WEBVTT - How Your Behavior Impacts Your Finances with Dr. Daniel Crosby #094 0:00:00.120 --> 0:00:03.079 Welcome to How to Money. I'm Joel and I'm Matt 0:00:03.240 --> 0:00:26.279 and today we're talking about behavioral finance with Daniel Crosby. Cheduel. 0:00:26.320 --> 0:00:28.760 Today we are excited to be sitting down with Dr 0:00:28.920 --> 0:00:32.680 Daniel Crosby. He is a psychologist and a behavioral finance 0:00:32.720 --> 0:00:35.919 expert who helps folks understand the intersection of their minds 0:00:35.960 --> 0:00:39.080 and the market. Daniel is a New York Times bestselling 0:00:39.120 --> 0:00:42.840 author on behavioral finance, and his latest book, The Behavioral 0:00:42.840 --> 0:00:48.480 Investor looks at the psychology, physiology, and sociology of financial 0:00:48.520 --> 0:00:51.120 decision making. That's a lot of bologies, a lot of oologies. 0:00:51.360 --> 0:00:54.760 He sets forth practical tips as well for making improvements 0:00:55.160 --> 0:00:58.040 and so when he's not consulting around market psychology, Daniel 0:00:58.120 --> 0:01:02.800 enjoys exploring the American South, fanatically following St. Louis Cardinals baseball, 0:01:03.080 --> 0:01:06.280 and spending time with his wife and three children. So, Daniel, 0:01:06.319 --> 0:01:08.160 thanks for being here, man, Yeah, my pleasure, Thanks for 0:01:08.160 --> 0:01:10.680 having me. He mentioned the Cards didn't they wamp the 0:01:10.680 --> 0:01:12.720 Braves a few days ago? Did you watch that game? Well? 0:01:12.760 --> 0:01:15.039 I was at all of the games, but then the 0:01:15.080 --> 0:01:17.720 Braves wamped the Cardinals the second too. But there was 0:01:17.760 --> 0:01:19.920 a streaker at the second one, so it was still 0:01:19.959 --> 0:01:22.880 worth it. Yeah, that was crazy. He was a non 0:01:23.040 --> 0:01:25.199 nude streaker who made it all the way from left 0:01:25.200 --> 0:01:27.880 field to home plate and then got crushed. I want 0:01:27.920 --> 0:01:30.520 the Braves security. I love the video of that security. 0:01:30.560 --> 0:01:33.840 People always just hammer them. He crushed him over a 0:01:33.840 --> 0:01:37.200 half brick while it was incredible. This is my moment. Yeah. Well, 0:01:37.240 --> 0:01:39.559 and he slipped. He broke his knees like this guy 0:01:39.840 --> 0:01:42.160 he was coming at him. He juked him, he slipped, 0:01:42.200 --> 0:01:44.360 then he got back up and laid the tackle on him. 0:01:44.360 --> 0:01:47.480 So go go Braves security guard. Wow, that's awesome. I 0:01:47.480 --> 0:01:49.400 think that that might be the most you hear us 0:01:49.400 --> 0:01:52.080 talking about baseball. We tend to talk about soccer here 0:01:52.080 --> 0:01:55.320 on the podcast. We're unintentional hipsters, I think, but we're 0:01:55.320 --> 0:01:58.320 trying not to be great soccer city. Yeah. By the way, Daniel, 0:01:58.320 --> 0:02:00.280 thanks so much for bringing beer. Daniel brought Land of 0:02:00.360 --> 0:02:02.640 brewing companies hop Planta for us to have on the 0:02:02.640 --> 0:02:05.400 show today. So yeah, we really appreciate you bring tasting 0:02:05.480 --> 0:02:07.160 notes on that one at the end of the show. 0:02:07.440 --> 0:02:09.920 So the first question we ask anybody that comes on 0:02:09.960 --> 0:02:12.520 the podcast now, Tamiel is since we do drink a 0:02:12.520 --> 0:02:14.720 beer on every show. It's something that we splourge on. 0:02:14.880 --> 0:02:17.000 What it's like the craft beer equivalent in your life. 0:02:17.360 --> 0:02:20.240 So it's it's cheese. So so my wife and I 0:02:20.400 --> 0:02:24.119 we we average seven different types of cheese and said 0:02:24.160 --> 0:02:27.639 at any given time, so we are love cheese. We 0:02:27.960 --> 0:02:31.120 uh we. Price is no object. We just buy what 0:02:31.160 --> 0:02:33.799 we want and it's absolutely a blast to to write 0:02:33.840 --> 0:02:36.000 different types of cheese for us. So that's our thing, 0:02:36.080 --> 0:02:39.280 it's your splurge. It's also a consumable. What is it 0:02:39.320 --> 0:02:41.280 about things that we consume that I don't know? We 0:02:41.280 --> 0:02:43.840 we derive a lot of pleasure from the senses, right, 0:02:43.880 --> 0:02:45.320 like cheese, I assume what kind of cheese? A do 0:02:45.320 --> 0:02:48.040 you like? We we like double cheese. No, I don't 0:02:48.080 --> 0:02:50.480 love this stinky stuff. Our favorite sort of easy go 0:02:50.600 --> 0:02:52.600 to is the doubling our cheese. We we tried it 0:02:52.639 --> 0:02:54.519 in Dublin for the first time and it's like got 0:02:54.560 --> 0:02:57.000 good family memories from a family trip I took there. 0:02:57.040 --> 0:02:59.959 So yeah, yeah, yeah, not nothing too stinky though. We're 0:03:01.760 --> 0:03:03.640 that's cool all right. Well we want to ask you too, 0:03:03.720 --> 0:03:07.120 like why did you decide to get into thinking about money? 0:03:07.240 --> 0:03:09.960 And you received your doctorate in psychology, but you've turned 0:03:09.960 --> 0:03:13.480 your focus to kind of investing in and behavioral finances. 0:03:13.480 --> 0:03:16.360 So like what spurred that on in you? Yeah? So 0:03:16.680 --> 0:03:19.160 um not wanting to be broke because the easy answers, 0:03:19.160 --> 0:03:21.600 so the UM. I had two great loves early on 0:03:21.639 --> 0:03:24.000 in college. One was investment management. I'm the son of 0:03:24.000 --> 0:03:26.640 a financial advisor, so just grew up in a house 0:03:26.880 --> 0:03:29.760 where we were always talking about investing in stocks at 0:03:29.800 --> 0:03:32.280 the dinner table. Uh. So grew up with a real 0:03:32.400 --> 0:03:34.920 love and a and a real familiarity with with that 0:03:35.000 --> 0:03:38.640 whole world. But it was also fascinated by human behavior. 0:03:38.680 --> 0:03:42.280 And so I went through my doctoral program, got about 0:03:42.320 --> 0:03:46.480 halfway through and had just had enough of being a clinician. 0:03:46.760 --> 0:03:48.920 You know, I'd met with thousands of clients and I 0:03:48.960 --> 0:03:51.840 was frankly just stressed out by it, you know, the 0:03:52.960 --> 0:03:56.920 rigors and just the tough slog of seeing forty fifty 0:03:56.920 --> 0:03:59.760 people a week who were having a very bad week. Uh. 0:03:59.840 --> 0:04:01.920 We just beginning to take its toll on me. And 0:04:01.960 --> 0:04:05.040 so I said, look, I love thinking about human behavior. 0:04:05.080 --> 0:04:07.560 I love wondering about why people do what they do, 0:04:07.600 --> 0:04:10.880 But is there a non medical application of this? And 0:04:10.920 --> 0:04:13.720 so my dad, being who he was I stumbled upon 0:04:13.760 --> 0:04:18.159 behavioral economics behavioral finance pretty early on. Uh, and it's 0:04:18.200 --> 0:04:21.040 been a great ride since. Were you board by the 0:04:21.200 --> 0:04:23.640 financial discussions at the dinner table when you're as a kid? No, 0:04:23.800 --> 0:04:25.719 I actually loved it. And it was one of those 0:04:25.760 --> 0:04:28.440 things where, you know, in my in my fifth grade 0:04:28.800 --> 0:04:32.240 um stock market game simulation, I dominated, right, And so 0:04:32.640 --> 0:04:34.800 you know, having having my dad helped me out. And 0:04:34.839 --> 0:04:39.359 I remember investing in the Chicago Tribune and these different stocks, 0:04:39.400 --> 0:04:42.440 Harley and these different stocks early on and watching it 0:04:42.520 --> 0:04:45.920 go up and just thinking how amazing it was that 0:04:46.040 --> 0:04:49.080 I could make money off of other people's work. I 0:04:49.080 --> 0:04:51.720 mean that was like as a as a young lazy kid, 0:04:51.920 --> 0:04:54.880 I was like, wow, Like other people are working and 0:04:55.000 --> 0:04:58.039 I'm getting paid and I'm clipping coupons getting dividends. It 0:04:58.080 --> 0:05:00.719 was just transformative to me. So I actually quite loved it. 0:05:01.400 --> 0:05:03.080 So let's talk a little bit about your book, The 0:05:03.200 --> 0:05:06.040 Behavioral Investor. In that book, like in the first portion 0:05:06.080 --> 0:05:07.719 of it, you spent a lot of time talking about 0:05:07.800 --> 0:05:11.039 our bodies and our minds and society as well. Why 0:05:11.080 --> 0:05:13.599 do you find that that's so important to to focus 0:05:13.640 --> 0:05:16.120 on in particular when it comes to investing in making 0:05:16.120 --> 0:05:19.040 those decisions. Yeah, so I I tried to take a 0:05:19.080 --> 0:05:22.320 big step back with this book because you know, most people, 0:05:22.880 --> 0:05:25.280 maybe they give some thought to psychology, but they give 0:05:25.440 --> 0:05:28.560 very very little thought to context. And so one of 0:05:28.560 --> 0:05:31.080 the things that that I have learned in my study 0:05:31.120 --> 0:05:33.919 of why we make the decisions that we do is 0:05:33.960 --> 0:05:37.640 that willpower is very limited and that context matters a 0:05:37.760 --> 0:05:41.640 great deal. You started off with with talking about the 0:05:41.640 --> 0:05:44.040 beer that I brought. So I'll give an example from 0:05:44.080 --> 0:05:47.600 a liquor store that was trying to titrate the the 0:05:47.600 --> 0:05:50.839 inflows and outflows of the different types of liquor. They 0:05:50.920 --> 0:05:54.000 found that the type of music they played was the 0:05:54.040 --> 0:05:57.000 best predictor of what people would buy. So they're trying 0:05:57.040 --> 0:05:59.560 to manage how much wine or champagne or beer they have. 0:06:00.000 --> 0:06:03.080 In days that they played German music, that the consumption 0:06:03.080 --> 0:06:06.239 of beer went up over On days when they played 0:06:06.279 --> 0:06:10.000 French music, the consumption of champagne went up over seventy percent. 0:06:10.400 --> 0:06:13.000 But if you ask someone leaving the store, like why 0:06:13.000 --> 0:06:15.600 did you buy this beer, They're not going to say, 0:06:15.680 --> 0:06:19.160 you know, I was subtly influenced by environmental cues. So 0:06:19.240 --> 0:06:21.200 we go through our days and we make all these 0:06:21.279 --> 0:06:24.159 choices sort of beneath our awareness, and so I wanted 0:06:24.160 --> 0:06:28.400 to highlight, you know, societally, physiologically, here are some of 0:06:28.480 --> 0:06:30.480 the things that are impinging on your ability to make 0:06:30.520 --> 0:06:33.240 good financial choices, because I thought there was sort of 0:06:33.279 --> 0:06:36.080 a gap in the literature around that. So, yeah, that's 0:06:36.080 --> 0:06:38.239 a great example. I think that actually helps us see 0:06:38.360 --> 0:06:42.479 how our brains are susceptible to having things that aren't 0:06:42.520 --> 0:06:45.880 necessarily self generated to make a decision um. And so 0:06:46.520 --> 0:06:49.279 when it comes to our brains, why is it that 0:06:49.320 --> 0:06:51.520 our brains play tricks on us? And why does that 0:06:51.600 --> 0:06:55.919 make it hard for us to be actually savvy, decent investors. 0:06:55.960 --> 0:06:58.039 So one of my favorite stats that I that I 0:06:58.080 --> 0:07:00.880 came across in the book was that your brain accounts 0:07:00.880 --> 0:07:03.159 for about two to three percent of your body weight, 0:07:03.200 --> 0:07:08.039 but it accounts for of your metabolic expenditures in a 0:07:08.080 --> 0:07:12.000 given day. So of the calories that you burn in 0:07:12.040 --> 0:07:15.720 a day are down to thinking effectively. And so because 0:07:15.760 --> 0:07:18.920 there's this enormous mismatch, your body is always trying to 0:07:18.920 --> 0:07:22.240 go into energy saver mode and be more efficient. And 0:07:22.280 --> 0:07:25.000 of the ways that we do this basically by shutting 0:07:25.120 --> 0:07:28.240 the brain down, like trying to think less. So we 0:07:28.320 --> 0:07:30.800 do things like we look at our neighbors and see 0:07:30.800 --> 0:07:32.800 what they're doing, and we try and do that, or 0:07:32.840 --> 0:07:35.400 we turn on the TV and see what the financial 0:07:35.400 --> 0:07:38.239 talking heads are telling us we should do. We draft 0:07:38.280 --> 0:07:40.680 off of the opinions of others, or we do what 0:07:40.720 --> 0:07:42.960 we've always done, or we do what our parents do. 0:07:43.400 --> 0:07:47.640 We're just not equipped to really make well thought out, 0:07:47.840 --> 0:07:52.480 well reasoned financial decisions again and again and again, because 0:07:52.640 --> 0:07:55.560 there's this huge mismatch between how hungry our brain is 0:07:55.600 --> 0:07:57.680 and how big it is. And so that to me 0:07:57.880 --> 0:08:01.520 is is an incredible Uh, was an incredible thing to learn. 0:08:02.280 --> 0:08:03.880 You know. The other thing I learned is that we 0:08:03.960 --> 0:08:07.840 lose thirteen percent of our intelligence of our i Q 0:08:08.040 --> 0:08:11.400 when we're under financial stress. So even if your brains 0:08:11.480 --> 0:08:14.240 fully loaded, right, even if your brain is is locked 0:08:14.280 --> 0:08:17.560 and ready to go with all the right financial education 0:08:17.600 --> 0:08:20.200 that you need, when when the risk hits the fan, 0:08:20.480 --> 0:08:23.520 so to speak, you're dumb, Like you you have least 0:08:23.560 --> 0:08:25.920 access to these things when you need them most. So 0:08:26.000 --> 0:08:28.400 your brain is not not too well equipped to be 0:08:28.640 --> 0:08:31.440 a savvy financial decision maker. Yeah, even though you know 0:08:31.520 --> 0:08:33.640 those facts, you know what you should be doing when Yeah, 0:08:33.640 --> 0:08:35.800 like when when the stuff hits the fan. Yeah, you 0:08:35.840 --> 0:08:38.520 are incapable of making the proper decision. One of the 0:08:38.520 --> 0:08:40.280 other things you mentioned in your book as well was 0:08:40.320 --> 0:08:43.959 how we're wired for more that immediate gratification and how 0:08:44.000 --> 0:08:47.120 we have a really tough time thinking beyond that, and 0:08:47.240 --> 0:08:51.080 that again makes us terrible long term investors, right, yeah, 0:08:51.120 --> 0:08:54.240 it does. There was a fascinating study in Merrill Lynch 0:08:54.280 --> 0:08:57.960 actually bought this technology. There was technology that allowed you 0:08:58.000 --> 0:09:00.400 to age your face so like you could take picture 0:09:00.400 --> 0:09:01.720 of you and then it would make you look like 0:09:01.760 --> 0:09:03.880 you were, you know whatever, a hundred years old. Joe 0:09:03.920 --> 0:09:07.600 loves that app co my co worker literally the other day, 0:09:07.640 --> 0:09:09.160 took a picture of me. Was like he was like, 0:09:09.160 --> 0:09:10.439 stand still, I'm gonna take a picture of you and 0:09:10.440 --> 0:09:12.000 I had no idea what he's doing for and he 0:09:12.040 --> 0:09:16.120 turned me into a girl. Yeah so yeah, yeah, you 0:09:16.160 --> 0:09:19.960 still get carded, don't you pretty much? Yeah. So what 0:09:20.000 --> 0:09:22.319 they found though, is when people were able to envision 0:09:22.360 --> 0:09:26.360 themselves older, they dramatically up their retirement savings. Because most 0:09:26.400 --> 0:09:28.080 of us think, you know, we're going to be this 0:09:28.120 --> 0:09:31.160 age forever and the me that exists today is the 0:09:31.200 --> 0:09:34.040 me that will always be. But we have to really 0:09:34.080 --> 0:09:36.840 get a more visceral sense of a of a future 0:09:36.880 --> 0:09:40.000 self that's gonna want vacations and food and you know, 0:09:40.360 --> 0:09:43.079 a warm place to sleep just as much as today 0:09:43.360 --> 0:09:45.719 you does. And that's hard for us to get our 0:09:45.720 --> 0:09:48.400 minds around, right, And so anything that we can do 0:09:48.880 --> 0:09:50.960 to kind of get a better picture of that future 0:09:50.960 --> 0:09:54.000 self is powerful, But it's nothing we do very naturally. Yeah, 0:09:54.040 --> 0:09:57.199 I think, Yeah, most people in their twenties, and looking 0:09:57.240 --> 0:09:59.280 back to when I was in my early twenties, it's 0:09:59.360 --> 0:10:02.319 kind of abnormal interested in this stuff. But most people 0:10:02.640 --> 0:10:04.760 it's just you think you're invincible, you think you're gonna 0:10:04.760 --> 0:10:06.760 live forever when you're twenty two, and that's just not 0:10:06.800 --> 0:10:08.640 the case. And but that's the most important time to 0:10:08.679 --> 0:10:10.920 start getting invested too, in the stock market, to start 0:10:11.120 --> 0:10:13.640 thinking about the future. But that's often the time that 0:10:13.679 --> 0:10:16.920 people are least thinking about the future. Yeah, the world 0:10:16.960 --> 0:10:19.600 of investing is full of these paradoxes, right, Like, twenty 0:10:19.600 --> 0:10:23.240 two is exactly when you need to be started building 0:10:23.240 --> 0:10:26.360 a compounding life financial legacy. And at that point, your 0:10:26.440 --> 0:10:29.800 prefrontal cortex isn't even fully formed, and you don't even 0:10:29.840 --> 0:10:33.240 fully grasp a relationship between cause and effect, and I 0:10:33.280 --> 0:10:35.079 think if we all look back to college, we can 0:10:35.200 --> 0:10:38.160 we can bring to mind instances where where this was 0:10:38.200 --> 0:10:42.040 on full display. But yeah, you're you're well positioned to 0:10:42.080 --> 0:10:45.720 start saving, but not psychologically. So, Daniel, you talked some 0:10:45.840 --> 0:10:47.760 in the book as well about the primacy and the 0:10:47.800 --> 0:10:50.000 recency effect. Can you explain that a little bit when 0:10:50.040 --> 0:10:52.200 it comes to investing. You know, we're talking about age 0:10:52.200 --> 0:10:56.000 and how certain things affect how we view money and 0:10:56.080 --> 0:10:57.959 just things in general. How does it affect how we 0:10:58.080 --> 0:11:01.240 view investing? Yes, So the primus see in recency effect, 0:11:01.360 --> 0:11:03.960 is this notion in psychology that's backed up by the 0:11:04.000 --> 0:11:07.600 literature that we have the best memory for things that 0:11:07.679 --> 0:11:10.800 happened early on and things that have happened recently. And 0:11:10.840 --> 0:11:13.480 so this is true of even conversations. You go have 0:11:13.600 --> 0:11:15.520 a conversation with a friend, you're going to have the 0:11:15.559 --> 0:11:18.400 best memory for sort of the opening gambit and then 0:11:18.440 --> 0:11:21.199 the last thing that you said before parting. It's also 0:11:21.240 --> 0:11:23.800 true of our investing live so you know, we look 0:11:23.840 --> 0:11:26.839 at someone like I'll use myself as an example. So 0:11:27.200 --> 0:11:28.600 you know, I went to a lot of school, so 0:11:28.679 --> 0:11:30.559 I didn't really get my first job until I was 0:11:30.600 --> 0:11:33.520 about twenty seven, and so I get out, get my 0:11:33.520 --> 0:11:35.920 first job. When I'm twenty seven, I start saving. I 0:11:35.960 --> 0:11:38.160 got a four oh one K, and then within a 0:11:38.240 --> 0:11:41.080 year and a half it's the Great Financial Crisis. So 0:11:41.160 --> 0:11:43.319 you know, you're just getting started. You think you're doing 0:11:43.360 --> 0:11:45.480 the right thing, and this nice little nest that you've 0:11:45.480 --> 0:11:49.120 built up is crushed right, it's down, and then you know, 0:11:49.240 --> 0:11:51.559 bring it to today and we'll go back to Q 0:11:51.840 --> 0:11:56.600 four of eighteen again, we're down fifteen or so. Someone 0:11:56.720 --> 0:11:59.600 like me, if they're not careful and if they don't 0:11:59.679 --> 0:12:03.480 sort of automate good practices, could say, look, the first 0:12:03.480 --> 0:12:05.640 thing that ever happened to my money was it got 0:12:05.760 --> 0:12:09.080 you know, when went down a third. Uh. Recently we've 0:12:09.080 --> 0:12:12.560 had more volatility. Therefore the market is a scary dangerous 0:12:12.600 --> 0:12:16.360 place forgetting that. You know, there's also been a whatever 0:12:16.400 --> 0:12:20.280 a four increase in that time as well. So we 0:12:20.360 --> 0:12:23.240 have to be careful because memory plays tricks on us, 0:12:23.320 --> 0:12:27.240 and especially I think millennials and others who who have 0:12:27.440 --> 0:12:30.840 started saving at an inopportune time or a time when 0:12:31.400 --> 0:12:34.800 they had a traumatic first experiences can be in a 0:12:34.800 --> 0:12:38.120 little trouble. And you know, the interestingly, the inverse is 0:12:38.160 --> 0:12:41.040 true too. You see some people who come out and 0:12:41.120 --> 0:12:44.320 confuse a bull market with a big brain. So they 0:12:44.400 --> 0:12:46.600 got out in a year. You know, Let's say they 0:12:46.640 --> 0:12:50.240 started saving in in two thousand and ten, and they're like, wow, 0:12:50.280 --> 0:12:52.760 this is easy, Like all the stock market does is 0:12:52.800 --> 0:12:57.360 go up. I'm a genius. And so either success or 0:12:57.400 --> 0:12:59.800 a failure can actually be problematic, and we have to 0:12:59.840 --> 0:13:02.720 be careful not to let those early and those recent 0:13:02.800 --> 0:13:06.680 experiences loom too large. Do you think that that same 0:13:06.720 --> 0:13:10.880 principle can affect the way that we broadly view money, 0:13:10.880 --> 0:13:13.839 not just investing. For instance, you sitting around the dining 0:13:13.880 --> 0:13:15.920 room table with your dad, who's you know, talking to 0:13:15.920 --> 0:13:18.360 you about stocks? Or for me, you know, I had 0:13:18.559 --> 0:13:21.640 an experience where my family didn't handle money well and 0:13:21.760 --> 0:13:23.800 we went through bankruptcy when I was thirteen, And that 0:13:23.920 --> 0:13:25.680 to me is like the line of demarcation of why 0:13:25.679 --> 0:13:28.439 I got interested in finances to begin with. How do 0:13:28.520 --> 0:13:32.040 those effects of primacy and recency affect us in regards 0:13:32.080 --> 0:13:35.240 to how we think about money in general? Yes, so 0:13:35.320 --> 0:13:37.840 this is I mean, this is a fascinating question to me. 0:13:37.880 --> 0:13:40.920 It's certainly the lessons that we learned early take take 0:13:41.000 --> 0:13:44.320 deep hold. But what's fascinating to me is anecdotally, what 0:13:44.400 --> 0:13:47.640 I've observed is sort of both sides of this. There 0:13:47.640 --> 0:13:50.920 are people who grew up in in my situation, say, 0:13:51.000 --> 0:13:53.760 where you know this talk about money is ever present, 0:13:53.800 --> 0:13:55.800 and they go, yuck, you know this is too that 0:13:55.880 --> 0:13:57.960 was too much. You know, that was too much. I 0:13:57.960 --> 0:14:00.240 don't I don't care about money. And there's people grow 0:14:00.280 --> 0:14:02.920 up in your situation where there's a bankruptcy or something, 0:14:03.320 --> 0:14:05.640 and sometimes that's going to lead them to say, I 0:14:05.679 --> 0:14:07.480 will never let this happen to me. I'm going to 0:14:07.640 --> 0:14:09.960 educate myself. I'm going to be different, this will never 0:14:10.000 --> 0:14:13.199 happen to me. And then other times, quite naturally, they 0:14:13.280 --> 0:14:15.720 perhaps learned the bad lessons that they grew up with. 0:14:16.000 --> 0:14:19.160 So I wish I knew better what separated people who 0:14:19.280 --> 0:14:22.560 who run from one style versus those who adopt it. 0:14:22.600 --> 0:14:26.480 But I have seen in both cases there's always an impact. 0:14:26.680 --> 0:14:29.120 There's always an impact, but some people run toward it 0:14:29.160 --> 0:14:31.560 and some people run far away from it. But but 0:14:31.680 --> 0:14:36.360 either way, I think you're absolutely impacted by those early experiences. Yeah, Daniel, 0:14:36.400 --> 0:14:38.320 if only we knew the depths of our minds and 0:14:38.360 --> 0:14:40.120 then why it was that we behave that way, right, 0:14:40.680 --> 0:14:43.040 So after the break, we're gonna talk more specifically about 0:14:43.040 --> 0:14:46.440 investing for folks who are not investing at all, things 0:14:46.440 --> 0:14:48.320 to watch out for, but as well, if you are 0:14:48.360 --> 0:15:00.840 already investing, we're going to talk about that as well. Alright, 0:15:00.840 --> 0:15:02.800 we're back from the break. We're speaking with Daniel Crosby, 0:15:02.880 --> 0:15:06.160 behavioral finance expert. Daniel, I so thoroughly enjoyed your book. 0:15:06.160 --> 0:15:08.560 I think I geeked out on somebody the studies and 0:15:08.600 --> 0:15:12.320 the specific stories that you discussed in there. By the way, 0:15:12.360 --> 0:15:14.720 for our listeners, we're going to give away a few 0:15:14.720 --> 0:15:16.920 copies of his book at the end of the episodes, 0:15:16.960 --> 0:15:18.680 so stay tuned for that. But first I want to 0:15:18.680 --> 0:15:20.680 ask you about a story that you mentioned in your 0:15:20.680 --> 0:15:22.840 TED talk and then also mentioned in your book, and 0:15:22.920 --> 0:15:25.360 it was about a woman named Brooke. You were helping 0:15:25.400 --> 0:15:27.680 her with a specific situation and she seemed to just 0:15:27.720 --> 0:15:30.000 bury her in the sand about something that was happening 0:15:30.000 --> 0:15:31.800 in regards to college emissions. Can you tell us a 0:15:31.840 --> 0:15:33.600 story and then kind of how the how we can 0:15:33.680 --> 0:15:36.080 learn from that. Yeah, So, Brooke and not not her 0:15:36.120 --> 0:15:39.520 real name, Brooke was my first ever counseling client, and 0:15:39.560 --> 0:15:41.720 so to set the stage a little bit. I'm twenty 0:15:41.760 --> 0:15:44.240 three years old at the time, which I think we 0:15:44.280 --> 0:15:46.920 can all agree is a great time to be dispensing, 0:15:47.360 --> 0:15:49.840 you know, life advice to people. Yeah, I've got it 0:15:49.880 --> 0:15:52.800 figured out. Come and get refer back to the prefuncile cortex. 0:15:53.240 --> 0:15:56.080 My prefuncial cortex is still half baked at this point. 0:15:56.520 --> 0:15:59.280 So Brooke foolishly comes to you know, comes to see me. 0:15:59.360 --> 0:16:02.480 She's literally the first client I've ever seen. And she 0:16:02.600 --> 0:16:04.640 comes in and she doesn't say a word. She hands 0:16:04.640 --> 0:16:08.040 me six envelopes, like six six large envelopes, and I'm like, 0:16:08.040 --> 0:16:09.920 oh my god, like what, you know, what am I 0:16:09.920 --> 0:16:11.880 in for? This was not in the book? You know, 0:16:11.920 --> 0:16:14.240 this was what? What chapter was this? Because it's all 0:16:14.240 --> 0:16:17.000 book learning at this point. And you know, she explains 0:16:17.040 --> 0:16:18.560 to me that ever since she was a little girl, 0:16:18.680 --> 0:16:22.360 she's wanted to be a doctor, and she's applied to 0:16:22.400 --> 0:16:25.360 six medical schools. She's heard back from all all six 0:16:25.400 --> 0:16:28.960 of them, and she can't bring herself to open the 0:16:29.080 --> 0:16:32.480 envelopes because she she feels like if she finds out 0:16:32.480 --> 0:16:35.200 that she didn't get in, she'll be crushed. So, you know, 0:16:35.240 --> 0:16:38.480 having recently been through the grad school application process myself. 0:16:38.480 --> 0:16:40.440 If I say to her, like, look, don't you have 0:16:40.480 --> 0:16:42.720 to let them know that you're that you're coming, Like 0:16:42.760 --> 0:16:44.680 if you if you did get in, and she goes, yeah, 0:16:44.680 --> 0:16:46.880 I've got like a week and a half before before 0:16:46.880 --> 0:16:49.320 i have to you know, have have worked through this 0:16:49.440 --> 0:16:52.480 open these and have moved on. And so she opened 0:16:52.480 --> 0:16:55.640 them and she got into all six schools, which really 0:16:56.080 --> 0:16:59.560 saved my high I mean, that could be a that 0:16:59.560 --> 0:17:01.600 could have been the end of my therapy career if 0:17:01.640 --> 0:17:03.640 she had gotten into none of them. But she got 0:17:03.680 --> 0:17:06.600 into all six schools. But the point that I made 0:17:06.720 --> 0:17:09.440 to her that that led her to open the envelopes 0:17:09.880 --> 0:17:13.080 is that sometimes in our efforts to to manage or 0:17:13.160 --> 0:17:16.200 mitigate risk, we bring about the certainty of the very 0:17:16.200 --> 0:17:19.119 thing we're scared of. And so in her case, you know, 0:17:19.200 --> 0:17:21.399 if she had the things she was scared of was 0:17:21.440 --> 0:17:25.159 not getting into grad school, and her tendency to not 0:17:25.200 --> 0:17:27.800 want to open these envelopes was going to guarantee the 0:17:27.920 --> 0:17:31.120 very thing she was scared of. For investors, there's there's 0:17:31.160 --> 0:17:34.080 an analog here, because the thing that most investors are 0:17:34.080 --> 0:17:37.280 scared of is not reaching their financial goals, like not 0:17:37.440 --> 0:17:41.200 crossing the finish line. But the way that they manage 0:17:41.200 --> 0:17:43.840 that fear is by not investing, by sitting on the sidelines, 0:17:43.880 --> 0:17:47.080 by staying in cash, by being too conservative. And in 0:17:47.119 --> 0:17:49.919 a world where your money is being destroyed by inflation 0:17:50.040 --> 0:17:53.240 at a rate of about three percent a year, choosing 0:17:53.280 --> 0:17:56.280 not to invest is bringing about the certainty of failure. 0:17:56.280 --> 0:17:59.040 You're dooming yourself to a diminished quality of life and 0:17:59.080 --> 0:18:01.960 diminished earning the potential. So that's the analog I'm trying 0:18:02.000 --> 0:18:04.040 to make their It's like, by not taking risk, you're 0:18:04.080 --> 0:18:07.000 actually choosing the most risky possible road. That's right. Not 0:18:07.119 --> 0:18:09.040 risking is the riskiest thing you could ever do. So 0:18:09.080 --> 0:18:10.879 for those folks, I mean, what do you say to them, Like, 0:18:11.000 --> 0:18:12.879 to those folks who aren't investing and they do have 0:18:12.960 --> 0:18:14.359 their head in the sand and they're just trying to 0:18:14.359 --> 0:18:17.640 avoid making that decision altogether, do you just say invest? Well, 0:18:17.720 --> 0:18:21.360 So it's interesting, there's a I've used to be really 0:18:21.400 --> 0:18:23.600 bad at this because I would get frustrated and go, oh, 0:18:23.600 --> 0:18:25.480 come on, like you, why aren't you doing Why aren't 0:18:25.480 --> 0:18:27.119 you doing this? Like you know, and you kind of 0:18:27.160 --> 0:18:29.359 bang your head against that wall. But we as a 0:18:29.480 --> 0:18:34.000 human family have a profound sort of get lost impulse 0:18:34.040 --> 0:18:36.679 when someone commands us to do something, you know, we 0:18:36.760 --> 0:18:39.360 kind of give them the finger, you know, metaphorically when 0:18:39.359 --> 0:18:41.359 they try and tell us to command us to do 0:18:41.440 --> 0:18:43.720 something or tell us we're so dumb for not doing something. 0:18:44.080 --> 0:18:46.119 So what I do now is I listen, you know, 0:18:46.200 --> 0:18:48.320 I listen and say, you know, what are what are 0:18:48.320 --> 0:18:50.840 the fears around this? And I try and empathize with 0:18:50.880 --> 0:18:54.920 those fears, and people once they feel understood, I feel 0:18:54.920 --> 0:18:58.560 like then they're open to having a conversation about the 0:18:58.640 --> 0:19:01.320 nuts and bolts of why investing is a good idea. 0:19:01.800 --> 0:19:04.480 But I find the same thing with diversification because here 0:19:04.520 --> 0:19:07.560 in Atlanta, I run across all sorts of folks who 0:19:07.600 --> 0:19:10.480 have eighty percent of their wealth and Coke or ups 0:19:10.600 --> 0:19:13.080 or a flack or any of the large corporations that 0:19:13.119 --> 0:19:17.399 are around here, and they're scared to diversify away from 0:19:17.440 --> 0:19:21.440 these really concentrated positions. And then when you start to listen, though, 0:19:21.520 --> 0:19:23.280 if you just say, look, you know, it's dumb. All 0:19:23.320 --> 0:19:25.159 of your eggs are in one basket, they they're not 0:19:25.240 --> 0:19:29.480 responsive to that. But if you listen and hear things like, look, um, 0:19:29.520 --> 0:19:31.320 you know this company took a chance on me when 0:19:31.320 --> 0:19:33.480 I had nothing, and they've made me a millionaire. They've 0:19:33.480 --> 0:19:36.280 made me who I am today. You can go, okay, 0:19:36.359 --> 0:19:38.199 you know, you can listen, you can empathize, and you 0:19:38.240 --> 0:19:41.360 can go, well, it's still dumb, but but but they're 0:19:41.359 --> 0:19:43.160