WEBVTT - Fixing Your Broken Financial Behavior w/ Dan Egan #911 0:00:00.080 --> 0:00:03.000 Welcome to How to Money. I'm Joel, I'm Matt, and 0:00:03.040 --> 0:00:06.120 today we're talking about fixing your broken financial behavior with 0:00:06.240 --> 0:00:26.280 Dan Egan. All right, so. 0:00:26.200 --> 0:00:30.480 Why are there more millionaires? Joel? Because the basic formula, right, 0:00:30.520 --> 0:00:33.400 it's pretty simple. Just spend less than you make so 0:00:33.400 --> 0:00:37.240 that you can invest in low cost, diverse fied index funds. 0:00:37.280 --> 0:00:39.239 Like we literally, we're not at all joking when we 0:00:39.240 --> 0:00:41.360 say that if you follow those straightforward steps, and it 0:00:41.400 --> 0:00:43.879 won't be long before you are sitting on millions of 0:00:43.880 --> 0:00:47.440 dollars in retirement. It's that simple. But that doesn't mean 0:00:47.479 --> 0:00:51.680 it is that easy. And evidently we are the reasons 0:00:51.680 --> 0:00:54.480 that we don't have more money or whatever it is 0:00:54.520 --> 0:00:56.880 that we want in life. Here to talk to us 0:00:56.880 --> 0:01:01.480 today about that is behavioral scientist Dan Dan is the 0:01:01.560 --> 0:01:05.720 director of Behavioral Finance and Investing over at Betterments, and 0:01:05.840 --> 0:01:09.320 today we're going to discuss how human psychology impacts our 0:01:09.520 --> 0:01:12.160 financial decision making. Dan, and thank you so much for 0:01:12.200 --> 0:01:14.120 taking the time to speak with Joel and I today. 0:01:14.240 --> 0:01:16.240 I'm very happy to be here, looking forward to the conversation. 0:01:16.319 --> 0:01:18.399 We are too, Dan, And the first question we ask 0:01:18.400 --> 0:01:19.920 everyone who comes on the show is what's your craft? 0:01:19.920 --> 0:01:22.200 Beer equivalent. I like to think of that as kind 0:01:22.240 --> 0:01:24.600 of a smart behavioral thing to have something to spend 0:01:24.640 --> 0:01:27.600 money on proactively, even though you're doing the smart thing 0:01:27.959 --> 0:01:30.400 with your money on the flip side, investing and saving 0:01:30.400 --> 0:01:33.160 for your future. What's that for you? What's your craft 0:01:33.200 --> 0:01:33.800 beer equivalent? 0:01:34.040 --> 0:01:36.440 So I've been doing something new a little bit lately, 0:01:37.080 --> 0:01:40.440 where with questions like this, I had my answer, and 0:01:40.480 --> 0:01:41.840 I'll tell you my answer, and then i'll tell you 0:01:41.840 --> 0:01:46.640 my wife's answer for me. My answer was, and this 0:01:46.680 --> 0:01:48.720 is something I'm so happy about. It's like a little 0:01:48.760 --> 0:01:50.600 luxury that makes me happy on the time. I have 0:01:50.720 --> 0:01:53.280 multiple of the same thing in different locations so that 0:01:53.320 --> 0:01:55.080 I don't have to worry about having that one thing. 0:01:55.160 --> 0:01:57.840 So I have like six pairs of the same sunglasses 0:01:57.840 --> 0:01:59.560 and ones inside the car and the other ones in 0:01:59.600 --> 0:02:03.000 my back, et cetera. It costs a bit more, you know, 0:02:03.040 --> 0:02:05.520 like it feels a little bit unfrugal because you could 0:02:05.560 --> 0:02:08.280 just have one. But I absolutely love having these extras 0:02:08.280 --> 0:02:08.640 and spares. 0:02:08.680 --> 0:02:09.440 Everything very cool. 0:02:09.440 --> 0:02:11.679 So I was talking to my wife about going on 0:02:11.040 --> 0:02:14.720 the podcast in this question, and I was like, but 0:02:14.760 --> 0:02:17.120 I want you know, like you know me, you're an 0:02:17.120 --> 0:02:20.160 outside perspective, How would you answer that question for me? 0:02:20.919 --> 0:02:27.520 And without hesitation, instantaneously, she said, power tools. Apparently I 0:02:27.560 --> 0:02:32.600 have fully entered my middle aged dad diy arc where 0:02:32.960 --> 0:02:35.480 my splurge is a one hundred and fifty two hundred 0:02:35.480 --> 0:02:37.359 dollars power tool that I'm going to use three times. 0:02:37.440 --> 0:02:38.760 But I'm really happy that I have it. 0:02:39.120 --> 0:02:39.800 That is awesome. 0:02:40.000 --> 0:02:41.800 I actually I really do the job easier if you 0:02:41.800 --> 0:02:42.760 have the right tool on hand. 0:02:42.800 --> 0:02:46.600 And I'm curious the multiple things in different places. I 0:02:46.600 --> 0:02:48.560 also love that. Is that because you forgot stuff like 0:02:48.560 --> 0:02:50.519 your sunglasses? Because I've got way too many pairs of 0:02:50.560 --> 0:02:52.560 sunglasses because I just lose them regularly, and so I 0:02:52.560 --> 0:02:54.840 buy three every summer and I place them in random places. 0:02:54.880 --> 0:02:56.960 But I guess what other things do you to lose? 0:02:57.040 --> 0:03:00.359 Is frugal card? Three of the same thing, they're like eight. 0:03:00.240 --> 0:03:02.519 Dollars, Like they're not nice, but they're like ray bans 0:03:02.600 --> 0:03:05.120 or anything like that. But what else? What else fits 0:03:05.120 --> 0:03:07.560 into that category? And is it because you're you got 0:03:07.600 --> 0:03:09.520 showed up someplace and you're like, ah, I forgot the 0:03:09.520 --> 0:03:09.880 thing again? 0:03:10.000 --> 0:03:16.080 Yes, little like spare battery packs for my phone charging cables, chapstick, 0:03:16.120 --> 0:03:19.520 perhaps an easy one, But that's that's cheap. Nice water 0:03:19.520 --> 0:03:25.120 bottles I have when at work. Oh, actually, here's another example. Keyboards. 0:03:25.240 --> 0:03:28.680 I have the exact same Apple keyboard with like the 0:03:28.680 --> 0:03:30.760 touch I D thing in the office as I do 0:03:30.800 --> 0:03:32.640 at home. And I bought both of them myself because 0:03:32.639 --> 0:03:35.960 I didn't want to have different keyboards between home and work. 0:03:36.000 --> 0:03:37.800 Now that I say it out loud, it sounds really OCD, 0:03:37.920 --> 0:03:41.040 and maybe it is. But yeah, I want, like I 0:03:41.080 --> 0:03:43.320 was like this, I spend so many hours on these things. 0:03:43.320 --> 0:03:45.560 I want them to be the same and make me happy. 0:03:45.760 --> 0:03:46.600 No, I get it. 0:03:46.920 --> 0:03:49.760 There's something to be said about redundancy, and like, that's 0:03:49.800 --> 0:03:52.160 what you're prioritizing here, the ability to not have to 0:03:52.960 --> 0:03:56.240 schlep something like I very much. I'm just so optimizing 0:03:56.320 --> 0:03:58.960 frugal and cheap. Some would say that I'm you know, 0:03:59.000 --> 0:04:02.160 I'm lugging my water bottle home from the week, Like 0:04:02.160 --> 0:04:03.440 I keep a water bottle here at work, but I 0:04:03.440 --> 0:04:04.640 don't use it during the week, but I take it 0:04:04.640 --> 0:04:06.400 home on the weekends and it's just something I have 0:04:06.560 --> 0:04:08.560 it I do. But I could see Dan in this situation. 0:04:08.880 --> 0:04:10.680 He'd be like, no, no, no, no, second, I've got the 0:04:10.720 --> 0:04:12.320 same water bottle at home that I get. 0:04:12.240 --> 0:04:14.680 To use, and the water bottle Matt uses Dan he 0:04:14.720 --> 0:04:17.120 I believe found on the side of the road or something, right. 0:04:16.920 --> 0:04:20.520 So, no, it was at a conference, then nobody claimed it. 0:04:20.520 --> 0:04:22.520 In the hotel, I was helping the clean up after 0:04:22.560 --> 0:04:25.080 our party and the hotel staff was about to toss 0:04:25.080 --> 0:04:27.080 this perfectly is still. 0:04:26.880 --> 0:04:27.760 Looking for that water battle. 0:04:27.800 --> 0:04:29.480 I feel like my wife is going to tell me 0:04:29.480 --> 0:04:31.359 I shouldn't have told you guys this, but they can 0:04:31.480 --> 0:04:34.960 do it anyway. Maybe one of the biggest riskiest things 0:04:35.000 --> 0:04:36.599 I did in our marriage was one day we were 0:04:36.640 --> 0:04:38.840 walking along the street in Philadelphia and there was this 0:04:39.120 --> 0:04:42.320 very cool, bright green hoodie on the side of the road. 0:04:42.480 --> 0:04:44.479 There was like dirty but not like messed up. And 0:04:44.480 --> 0:04:45.800 I looked at I was like, that's really cool. I 0:04:45.839 --> 0:04:48.039 really like that, and she was like, leave it, don't. 0:04:48.960 --> 0:04:51.039 I picked it up. I took it home, I put 0:04:51.080 --> 0:04:53.560 it through the washer. It's still one of my favorite hoodies. 0:04:53.960 --> 0:04:57.880 It's fantastic. Oh my goes, I can't believe you did that. 0:04:58.160 --> 0:04:59.560 I like how she said leave it like she was 0:04:59.600 --> 0:05:03.039 walking walking y'all's dog, but instead she was talking to you, Dan. 0:05:04.440 --> 0:05:05.880 I've ever seen that to my dog when they would 0:05:05.880 --> 0:05:07.840 pick something up with her mouth the. 0:05:07.720 --> 0:05:08.960 Exact same tone. Leave it. 0:05:09.279 --> 0:05:11.919 Oh my gosh, you also have a okay, and this 0:05:12.040 --> 0:05:13.720 is why I've figured that Joel and I would be 0:05:14.520 --> 0:05:17.520 fast friends. But you've got a bunch of bikes, right, Like, 0:05:17.560 --> 0:05:19.280 how many bikes do you have? Because you're up in 0:05:19.279 --> 0:05:21.760 New York City. Space comes out of premium there. 0:05:22.040 --> 0:05:26.640 So I would now say that I have three. I've got, 0:05:26.720 --> 0:05:28.880 you know, like you're It's called a triathlon bike, so 0:05:28.920 --> 0:05:31.080 it's a little bit like a road bike, dropped handles, 0:05:31.480 --> 0:05:34.840 thin tires. I like it, but the fact is is 0:05:34.880 --> 0:05:37.000 I've gotten older, I don't really I'm not going to 0:05:37.040 --> 0:05:40.040 do the performance thing much anymore. I don't go that fast. 0:05:40.800 --> 0:05:43.600 So my main one is a what's it called. It's 0:05:43.640 --> 0:05:46.520 like a fortified like city hybrid bike. It's got the 0:05:46.560 --> 0:05:47.280 pannier rack. 0:05:47.440 --> 0:05:48.880 It's my steady like gravel bike. 0:05:49.160 --> 0:05:50.920 Yeah, exactly, like get into work at home. 0:05:51.320 --> 0:05:52.159 That's my daily commuter. 0:05:52.320 --> 0:05:55.160 And then I do have a piece of land upstate 0:05:55.200 --> 0:05:57.640 and we have bikes there, and that is where I have. 0:05:59.040 --> 0:06:00.880 You know, again, one of my my biggest purchase is 0:06:00.880 --> 0:06:03.480 that I'm very happy about I have an electric rad 0:06:03.560 --> 0:06:07.440 bike where I can bang out sort of like twelve 0:06:07.600 --> 0:06:11.440 mile rides with like my kids sitting on the penny 0:06:11.839 --> 0:06:14.200 or hauling her on her bike without a problem. So 0:06:14.400 --> 0:06:15.599 I have three at this point. 0:06:15.839 --> 0:06:18.480 That's awesome. Is the rad Is it a rad wagon? 0:06:19.440 --> 0:06:22.560 It's the convertible one, one that's like a Brompton that 0:06:22.560 --> 0:06:23.200 you can collapse. 0:06:23.200 --> 0:06:26.520 Okay, cool, I too have a power bike. I love 0:06:26.560 --> 0:06:29.000 it hauling the little man around to and from school 0:06:29.000 --> 0:06:30.640 and stuff like that. So awesome. 0:06:30.680 --> 0:06:32.599 Okay, let's move. We better start talking about money here 0:06:32.600 --> 0:06:33.400 before we leave. Yeah. 0:06:33.480 --> 0:06:36.239 Yeah, but we do talk about bikes a lot. They're 0:06:36.279 --> 0:06:40.720 money saving instruments, right, But let's talk about behavioral finance. Dan. 0:06:41.120 --> 0:06:43.279 I'm going to ask you three questions at once. What 0:06:43.400 --> 0:06:46.240 is behavioral finance? How new is the discipline? And why 0:06:46.240 --> 0:06:47.440 were you attracted to it? All? 0:06:47.520 --> 0:06:47.640 Right? 0:06:47.800 --> 0:06:51.719 Behavioral finance is just you know, taking into account the 0:06:51.720 --> 0:06:54.640 fact that we're humans in financial models. And I can 0:06:54.680 --> 0:06:57.680 go through some specific examples of this. They'll resonate. They're 0:06:57.680 --> 0:07:00.600 pretty simple. But it's just that we don't make decisions 0:07:00.640 --> 0:07:03.960 like computers or like mathematicians would, and it's pretty predictable 0:07:04.000 --> 0:07:06.799 how we're going to make decisions that are different. It 0:07:06.839 --> 0:07:11.040 is relatively new in that I think probably some of 0:07:11.040 --> 0:07:13.400 the most seminal work that has influenced me was done 0:07:13.400 --> 0:07:17.080 in the nineteen seventies. So the paper that won Daniel 0:07:17.120 --> 0:07:20.360 Konneman and Namedstavirsky the Nobel Prize was published in nineteen 0:07:20.480 --> 0:07:24.760 seventy four. So it takes a little while for academic 0:07:24.800 --> 0:07:26.920 findings to get sort of substantiated and brought over to 0:07:26.960 --> 0:07:30.560 the commercial world. So twenty thirty years isn't that bad. 0:07:31.000 --> 0:07:34.720 I've been doing this now for about fifteen years in 0:07:34.720 --> 0:07:38.520 an applied kind of business setting. So I actually remember 0:07:38.720 --> 0:07:41.440 in college I was doing economics and the most interesting 0:07:41.480 --> 0:07:44.880 part of it was the introspective of microeconomics. Why do 0:07:44.920 --> 0:07:47.000 we make decisions this way? How do we think about 0:07:47.120 --> 0:07:50.920 risk and return? And can we do it better? There's 0:07:50.920 --> 0:07:54.800 sort of systematic patterns in how people mismake decisions about 0:07:54.800 --> 0:07:56.320 what's going to make them happy in the future in 0:07:56.360 --> 0:07:58.920 terms of how and when they spend money. And is 0:07:58.960 --> 0:08:00.760 there like a career there where I get to go 0:08:00.800 --> 0:08:03.680 and think about, oh, you keep making the same mistake 0:08:03.760 --> 0:08:06.120 over and over again with money, maybe you could help 0:08:06.160 --> 0:08:07.440 other people avoid that mistake? 0:08:07.720 --> 0:08:10.640 All right, Well, you mentioned maybe sharing some examples like 0:08:10.720 --> 0:08:15.280 what are the most common behavioral patterns you know of 0:08:15.400 --> 0:08:18.800 human fallibility of these mistakes that you see, and how 0:08:18.800 --> 0:08:21.480 do they tend to impact money decisions that we're making 0:08:21.600 --> 0:08:22.000 us people. 0:08:22.360 --> 0:08:24.720 So the core one, the core, the one that won 0:08:24.720 --> 0:08:27.720 the Nobel Prize is a model called prospect theory that 0:08:27.800 --> 0:08:30.920 I think mostly just has like three core parts. The 0:08:31.000 --> 0:08:36.480 first is that our views of things are context dependent 0:08:36.559 --> 0:08:40.280 or reference point dependent. So if you are making one 0:08:40.320 --> 0:08:42.839 hundred thousand dollars a year, you are going to look 0:08:42.880 --> 0:08:46.679 at a ten thousand dollars windfall way differently than if 0:08:46.720 --> 0:08:49.280 you are making thirty thousand dollars a year. The amount 0:08:49.320 --> 0:08:51.560 that you're willing to risk to get that ten thousand 0:08:51.559 --> 0:08:53.400 dollars is going to be different. So the first thing, 0:08:53.480 --> 0:08:55.600 which again is very into it, is just we are 0:08:55.600 --> 0:08:57.640 not kind of computers that look at how much money 0:08:57.640 --> 0:08:59.920 will I end up with? We are people who say, 0:09:00.040 --> 0:09:02.320 here's where I am now, what's the change from where 0:09:02.320 --> 0:09:05.720 I am now? When we're considering a decision. So number 0:09:05.720 --> 0:09:11.319 one reference point dependent. Number two, we're risk averse, which 0:09:11.400 --> 0:09:14.560 is that we generally are going to require there to 0:09:14.559 --> 0:09:17.840 be a bigger payoff if we're going into a risky situation. 0:09:19.160 --> 0:09:21.160 The neat thing that prospect theory found is that while 0:09:21.160 --> 0:09:24.520 that's true more in the gain setting, it actually flips 0:09:24.520 --> 0:09:28.400 in losses. We are risk seeking in losses, which this 0:09:28.480 --> 0:09:31.160 comes up in gambling a lot, where if you are losing, 0:09:31.240 --> 0:09:33.040 you're gonna be like, I want to double down, I 0:09:33.080 --> 0:09:35.280 want to get back to even. It comes up in 0:09:35.400 --> 0:09:38.760 single stock investing a lot where this translates over to 0:09:38.840 --> 0:09:42.840 something called the disposition effect, where people will sell stocks 0:09:42.880 --> 0:09:45.640 that have gone up in value because it feels good. 0:09:45.800 --> 0:09:48.640 They're closing out again. It feels nice. But people who 0:09:48.679 --> 0:09:50.640 are holding onto a losing stock will hold on to 0:09:50.720 --> 0:09:52.360 it for nearly twice as long in the hope that 0:09:52.360 --> 0:09:54.360 they'll get back to even. And in fact, if they 0:09:54.400 --> 0:09:55.839 get back to even, they sort of sell out of 0:09:55.880 --> 0:09:59.199 that stock immediately because they're like, few that sucked, but 0:09:59.200 --> 0:10:01.720 at least I didn't lose any money on it. So 0:10:01.760 --> 0:10:04.480 those three things reference dependence, risk aversion, and gains and 0:10:04.600 --> 0:10:08.800 risk seeking lawsuits is prospect theory, and it's been incredibly 0:10:08.840 --> 0:10:12.160 powerful for explaining a wide array of behavior about insurance 0:10:12.320 --> 0:10:15.920 or gambling behavior, or investor behavior, or what neighborhood we 0:10:16.000 --> 0:10:18.640 choose to live in, and how to incentivize teachers to 0:10:18.679 --> 0:10:20.000 improve their students' test scores. 0:10:20.800 --> 0:10:22.520 You wrote At one point you wrote that finding a 0:10:22.520 --> 0:10:25.200 bias is easy, Fixing it is hard, which makes sense, 0:10:25.280 --> 0:10:27.240 Like you could just kind of watch humans walk down 0:10:27.280 --> 0:10:29.400 the street and be like, idiot, that was a dumb move. 0:10:29.440 --> 0:10:32.160 Can't believe that person did that. It's so easy to 0:10:32.760 --> 0:10:35.160 and same like I could look in the mirror and say, 0:10:35.200 --> 0:10:36.679 like one hundred things I did that were really done 0:10:36.720 --> 0:10:40.120 that day. It's easy to identify the biases. But when 0:10:40.160 --> 0:10:43.800 it comes down to actually like fixing those errors in 0:10:44.440 --> 0:10:47.360 maybe the way in particular that we approach our personal finances, 0:10:47.520 --> 0:10:48.280 what does that look like? 0:10:48.920 --> 0:10:54.120 So the first element of it is admitting or you 0:10:54.160 --> 0:10:55.920 know that the first the first step is admitting that 0:10:55.920 --> 0:10:58.000 you've done something wrong or that you're doing something wrong, 0:10:58.400 --> 0:10:59.440 which is actually a big step. 0:10:59.480 --> 0:11:01.200 Starting to sound twelve step program here. 0:11:01.160 --> 0:11:03.640 Yeah, saying like over and over again, I do something 0:11:03.640 --> 0:11:05.200 that is not in my own best interest. You have 0:11:05.280 --> 0:11:08.000 to have enough like letting go of ego that you're like, eh, 0:11:08.600 --> 0:11:10.599 I should probably improve that and it's something that I 0:11:10.640 --> 0:11:12.360 should do better. A lot of people aren't going to 0:11:12.400 --> 0:11:14.920 get past that first step of having some introspect in 0:11:15.000 --> 0:11:17.840 saying I could be better if I changed this somehow. 0:11:17.880 --> 0:11:21.480 This is something that's not actually how I want to behave. However, 0:11:22.320 --> 0:11:24.400 it is human nature to behave in a certain way. 0:11:24.440 --> 0:11:26.880 We have a lot of like automatic processes that run 0:11:27.000 --> 0:11:28.960 so that we don't have to think about them. Changing 0:11:29.000 --> 0:11:31.360 your behavior is tough. So number one, you have to 0:11:31.360 --> 0:11:33.199 say this is something I want to change. Number two, 0:11:33.200 --> 0:11:36.040 you have to set up habits or patterns or external 0:11:36.080 --> 0:11:39.520 prostheses to get you to do those things differently and 0:11:39.600 --> 0:11:42.480 stick with them over a period of time. So the 0:11:42.600 --> 0:11:47.000 analogy I like to use is it's very easy to say, like, oh, 0:11:47.040 --> 0:11:51.560 you're short sighted, you should wear glasses. Making glasses is 0:11:51.640 --> 0:11:54.160 really difficult. Remembering your glasses and remembering to wear your 0:11:54.200 --> 0:11:57.560 glasses is a little bit as much harder. So when 0:11:57.559 --> 0:12:00.520 we find a behavioral bias, it's nice, but it's sort 0:12:00.520 --> 0:12:02.560 of like the beginning of the are people going to 0:12:02.720 --> 0:12:05.360 admit and want to be helped with this thing? Are 0:12:05.440 --> 0:12:06.720 they going to be able to let go pride in 0:12:06.720 --> 0:12:08.360 you go and say, yeah, I'm flawed and here's something 0:12:08.400 --> 0:12:10.320 that I would like to be better at. And number two, 0:12:10.760 --> 0:12:14.080 can we set up an environment or tools or accountability 0:12:14.120 --> 0:12:17.640 patterns that help them actually change that behavioral pattern. 0:12:17.720 --> 0:12:18.679 We'll talk to us about that. 0:12:18.760 --> 0:12:21.760 I guess you said something a second ago external prosthesis, right, 0:12:21.800 --> 0:12:24.040 So like it sounds like what you're talking about exoskeleton 0:12:24.600 --> 0:12:28.439 or like systems for us to exist within. It's almost 0:12:28.520 --> 0:12:30.720 like when the problem shows up, you already need to 0:12:30.720 --> 0:12:34.000 have something happening, right. Like It's funny, like we were 0:12:34.040 --> 0:12:35.400 just talking about this with bit when it came to 0:12:35.440 --> 0:12:37.960 bitcoin and investing, because we've seen a run up recently 0:12:38.360 --> 0:12:40.000 and I was just like, dang it, I feel like 0:12:40.360 --> 0:12:42.480 this is something I should have addressed because we own 0:12:42.640 --> 0:12:45.960 a small amount of bitcoin, not much, but I was like, 0:12:46.240 --> 0:12:49.000 I prior to this most recent run up, I wish 0:12:49.000 --> 0:12:51.839 I would have created some sort of rule that said that, oh, right, 0:12:51.840 --> 0:12:53.640 once it hits one hundred k, once it hits two 0:12:53.679 --> 0:12:55.800 hundred two and fifty, what am I going to do? 0:12:55.840 --> 0:12:59.839 Because in the moment once it hits zero or zero, 0:13:00.040 --> 0:13:02.280 Because then the moment you're thinking, you're either looking to 0:13:02.320 --> 0:13:04.559 minimize risk, like you said, or you're looking to kind 0:13:04.559 --> 0:13:08.439 of maximize risk and take on additional risk. Is that 0:13:08.480 --> 0:13:10.400 what you're talking about here? You're almost talking about rules 0:13:10.400 --> 0:13:12.079 and systems to put in place. 0:13:12.600 --> 0:13:15.360 Yes, and I think you touched on some good parts 0:13:15.360 --> 0:13:18.120 of it. Number One, you need to come up with 0:13:18.679 --> 0:13:21.160 something that I sometimes think is like a constitution that 0:13:21.160 --> 0:13:23.840 you're writing. I hear, are the rules for how I 0:13:23.880 --> 0:13:26.160 am going to do this. It's not necessarily what policy 0:13:26.160 --> 0:13:28.719 you're going to implement, but even think about, Okay, I'm 0:13:28.720 --> 0:13:34.200 going to write down my bitcoin trading strategy and it 0:13:34.240 --> 0:13:36.560 will say if bitcoin does this, I will do this, 0:13:36.600 --> 0:13:38.600 and if bitcoin does that, I will do that. So 0:13:38.880 --> 0:13:40.720 you've already set out you're sort of like your policy, 0:13:40.760 --> 0:13:42.840 your strategy. Now you have to have some way to 0:13:42.880 --> 0:13:45.760 implement it that doesn't rely on your self control and 0:13:45.800 --> 0:13:48.360 doing it in the moment. And that's really the hard part. 0:13:48.400 --> 0:13:50.200 It's easy to say, like I'm going to eat healthy. 0:13:51.040 --> 0:13:54.040 Here's what I'm gonna eat Monday, Tuesday, Wednesday, Thursday. How 0:13:54.080 --> 0:13:55.559 are you going to handle it when the snack tray 0:13:55.640 --> 0:13:59.760 comes around? Yeah, So that's the process. Processes is the 0:13:59.760 --> 0:14:03.240 idea of kind of being a bionic person, having external 0:14:03.280 --> 0:14:07.959 things glasses for example, that help you to in effect 0:14:08.000 --> 0:14:09.480 see the world or interact with the world in the 0:14:09.480 --> 0:14:13.240 way that you really want to. So a good example 0:14:13.280 --> 0:14:17.200 of this that I think it's so illuminating in multiple ways. 0:14:17.400 --> 0:14:20.280 There's a study that was done with a German brokerage 0:14:20.720 --> 0:14:24.920 so like trading brokerage, stock brokerage, online stock brokerage, and 0:14:25.840 --> 0:14:28.760 what they did is they said, for free, no cost 0:14:28.840 --> 0:14:31.520 to you, we the researchers are going to send you 0:14:32.200 --> 0:14:37.200 performance reports for your accounts every three months. And they 0:14:37.200 --> 0:14:39.120 did this off the back of some research that found 0:14:39.120 --> 0:14:41.840 that generally speaking, people don't know what their own portfolio 0:14:41.920 --> 0:14:44.800 returns are, or if they do, they tend to pay 0:14:44.840 --> 0:14:46.680 more attention when they believe that they're going to have 0:14:46.840 --> 0:14:50.200 beaten the market and be up, then underperform the market 0:14:50.240 --> 0:14:52.760 and or be down. So when we pay attention to 0:14:52.840 --> 0:14:55.280 how we've done is very asymmetric. We pay more attention 0:14:55.800 --> 0:14:57.800 when we think it's going to make us feel good, 0:14:58.320 --> 0:15:01.200 and so most people don't realize how often and when 0:15:01.240 --> 0:15:04.680 they have underperformed or done poorly at investing. So these 0:15:04.680 --> 0:15:07.600 reseachers just said, cool, we want to give people feedback, 0:15:07.760 --> 0:15:10.840 Like a professional portfolio manager whose job it was to 0:15:10.880 --> 0:15:13.200 get We're going to give them these performance reports every 0:15:13.400 --> 0:15:15.240 three months. For I believe it was a year and 0:15:15.280 --> 0:15:17.320 a half, and it told them, you know, like what 0:15:17.400 --> 0:15:20.320 percentage of trades you made did well? Did you beat 0:15:20.320 --> 0:15:23.520 the index? Did you underperform? Were you overweight in specific sectors. 0:15:23.520 --> 0:15:25.760 It was very like, at some level like dry stuff, 0:15:26.120 --> 0:15:29.320 but it was a feedback loop that told them unequivocally, 0:15:29.720 --> 0:15:31.760 here were your returns, here were the returns of the 0:15:31.760 --> 0:15:34.120 market over the same period, and here's some other information 0:15:34.160 --> 0:15:36.960 about you. And what they found is that at the 0:15:37.040 --> 0:15:39.720 end of I believe, one year of sending these people 0:15:39.760 --> 0:15:41.400 reports again just for them over the course of the 0:15:41.520 --> 0:15:45.760 year every three months these personalized performance reports, people started 0:15:45.760 --> 0:15:48.040 trading less. They were more likely to use kind of 0:15:48.080 --> 0:15:52.040 broad based index funds, they were more diversified. So this 0:15:52.200 --> 0:15:54.120 was a good signal that like this kind of personalized 0:15:54.120 --> 0:15:57.680 feedback that tells somebody, hey, maybe you're not so good 0:15:57.680 --> 0:15:59.560 at this, Maybe you could, you know, spend your time 0:15:59.600 --> 0:16:01.280 doing other things and it would be a better use 0:16:01.320 --> 0:16:04.720 of your time. It works. At the same time, that 0:16:04.880 --> 0:16:07.520 brokerage after the study was done, was like, cool, let's 0:16:07.560 --> 0:16:09.640 shut this down because people are trading less, yea, and 0:16:09.680 --> 0:16:11.320 they're not happy that we're telling them that they're doing 0:16:11.360 --> 0:16:11.680 it best. 0:16:11.680 --> 0:16:13.920 Okay, I really want to ask you this then, because 0:16:13.920 --> 0:16:17.120 you're right, like, there's as someone who's in charge of 0:16:17.760 --> 0:16:22.520 architecting kind of behavioral things for betterment, behavioral elements to 0:16:23.040 --> 0:16:26.880 help investors make better decisions. You've done some really great work, 0:16:26.920 --> 0:16:29.800 but can't you also use your powers for evil? And 0:16:30.320 --> 0:16:33.640 aren't there companies doing this like hijacking our attention with 0:16:33.680 --> 0:16:37.160 advertising companies, advertising companies, social media companies. There's this way 0:16:37.160 --> 0:16:39.200 in which you can say, ah, here's what's true about 0:16:39.280 --> 0:16:42.280 human behavior. Let me exploit this from my own personal benefit. 0:16:42.320 --> 0:16:44.760 And it sounds like that company maybe was onto something 0:16:44.800 --> 0:16:47.680 good and then abandon it because they realized maybe it 0:16:47.720 --> 0:16:50.800 was benefiting investors but not the company itself. 0:16:51.200 --> 0:16:54.800 Absolutely, I think unfortunately this is I feel like there's 0:16:55.240 --> 0:17:02.080 a gravitational pull towards free and easy and things that 0:17:02.120 --> 0:17:05.040 make us feel good that we only learn to get 0:17:05.080 --> 0:17:09.440 out of after we've had enough experience. So definitely, I think. 0:17:09.920 --> 0:17:12.360 You know, like one of the pieces that I wrote 0:17:12.400 --> 0:17:14.360 a while ago that I was kind of coming back 0:17:14.400 --> 0:17:16.919 to was this allure of free and how free is 0:17:17.000 --> 0:17:19.320 so much better than paying any little amount. But that 0:17:19.359 --> 0:17:21.480 means that you have a very different relationship with whoever's 0:17:21.520 --> 0:17:24.280 providing the service, Like if your stock brokerage is free, 0:17:24.520 --> 0:17:26.760 they're getting paid by somebody else, which means you kind 0:17:26.760 --> 0:17:29.080 of don't have any like leverage with them to say, 0:17:29.119 --> 0:17:31.080 here's the service that I want, here's how I would 0:17:31.080 --> 0:17:32.639 like things to be different, here's how you could improve 0:17:32.680 --> 0:17:35.120 things for me, and like I'll pay more for it. 0:17:35.720 --> 0:17:39.399 The other element of it that I think is pretty 0:17:39.440 --> 0:17:42.960 tough is there's a smaller market for people who want 0:17:43.200 --> 0:17:45.720 that's the right way to put this, For people who 0:17:45.720 --> 0:17:47.760 have experienced their own mistakes and kind of have a 0:17:47.760 --> 0:17:50.000 low enough you go to say, like, I want somebody 0:17:50.040 --> 0:17:53.439 to help me with this, compared to I think it 0:17:53.520 --> 0:17:56.840 was like decades ago the e trade adverts, where you know, 0:17:56.880 --> 0:17:59.520 it's like this very kind of like alpha male. I'm 0:17:59.520 --> 0:18:02.320 going to train and make lots of money and be 0:18:02.600 --> 0:18:07.800 such a kind of like just alpha male. Some words 0:18:07.800 --> 0:18:12.600 I can't use. The idea there is, like it takes 0:18:12.720 --> 0:18:16.119 time and good feedback loops for you to realize these 0:18:16.720 --> 0:18:19.360 perfectly human faults within yourself and want to help handle them. 0:18:19.960 --> 0:18:21.640 I think at better in One of the nice things 0:18:21.760 --> 0:18:25.000 is that generally speaking, the people who we deal with 0:18:25.280 --> 0:18:27.239 either have already gone through that process and come out 0:18:27.280 --> 0:18:29.560 the other side. They've climbed Mount stupid and walked down 0:18:29.600 --> 0:18:32.320 the other side, or they just went around it entirely 0:18:32.440 --> 0:18:34.960 because they weren't interested in it, or it never really 0:18:35.000 --> 0:18:37.240 appealed to them. One of the neat things we did 0:18:37.359 --> 0:18:40.000 years back was look at who was most likely to 0:18:40.080 --> 0:18:43.320 try to market time, both during raging markets and falling markets, 0:18:43.440 --> 0:18:46.320