, That

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<v Speaker 1>genetic line ends there.

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<v Speaker 2>That's the way evolution works. We are an adaptive species.

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<v Speaker 2>So there are certain genes and instincts that are more

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<v Speaker 2>by luck than by design. They land well in the world,

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<v Speaker 2>and those are the ones that get replicated. Those are

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<v Speaker 2>the genes that profligate through our system our biological systems,

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<v Speaker 2>and as a result, the human condition is what it is.

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<v Speaker 1>So let's talk a bit about emotion. I'm a big

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<v Speaker 1>fan of Danny Kanneman's book Thinking Fast and Slow. Why

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<v Speaker 1>is it that our instinctual first reaction is this often

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<v Speaker 1>over the top emotional reaction that gets our heart pumping,

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<v Speaker 1>our breath quick, we begin to sweat. Why do we

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<v Speaker 1>react that way?

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<v Speaker 2>I mean, it comes back to this survival instinct, Barry.

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<v Speaker 2>It's this hardwiring that we need to survive. We are

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<v Speaker 2>so good, if you think about it, so good at

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<v Speaker 2>sensing danger. If you walk into a room, could be

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<v Speaker 2>in your home or in the office, or if you're

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<v Speaker 2>socializing with friends. If there's something in that environment that

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<v Speaker 2>feels slightly off, you are so finely attuned to it

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<v Speaker 2>you are going to react. It's just who we are.

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<v Speaker 2>And so when you talk about Danny Kanneman, one of

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<v Speaker 2>my all time heroes, writer of Thinking Fast and Slow,

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<v Speaker 2>inventor of behavioral finance, with almost Tabsky, you absolutely have

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

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<v Speaker 2>a little bit, because that is a natural biological reaction

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<v Speaker 2>to a threatening environment. And the thing is a line

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<v Speaker 2>on the savannah and a red line on a stock

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<v Speaker 2>chart actually trigger us in the exact same way. At

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<v Speaker 2>some level, danger is danger is danger.

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<v Speaker 1>Huh. So when we look at how humans have evolved

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<v Speaker 1>and adapted, it seems life on the savannah was hard,

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<v Speaker 1>and our emotions get us excited, and that leads us

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<v Speaker 1>to a fight or flight response, and that affects us

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<v Speaker 1>in the modern capital markets. Tell us what this means

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<v Speaker 1>for us today.

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

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

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<v Speaker 2>of like saying let's take gravity out of space. There's

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<v Speaker 2>no way to get around it. We are emotional creatures.

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<v Speaker 2>Emotions are actually sources of information so that we can

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<v Speaker 2>navigate the world better. So there's nothing wrong with having

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<v Speaker 2>an emotional reaction. Hey, my portfolio is declining in value.

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<v Speaker 2>Am I still going to be able to retire comfortably?

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

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<v Speaker 2>is that we get away from thinking of ourselves as irrational.

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

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

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

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<v Speaker 2>world is hard. The world is very hard. We're processing

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<v Speaker 2>a lot of information. It is complicated times. So let's

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<v Speaker 2>not think of ourselves as irrational. Let's think of emotions

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<v Speaker 2>as a source of information and strength and think, well,

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<v Speaker 2>we are normal. We are adaptive for a reason. It

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<v Speaker 2>might land us in a difficult spot, but we can

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<v Speaker 2>pull back from that and with a little bit of

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<v Speaker 2>self awareness, make better decisions.

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<v Speaker 1>So let me bring up something that Danny Conneman said

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<v Speaker 1>that I found so fascinating. He said, even I full

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<v Speaker 1>prey to my own cognitive biases and emotional reactions. If

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<v Speaker 1>someone as knowledgeable and just a pioneer in the space

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<v Speaker 1>as Danny Kahneman is susceptible to emotions leading him astray,

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<v Speaker 1>what hope do the rest of us have?

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<v Speaker 2>We have a ton of hope, Barry, a ton of

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

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<v Speaker 2>awesome thing that we are emotional. It makes life rich

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<v Speaker 2>and colorful. It's just that we want to make sure

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<v Speaker 2>that we appreciate that emotion is a language with vocabulary,

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<v Speaker 2>and as we navigate markets, as we navigate our financial lives,

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<v Speaker 2>these feelings of greed, joy, fear, envy, anger. One they

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<v Speaker 2>are normal, and two we can use those as a

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<v Speaker 2>jumping off spot to understanding how we want to approach

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<v Speaker 2>a situation and make things better. When Danny Conyman says, hey,

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

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<v Speaker 2>a really fantastic door for all of us to appreciate

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<v Speaker 2>that this is just the way that we are. So

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<v Speaker 2>the job here is not to change human nature. It's

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<v Speaker 2>to understand human nature in ways that help us make

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<v Speaker 2>better decisions in a very complicated world.

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<v Speaker 1>So I love the way you're framing that. So let's

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<v Speaker 1>take what's probably one of the two most damaging emotions

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

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<v Speaker 1>have been a little wobbly the past couple of weeks.

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<v Speaker 1>After a good run from the lows in twenty twenty two,

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<v Speaker 1>things have kind of stumbled a bit. And the genuine

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<v Speaker 1>risk for investors is after this goes on for a

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<v Speaker 1>few weeks or even months, they just throw their hands

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<v Speaker 1>up and say, I'm not sleeping, I'm not comfortable. Get

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<v Speaker 1>me out. Everybody who works with clients has heard that phrase,

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

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<v Speaker 1>a great buying signal. Why is it that at Low's

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<v Speaker 1>our panic reaches a crescendo.

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<v Speaker 2>Well, it gets back to the fear instinct. The reason

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<v Speaker 2>we feel fear is that we sense danger. We sense

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<v Speaker 2>a threat to our security. It might not be our

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<v Speaker 2>physical lives way back in the day, but our financial

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<v Speaker 2>lives if they are under threat, well, maybe we can't

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<v Speaker 2>afford to eat, maybe we can't afford our mortgage. These

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

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<v Speaker 2>is that if we think of investing broadly less as

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<v Speaker 2>a game or a casino something to be won, but

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<v Speaker 2>as a tool in reaching our goals, we actually dampen

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<v Speaker 2>down some of those harsher emotions that we might feel

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<v Speaker 2>because we no longer are asking the question am I

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<v Speaker 2>am I holding the right investments? How much money am

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<v Speaker 2>I losing? We pivot to a more constructive question of

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<v Speaker 2>am I closer to or further away from my goals?

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<v Speaker 2>And the goals actually serve as a really fantastic bridge

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<v Speaker 2>from a cognitive point of view. From an emotional point

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<v Speaker 2>of view where you can really have a better conversation

0:13:29.600 --> 0:13:33.000
<v Speaker 2>in your own mind, with your partner, with your financial advisor.

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<v Speaker 2>It provides a context so that you're not being whipsawed

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<v Speaker 2>by the daily machinations of the market. If you're paying

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<v Speaker 2>too close of attention to that, you're probably not playing

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<v Speaker 2>the game that you should be in terms of long

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<v Speaker 2>term financial well being.

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<v Speaker 1>Really really intriguing. So if I get this right, emotions

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

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<v Speaker 1>of who we are. But allowing your emotions to affect

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<v Speaker 1>your thought to lead to bad decisions that could cause

0:14:05.200 --> 0:14:10.800
<v Speaker 1>bad investments, bad timing, and bad behavior, and that leads

0:14:10.840 --> 0:14:14.320
<v Speaker 1>to bad results. But at the very least, if you're

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<v Speaker 1>aware of your emotions and put them into some context

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

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<v Speaker 1>hey you're halfway there to a successful financial result. The

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<v Speaker 1>bottom line, don't allow your emotions to get the better

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<v Speaker 1>of you. That's just your wet wear, that's just how

0:14:34.520 --> 0:14:42.800
<v Speaker 1>you're built. You can listen to At the Money every week,

0:14:43.000 --> 0:14:45.920
<v Speaker 1>find it in our masters and business feed at Bloomberg

0:14:45.920 --> 0:14:49.840
<v Speaker 1>dot com, Apple Podcasts and Spotify Each week, we'll be

0:14:49.880 --> 0:14:52.800
<v Speaker 1>here to discuss the issues that matter most to you

0:14:52.840 --> 0:14:56.320
<v Speaker 1>as an investor. I'm Barry Redults you've been listening to

0:14:56.440 --> 0:15:01.320
<v Speaker 1>At the Money on Bloomberg Radio. He sa