Speaker 1: Welcome to How to Money. I'm Joel, I'm Matt, and
Speaker 1: today we're talking about fixing your broken financial behavior with
Speaker 1: Dan Egan. All right, so.
Speaker 2: Why are there more millionaires? Joel? Because the basic formula, right,
Speaker 2: it's pretty simple. Just spend less than you make so
Speaker 2: that you can invest in low cost, diverse fied index funds.
Speaker 2: Like we literally, we're not at all joking when we
Speaker 2: say that if you follow those straightforward steps, and it
Speaker 2: won't be long before you are sitting on millions of
Speaker 2: dollars in retirement. It's that simple. But that doesn't mean
Speaker 2: it is that easy. And evidently we are the reasons
Speaker 2: that we don't have more money or whatever it is
Speaker 2: that we want in life. Here to talk to us
Speaker 2: today about that is behavioral scientist Dan Dan is the
Speaker 2: director of Behavioral Finance and Investing over at Betterments, and
Speaker 2: today we're going to discuss how human psychology impacts our
Speaker 2: financial decision making. Dan, and thank you so much for
Speaker 2: taking the time to speak with Joel and I today.
Speaker 3: I'm very happy to be here, looking forward to the conversation.
Speaker 1: We are too, Dan, And the first question we ask
Speaker 1: everyone who comes on the show is what's your craft?
Speaker 1: Beer equivalent. I like to think of that as kind
Speaker 1: of a smart behavioral thing to have something to spend
Speaker 1: money on proactively, even though you're doing the smart thing
Speaker 1: with your money on the flip side, investing and saving
Speaker 1: for your future. What's that for you? What's your craft
Speaker 1: beer equivalent?
Speaker 3: So I've been doing something new a little bit lately,
Speaker 3: where with questions like this, I had my answer, and
Speaker 3: I'll tell you my answer, and then i'll tell you
Speaker 3: my wife's answer for me. My answer was, and this
Speaker 3: is something I'm so happy about. It's like a little
Speaker 3: luxury that makes me happy on the time. I have
Speaker 3: multiple of the same thing in different locations so that
Speaker 3: I don't have to worry about having that one thing.
Speaker 3: So I have like six pairs of the same sunglasses
Speaker 3: and ones inside the car and the other ones in
Speaker 3: my back, et cetera. It costs a bit more, you know,
Speaker 3: like it feels a little bit unfrugal because you could
Speaker 3: just have one. But I absolutely love having these extras
Speaker 3: and spares.
Speaker 1: Everything very cool.
Speaker 3: So I was talking to my wife about going on
Speaker 3: the podcast in this question, and I was like, but
Speaker 3: I want you know, like you know me, you're an
Speaker 3: outside perspective, How would you answer that question for me?
Speaker 3: And without hesitation, instantaneously, she said, power tools. Apparently I
Speaker 3: have fully entered my middle aged dad diy arc where
Speaker 3: my splurge is a one hundred and fifty two hundred
Speaker 3: dollars power tool that I'm going to use three times.
Speaker 3: But I'm really happy that I have it.
Speaker 1: That is awesome.
Speaker 2: I actually I really do the job easier if you
Speaker 2: have the right tool on hand.
Speaker 1: And I'm curious the multiple things in different places. I
Speaker 1: also love that. Is that because you forgot stuff like
Speaker 1: your sunglasses? Because I've got way too many pairs of
Speaker 1: sunglasses because I just lose them regularly, and so I
Speaker 1: buy three every summer and I place them in random places.
Speaker 1: But I guess what other things do you to lose?
Speaker 2: Is frugal card? Three of the same thing, they're like eight.
Speaker 1: Dollars, Like they're not nice, but they're like ray bans
Speaker 1: or anything like that. But what else? What else fits
Speaker 1: into that category? And is it because you're you got
Speaker 1: showed up someplace and you're like, ah, I forgot the
Speaker 1: thing again?
Speaker 3: Yes, little like spare battery packs for my phone charging cables, chapstick,
Speaker 3: perhaps an easy one, But that's that's cheap. Nice water
Speaker 3: bottles I have when at work. Oh, actually, here's another example. Keyboards.
Speaker 3: I have the exact same Apple keyboard with like the
Speaker 3: touch I D thing in the office as I do
Speaker 3: at home. And I bought both of them myself because
Speaker 3: I didn't want to have different keyboards between home and work.
Speaker 3: Now that I say it out loud, it sounds really OCD,
Speaker 3: and maybe it is. But yeah, I want, like I
Speaker 3: was like this, I spend so many hours on these things.
Speaker 3: I want them to be the same and make me happy.
Speaker 1: No, I get it.
Speaker 2: There's something to be said about redundancy, and like, that's
Speaker 2: what you're prioritizing here, the ability to not have to
Speaker 2: schlep something like I very much. I'm just so optimizing
Speaker 2: frugal and cheap. Some would say that I'm you know,
Speaker 2: I'm lugging my water bottle home from the week, Like
Speaker 2: I keep a water bottle here at work, but I
Speaker 2: don't use it during the week, but I take it
Speaker 2: home on the weekends and it's just something I have
Speaker 2: it I do. But I could see Dan in this situation.
Speaker 2: He'd be like, no, no, no, no, second, I've got the
Speaker 2: same water bottle at home that I get.
Speaker 1: To use, and the water bottle Matt uses Dan he
Speaker 1: I believe found on the side of the road or something, right.
Speaker 2: So, no, it was at a conference, then nobody claimed it.
Speaker 2: In the hotel, I was helping the clean up after
Speaker 2: our party and the hotel staff was about to toss
Speaker 2: this perfectly is still.
Speaker 1: Looking for that water battle.
Speaker 3: I feel like my wife is going to tell me
Speaker 3: I shouldn't have told you guys this, but they can
Speaker 3: do it anyway. Maybe one of the biggest riskiest things
Speaker 3: I did in our marriage was one day we were
Speaker 3: walking along the street in Philadelphia and there was this
Speaker 3: very cool, bright green hoodie on the side of the road.
Speaker 3: There was like dirty but not like messed up. And
Speaker 3: I looked at I was like, that's really cool. I
Speaker 3: really like that, and she was like, leave it, don't.
Speaker 3: I picked it up. I took it home, I put
Speaker 3: it through the washer. It's still one of my favorite hoodies.
Speaker 3: It's fantastic. Oh my goes, I can't believe you did that.
Speaker 2: I like how she said leave it like she was
Speaker 2: walking walking y'all's dog, but instead she was talking to you, Dan.
Speaker 2: I've ever seen that to my dog when they would
Speaker 2: pick something up with her mouth the.
Speaker 3: Exact same tone. Leave it.
Speaker 2: Oh my gosh, you also have a okay, and this
Speaker 2: is why I've figured that Joel and I would be
Speaker 2: fast friends. But you've got a bunch of bikes, right, Like,
Speaker 2: how many bikes do you have? Because you're up in
Speaker 2: New York City. Space comes out of premium there.
Speaker 3: So I would now say that I have three. I've got,
Speaker 3: you know, like you're It's called a triathlon bike, so
Speaker 3: it's a little bit like a road bike, dropped handles,
Speaker 3: thin tires. I like it, but the fact is is
Speaker 3: I've gotten older, I don't really I'm not going to
Speaker 3: do the performance thing much anymore. I don't go that fast.
Speaker 3: So my main one is a what's it called. It's
Speaker 3: like a fortified like city hybrid bike. It's got the
Speaker 3: pannier rack.
Speaker 1: It's my steady like gravel bike.
Speaker 3: Yeah, exactly, like get into work at home.
Speaker 2: That's my daily commuter.
Speaker 3: And then I do have a piece of land upstate
Speaker 3: and we have bikes there, and that is where I have.
Speaker 3: You know, again, one of my my biggest purchase is
Speaker 3: that I'm very happy about I have an electric rad
Speaker 3: bike where I can bang out sort of like twelve
Speaker 3: mile rides with like my kids sitting on the penny
Speaker 3: or hauling her on her bike without a problem. So
Speaker 3: I have three at this point.
Speaker 1: That's awesome. Is the rad Is it a rad wagon?
Speaker 3: It's the convertible one, one that's like a Brompton that
Speaker 3: you can collapse.
Speaker 1: Okay, cool, I too have a power bike. I love
Speaker 1: it hauling the little man around to and from school
Speaker 1: and stuff like that. So awesome.
Speaker 2: Okay, let's move. We better start talking about money here
Speaker 2: before we leave. Yeah.
Speaker 1: Yeah, but we do talk about bikes a lot. They're
Speaker 1: money saving instruments, right, But let's talk about behavioral finance. Dan.
Speaker 1: I'm going to ask you three questions at once. What
Speaker 1: is behavioral finance? How new is the discipline? And why
Speaker 1: were you attracted to it? All?
Speaker 2: Right?
Speaker 3: Behavioral finance is just you know, taking into account the
Speaker 3: fact that we're humans in financial models. And I can
Speaker 3: go through some specific examples of this. They'll resonate. They're
Speaker 3: pretty simple. But it's just that we don't make decisions
Speaker 3: like computers or like mathematicians would, and it's pretty predictable
Speaker 3: how we're going to make decisions that are different. It
Speaker 3: is relatively new in that I think probably some of
Speaker 3: the most seminal work that has influenced me was done
Speaker 3: in the nineteen seventies. So the paper that won Daniel
Speaker 3: Konneman and Namedstavirsky the Nobel Prize was published in nineteen
Speaker 3: seventy four. So it takes a little while for academic
Speaker 3: findings to get sort of substantiated and brought over to
Speaker 3: the commercial world. So twenty thirty years isn't that bad.
Speaker 3: I've been doing this now for about fifteen years in
Speaker 3: an applied kind of business setting. So I actually remember
Speaker 3: in college I was doing economics and the most interesting
Speaker 3: part of it was the introspective of microeconomics. Why do
Speaker 3: we make decisions this way? How do we think about
Speaker 3: risk and return? And can we do it better? There's
Speaker 3: sort of systematic patterns in how people mismake decisions about
Speaker 3: what's going to make them happy in the future in
Speaker 3: terms of how and when they spend money. And is
Speaker 3: there like a career there where I get to go
Speaker 3: and think about, oh, you keep making the same mistake
Speaker 3: over and over again with money, maybe you could help
Speaker 3: other people avoid that mistake?
Speaker 2: All right, Well, you mentioned maybe sharing some examples like
Speaker 2: what are the most common behavioral patterns you know of
Speaker 2: human fallibility of these mistakes that you see, and how
Speaker 2: do they tend to impact money decisions that we're making
Speaker 2: us people.
Speaker 3: So the core one, the core, the one that won
Speaker 3: the Nobel Prize is a model called prospect theory that
Speaker 3: I think mostly just has like three core parts. The
Speaker 3: first is that our views of things are context dependent
Speaker 3: or reference point dependent. So if you are making one
Speaker 3: hundred thousand dollars a year, you are going to look
Speaker 3: at a ten thousand dollars windfall way differently than if
Speaker 3: you are making thirty thousand dollars a year. The amount
Speaker 3: that you're willing to risk to get that ten thousand
Speaker 3: dollars is going to be different. So the first thing,
Speaker 3: which again is very into it, is just we are
Speaker 3: not kind of computers that look at how much money
Speaker 3: will I end up with? We are people who say,
Speaker 3: here's where I am now, what's the change from where
Speaker 3: I am now? When we're considering a decision. So number
Speaker 3: one reference point dependent. Number two, we're risk averse, which
Speaker 3: is that we generally are going to require there to
Speaker 3: be a bigger payoff if we're going into a risky situation.
Speaker 3: The neat thing that prospect theory found is that while
Speaker 3: that's true more in the gain setting, it actually flips
Speaker 3: in losses. We are risk seeking in losses, which this
Speaker 3: comes up in gambling a lot, where if you are losing,
Speaker 3: you're gonna be like, I want to double down, I
Speaker 3: want to get back to even. It comes up in
Speaker 3: single stock investing a lot where this translates over to
Speaker 3: something called the disposition effect, where people will sell stocks
Speaker 3: that have gone up in value because it feels good.
Speaker 3: They're closing out again. It feels nice. But people who
Speaker 3: are holding onto a losing stock will hold on to
Speaker 3: it for nearly twice as long in the hope that
Speaker 3: they'll get back to even. And in fact, if they
Speaker 3: get back to even, they sort of sell out of
Speaker 3: that stock immediately because they're like, few that sucked, but
Speaker 3: at least I didn't lose any money on it. So
Speaker 3: those three things reference dependence, risk aversion, and gains and
Speaker 3: risk seeking lawsuits is prospect theory, and it's been incredibly
Speaker 3: powerful for explaining a wide array of behavior about insurance
Speaker 3: or gambling behavior, or investor behavior, or what neighborhood we
Speaker 3: choose to live in, and how to incentivize teachers to
Speaker 3: improve their students' test scores.
Speaker 1: You wrote At one point you wrote that finding a
Speaker 1: bias is easy, Fixing it is hard, which makes sense,
Speaker 1: Like you could just kind of watch humans walk down
Speaker 1: the street and be like, idiot, that was a dumb move.
Speaker 1: Can't believe that person did that. It's so easy to
Speaker 1: and same like I could look in the mirror and say,
Speaker 1: like one hundred things I did that were really done
Speaker 1: that day. It's easy to identify the biases. But when
Speaker 1: it comes down to actually like fixing those errors in
Speaker 1: maybe the way in particular that we approach our personal finances,
Speaker 1: what does that look like?
Speaker 3: So the first element of it is admitting or you
Speaker 3: know that the first the first step is admitting that
Speaker 3: you've done something wrong or that you're doing something wrong,
Speaker 3: which is actually a big step.
Speaker 1: Starting to sound twelve step program here.
Speaker 3: Yeah, saying like over and over again, I do something
Speaker 3: that is not in my own best interest. You have
Speaker 3: to have enough like letting go of ego that you're like, eh,
Speaker 3: I should probably improve that and it's something that I
Speaker 3: should do better. A lot of people aren't going to
Speaker 3: get past that first step of having some introspect in
Speaker 3: saying I could be better if I changed this somehow.
Speaker 3: This is something that's not actually how I want to behave. However,
Speaker 3: it is human nature to behave in a certain way.
Speaker 3: We have a lot of like automatic processes that run
Speaker 3: so that we don't have to think about them. Changing
Speaker 3: your behavior is tough. So number one, you have to
Speaker 3: say this is something I want to change. Number two,
Speaker 3: you have to set up habits or patterns or external
Speaker 3: prostheses to get you to do those things differently and
Speaker 3: stick with them over a period of time. So the
Speaker 3: analogy I like to use is it's very easy to say, like, oh,
Speaker 3: you're short sighted, you should wear glasses. Making glasses is
Speaker 3: really difficult. Remembering your glasses and remembering to wear your
Speaker 3: glasses is a little bit as much harder. So when
Speaker 3: we find a behavioral bias, it's nice, but it's sort
Speaker 3: of like the beginning of the are people going to
Speaker 3: admit and want to be helped with this thing? Are
Speaker 3: they going to be able to let go pride in
Speaker 3: you go and say, yeah, I'm flawed and here's something
Speaker 3: that I would like to be better at. And number two,
Speaker 3: can we set up an environment or tools or accountability
Speaker 3: patterns that help them actually change that behavioral pattern.
Speaker 1: We'll talk to us about that.
Speaker 2: I guess you said something a second ago external prosthesis, right,
Speaker 2: So like it sounds like what you're talking about exoskeleton
Speaker 2: or like systems for us to exist within. It's almost
Speaker 2: like when the problem shows up, you already need to
Speaker 2: have something happening, right. Like It's funny, like we were
Speaker 2: just talking about this with bit when it came to
Speaker 2: bitcoin and investing, because we've seen a run up recently
Speaker 2: and I was just like, dang it, I feel like
Speaker 2: this is something I should have addressed because we own
Speaker 2: a small amount of bitcoin, not much, but I was like,
Speaker 2: I prior to this most recent run up, I wish
Speaker 2: I would have created some sort of rule that said that, oh, right,
Speaker 2: once it hits one hundred k, once it hits two
Speaker 2: hundred two and fifty, what am I going to do?
Speaker 2: Because in the moment once it hits zero or zero,
Speaker 2: Because then the moment you're thinking, you're either looking to
Speaker 2: minimize risk, like you said, or you're looking to kind
Speaker 2: of maximize risk and take on additional risk. Is that
Speaker 2: what you're talking about here? You're almost talking about rules
Speaker 2: and systems to put in place.
Speaker 3: Yes, and I think you touched on some good parts
Speaker 3: of it. Number One, you need to come up with
Speaker 3: something that I sometimes think is like a constitution that
Speaker 3: you're writing. I hear, are the rules for how I
Speaker 3: am going to do this. It's not necessarily what policy
Speaker 3: you're going to implement, but even think about, Okay, I'm
Speaker 3: going to write down my bitcoin trading strategy and it
Speaker 3: will say if bitcoin does this, I will do this,
Speaker 3: and if bitcoin does that, I will do that. So
Speaker 3: you've already set out you're sort of like your policy,
Speaker 3: your strategy. Now you have to have some way to
Speaker 3: implement it that doesn't rely on your self control and
Speaker 3: doing it in the moment. And that's really the hard part.
Speaker 3: It's easy to say, like I'm going to eat healthy.
Speaker 3: Here's what I'm gonna eat Monday, Tuesday, Wednesday, Thursday. How
Speaker 3: are you going to handle it when the snack tray
Speaker 3: comes around? Yeah, So that's the process. Processes is the
Speaker 3: idea of kind of being a bionic person, having external
Speaker 3: things glasses for example, that help you to in effect
Speaker 3: see the world or interact with the world in the
Speaker 3: way that you really want to. So a good example
Speaker 3: of this that I think it's so illuminating in multiple ways.
Speaker 3: There's a study that was done with a German brokerage
Speaker 3: so like trading brokerage, stock brokerage, online stock brokerage, and
Speaker 3: what they did is they said, for free, no cost
Speaker 3: to you, we the researchers are going to send you
Speaker 3: performance reports for your accounts every three months. And they
Speaker 3: did this off the back of some research that found
Speaker 3: that generally speaking, people don't know what their own portfolio
Speaker 3: returns are, or if they do, they tend to pay
Speaker 3: more attention when they believe that they're going to have
Speaker 3: beaten the market and be up, then underperform the market
Speaker 3: and or be down. So when we pay attention to
Speaker 3: how we've done is very asymmetric. We pay more attention
Speaker 3: when we think it's going to make us feel good,
Speaker 3: and so most people don't realize how often and when
Speaker 3: they have underperformed or done poorly at investing. So these
Speaker 3: reseachers just said, cool, we want to give people feedback,
Speaker 3: Like a professional portfolio manager whose job it was to
Speaker 3: get We're going to give them these performance reports every
Speaker 3: three months. For I believe it was a year and
Speaker 3: a half, and it told them, you know, like what
Speaker 3: percentage of trades you made did well? Did you beat
Speaker 3: the index? Did you underperform? Were you overweight in specific sectors.
Speaker 3: It was very like, at some level like dry stuff,
Speaker 3: but it was a feedback loop that told them unequivocally,
Speaker 3: here were your returns, here were the returns of the
Speaker 3: market over the same period, and here's some other information
Speaker 3: about you. And what they found is that at the
Speaker 3: end of I believe, one year of sending these people
Speaker 3: reports again just for them over the course of the
Speaker 3: year every three months these personalized performance reports, people started
Speaker 3: trading less. They were more likely to use kind of
Speaker 3: broad based index funds, they were more diversified. So this
Speaker 3: was a good signal that like this kind of personalized
Speaker 3: feedback that tells somebody, hey, maybe you're not so good
Speaker 3: at this, Maybe you could, you know, spend your time
Speaker 3: doing other things and it would be a better use
Speaker 3: of your time. It works. At the same time, that
Speaker 3: brokerage after the study was done, was like, cool, let's
Speaker 3: shut this down because people are trading less, yea, and
Speaker 3: they're not happy that we're telling them that they're doing
Speaker 3: it best.
Speaker 1: Okay, I really want to ask you this then, because
Speaker 1: you're right, like, there's as someone who's in charge of
Speaker 1: architecting kind of behavioral things for betterment, behavioral elements to
Speaker 1: help investors make better decisions. You've done some really great work,
Speaker 1: but can't you also use your powers for evil? And
Speaker 1: aren't there companies doing this like hijacking our attention with
Speaker 1: advertising companies, advertising companies, social media companies. There's this way
Speaker 1: in which you can say, ah, here's what's true about
Speaker 1: human behavior. Let me exploit this from my own personal benefit.
Speaker 1: And it sounds like that company maybe was onto something
Speaker 1: good and then abandon it because they realized maybe it
Speaker 1: was benefiting investors but not the company itself.
Speaker 3: Absolutely, I think unfortunately this is I feel like there's
Speaker 3: a gravitational pull towards free and easy and things that
Speaker 3: make us feel good that we only learn to get
Speaker 3: out of after we've had enough experience. So definitely, I think.
Speaker 3: You know, like one of the pieces that I wrote
Speaker 3: a while ago that I was kind of coming back
Speaker 3: to was this allure of free and how free is
Speaker 3: so much better than paying any little amount. But that
Speaker 3: means that you have a very different relationship with whoever's
Speaker 3: providing the service, Like if your stock brokerage is free,
Speaker 3: they're getting paid by somebody else, which means you kind
Speaker 3: of don't have any like leverage with them to say,
Speaker 3: here's the service that I want, here's how I would
Speaker 3: like things to be different, here's how you could improve
Speaker 3: things for me, and like I'll pay more for it.
Speaker 3: The other element of it that I think is pretty
Speaker 3: tough is there's a smaller market for people who want
Speaker 3: that's the right way to put this, For people who
Speaker 3: have experienced their own mistakes and kind of have a
Speaker 3: low enough you go to say, like, I want somebody
Speaker 3: to help me with this, compared to I think it
Speaker 3: was like decades ago the e trade adverts, where you know,
Speaker 3: it's like this very kind of like alpha male. I'm
Speaker 3: going to train and make lots of money and be
Speaker 3: such a kind of like just alpha male. Some words
Speaker 3: I can't use. The idea there is, like it takes
Speaker 3: time and good feedback loops for you to realize these
Speaker 3: perfectly human faults within yourself and want to help handle them.
Speaker 3: I think at better in One of the nice things
Speaker 3: is that generally speaking, the people who we deal with
Speaker 3: either have already gone through that process and come out
Speaker 3: the other side. They've climbed Mount stupid and walked down
Speaker 3: the other side, or they just went around it entirely
Speaker 3: because they weren't interested in it, or it never really
Speaker 3: appealed to them. One of the neat things we did
Speaker 3: years back was look at who was most likely to
Speaker 3: try to market time, both during raging markets and falling markets,
Speaker 3: and the answer was always young men, and that women,
Speaker 3: almost regardless of age, were really good at just kind
Speaker 3: of staying the course and not reacting to anything and
Speaker 3: did much better for it. So I think the tempting
Speaker 3: thing is that you'll hear about the kind of the
Speaker 3: I don't know the sexiest, most glamorous, high growth things
Speaker 3: that are free and so on which work, but I
Speaker 3: think they tend to work as long as there's new, fresh,
Speaker 3: naive people who haven't gone through the process of Eh.
Speaker 3: I don't know, is this a good use of my
Speaker 3: time or should I really kind of like spend my
Speaker 3: time improving my own personal life or my own career
Speaker 3: rather than trying to trade stocks.
Speaker 2: I think that makes a ton of sense. And that's
Speaker 2: I mean, like you said, like that's what betterment is
Speaker 2: on a mission to do and not to I guess
Speaker 2: give too heart of a plug to that you're the
Speaker 2: company that you're with, But like you're talking about folks
Speaker 2: who are looking to potentially time the market, and the
Speaker 2: solution to that is to just simply dollar cost average
Speaker 2: into the market. But what are some of the tools
Speaker 2: that Betterment's offering to just accommodate for our flaws to
Speaker 2: make it to where we are over the course of
Speaker 2: the long run winning right? Like And that's I guess
Speaker 2: that's the difference here too, is that like in the
Speaker 2: short term, it may not be as winning of a
Speaker 2: proposition for the business right for Betterments, but it's almost
Speaker 2: like an altruistic approach to the customer and to business
Speaker 2: generally speaking, because it's like, look, over the long haul,
Speaker 2: you're going to vastly outperform what you would have done
Speaker 2: on your own.
Speaker 3: Yeah. I think both for us and for individual clients
Speaker 3: people who are looking to invest, it can get exhausting
Speaker 3: to chase whatever fat is out there, and it is
Speaker 3: much better to be consistently thinking what is a core,
Speaker 3: evergreen thing that we want to be doing, and how
Speaker 3: do we invest and spend time to have that available.
Speaker 3: Keep going back to the Jeff Bezos quote, if we
Speaker 3: had a good quarter this quarter, it's because of decisions
Speaker 3: that we made two or three years ago. And I
Speaker 3: think that is true for us as a business, and
Speaker 3: it's also true for individual investors. It's not month to month.
Speaker 3: It is I'm going to make a decision now, and
Speaker 3: hopefully it's going to pay off well in two to
Speaker 3: three years. So a few examples of how we try
Speaker 3: and make the boring, straightforward dollar cost average, low cost
Speaker 3: diversified investing interesting and fun and not the boring. Option.
Speaker 3: Number one is goals. So you think about it as
Speaker 3: envelopes or buckets or just ways to separate out your money.
Speaker 3: The idea is that I have a goal that is
Speaker 3: I want to send my daughter to college. I've got
Speaker 3: roughly fourteen years left in that how much do I
Speaker 3: need to save every year when I put it into
Speaker 3: this portfolio that's going to glypath over time in order
Speaker 3: to make sure that she could go to college if
Speaker 3: she wanted to, or a new car, or a house
Speaker 3: down payment, or the biggie retirement. So the ability to
Speaker 3: separate out individual pockets of money has a lot of benefits.
Speaker 3: Number one, the more that that goal has a meaningful
Speaker 3: emotive purpose for you, the better behavior're going to be
Speaker 3: around saving and investing in that goal. So my daughter's
Speaker 3: college fund, it has a picture of her. You can
Speaker 3: upload individual pictures to betterment, and it's got a picture
Speaker 3: of her actually at a graduation ceremony for my wife.
Speaker 3: And so every time I see that goal, I'm reminded of, like,
Speaker 3: I want to invest for my daughter's future. I want
Speaker 3: to go to her graduation ceremony many years from now.
Speaker 3: This is what the purpose of this is, and I
Speaker 3: really want to make sure that I continue to save
Speaker 3: into it and know I'm not going to get distracted
Speaker 3: by what the market's doing over the next two months
Speaker 3: or three months, because this is a goal that I
Speaker 3: am investing in for fourteen years. So gold based investing
Speaker 3: and making it evocative and meaningful for what the person's
Speaker 3: trying to achieve is one of the big wins.
Speaker 1: Can you elaborate on evocative and meaningful real quick? Like?
Speaker 1: And humans, there was what that Fidelity study a number
Speaker 1: of years back about taking a selfie and using the
Speaker 1: age yes, the aging yes yeah, like, So visualizing yourself
Speaker 1: at a thirty years down the road makes you more
Speaker 1: inclined to sympathize with older you, whereas thirty year old
Speaker 1: individual is likely just to prioritize living for the now. Yeah,
Speaker 1: how important is it to kind of connect those tangible
Speaker 1: future realities to kind of our current living experience.
Speaker 3: So this is one of the coolest parts about being human.
Speaker 2: You know.
Speaker 3: Sometimes we talk about like how are humans actually different
Speaker 3: than other animals and so on. Humans spend a lot
Speaker 3: of time thinking about and imagining the future and imagining
Speaker 3: like the past that might get them to different futures.
Speaker 3: And the more that we spend time thinking about, like
Speaker 3: I'm here, what do I want to have happen? What's
Speaker 3: going to be required to get from a to BO
Speaker 3: on that path, the more realistic we can actually say, like, Okay,
Speaker 3: if I want to have a warm house this winter,
Speaker 3: then I need to go out and chop wood now
Speaker 3: so that I have it prepared for when the winter
Speaker 3: is cold. It is superpower. It's this power that we're
Speaker 3: kind of constantly a little bit living in the future.
Speaker 3: We care a lot about our future selves, and that
Speaker 3: works against the kind of the nawism, the short termism
Speaker 3: of like how does it feel right now? What would
Speaker 3: relieve me when markets are going down. It feels anxiety.
Speaker 3: If you're paying attention to it, it pays. It feels
Speaker 3: anxiety provoking. You feel like you have to do something,
Speaker 3: you have to feel like active, you have to react
Speaker 3: to what's going on now. The more that you start
Speaker 3: thinking about I'm talking about Okay, I'm in this for
Speaker 3: twelve years for a purpose, which is my daughter's education.
Speaker 3: It is not to make money. Sort of addressing your
Speaker 3: question directly, we people can like name their goals whatever
Speaker 3: they want for them. They can attach images to them,
Speaker 3: or you can keep it as the default. And I
Speaker 3: think the default name is something like build wealth, which
Speaker 3: is very generic and sounds good, but it's not very evocative.
Speaker 3: It's kind of weird. I want more, you know, I'm
Speaker 3: the Scrooge McDuck. I want more of what I got.
Speaker 3: And so if your only benchmark for our things going
Speaker 3: well is do I have more than I put in,
Speaker 3: it's very it's very thrashy. Sometimes you're up, sometimes you're down.
Speaker 3: It's very emotionally volatile. On the other hand, if you're
Speaker 3: looking at okay, I am on track to send my
Speaker 3: kid to college, and I am saving and I'm investing
Speaker 3: in a way that it keeps me on track for it,
Speaker 3: and I still have a I don't know, seventy eight
Speaker 3: percent chance of hitting that amount in ten years. All
Speaker 3: that anxiety and that thrash goes away, and you're kind
Speaker 3: of like comforted and relaxed because you're I know the
Speaker 3: future that I am building for is going to be correct.
Speaker 3: I'm not reacting to the present. I am building for
Speaker 3: the future. So much stuff, so much stuff around our interface,
Speaker 3: around the way we think about things is how can
Speaker 3: we help people focus on and build for the future.
Speaker 3: How can we give them the tools to say, what's
Speaker 3: the range of outcomes I can expect over a year
Speaker 3: if I'm in this portfolio in the future, how much
Speaker 3: do I need to save if I want to hit
Speaker 3: this goal six years in the future. Instead of if
Speaker 3: you log into a brokerage or something, what hits you
Speaker 3: is the past you log in, it's just like, here's
Speaker 3: how you did over the past five days, here's how
Speaker 3: you did over the past three months. It's a fact,
Speaker 3: but you can't change it and there's no planning for it.
Speaker 3: So the more that we can help people, we give
Speaker 3: them those tools to say, like, let's focus on the
Speaker 3: future and focus over the things we can control and
Speaker 3: change to make the future better. The better they invest in,
Speaker 3: the better we do as a company.
Speaker 1: I love it.
Speaker 2: Yeah, it makes so much sense. All Right, We've got
Speaker 2: more dumb decisions to talk about and how it does
Speaker 2: that we can that we can avoid those and like
Speaker 2: Dan said, build our wealth. We'll get to all of
Speaker 2: that and more right after this. All right, we're back.
Speaker 1: We're still talking with Dan Egan. We're talking about financial behavior.
Speaker 1: And the truth is us humans exhibit a lot of
Speaker 1: poor financial behavior so much of the time. But there
Speaker 1: are ways that we can, yeah, fix that and Dan,
Speaker 1: Dan is an expert at this. And Dan, I'm curious,
Speaker 1: like unique human beings. I like to think of myself
Speaker 1: as a unique individual, and I think most.
Speaker 2: People do, right, snowflakes.
Speaker 1: Yeah, it's not in a strong way, that's right, that's right,
Speaker 1: A very strong snowflake. I mean, I think most people
Speaker 1: like to think themselves that way. They don't like to
Speaker 1: think that they are one in a crowd of many.
Speaker 1: How does like behavioral finance maybe not just help mitigate
Speaker 1: common flaws, but how does it speak to specific personality types?
Speaker 1: It does it have that level of sophistication, It does.
Speaker 3: It's definitely more work to make use of it. And
Speaker 3: also what's tricky about it is how well can you
Speaker 3: do it sor right we put it out of sample,
Speaker 3: you know, like how well can I predict what behavioral
Speaker 3: biases you are likely to have without following you around
Speaker 3: for a year or two to actually like get the
Speaker 3: data and run it off there. And this is something
Speaker 3: that we're getting better at, and we're getting better both
Speaker 3: at knowing when we can do it and when we
Speaker 3: can't do it. So, coming back to some of the
Speaker 3: things we talked about before, I was looking at data
Speaker 3: around kind of thinking about like who do we need
Speaker 3: to talk to and how do we need to talk
Speaker 3: to them when markets are getting choppy around to specific
Speaker 3: news events. You can think about elections or the FED
Speaker 3: changing rates, or I don't know, some like you know,
Speaker 3: China trade deal, et cetera. Things that are likely to
Speaker 3: cause markets to be volatile that people never coming up.
Speaker 3: And so we were looking at trying to predict who
Speaker 3: was going to be the type of person, not the individual,
Speaker 3: but the type of person who was going to de
Speaker 3: risk their allocation ahead of a scary event. And we
Speaker 3: were building up this model which was something on the
Speaker 3: order of like how old are you, what gender do
Speaker 3: you identify as, how long you've been with us, what
Speaker 3: type of gold do you have with us? And then
Speaker 3: two factors which were very powerful, more powerful than a
Speaker 3: lot of the other stuff. Do you use our mobile app?
Speaker 3: And how often do you log it? And so you know,
Speaker 3: like I wasn't necessarily trying to figure out for a
Speaker 3: specific person, but I can go off of some demographics
Speaker 3: as well as a little bit of the observed behavior
Speaker 3: for you that I have and build out a model
Speaker 3: that it was I think it was like sixty or
Speaker 3: seventy percent accurate. It's saying who was going to come
Speaker 3: in and do something that we were worried about, so
Speaker 3: that we could target just those specific people with communications
Speaker 3: and not hit the people who weren't so much of
Speaker 3: a risk with those communications. So I think it is
Speaker 3: a cutting edge area. I think the hardest part about
Speaker 3: it is either having the specific behavioral data of the
Speaker 3: person themselves or being able to predict it based upon
Speaker 3: other people like you.
Speaker 2: And there are just so many stinking factors that go
Speaker 2: into that as well. But so you're talking about the
Speaker 2: app and just I guess the frequency at which folks
Speaker 2: are opening the app. It makes me think about neuroticism.
Speaker 2: And I'm not sure if you were referencing the study
Speaker 2: you're talking about, that German study, But was that the
Speaker 2: same study as the where you addressed the Meerkat effect
Speaker 2: versus more of the Ostrich approach and putting your head
Speaker 2: in the sand. Okay, No, there are two different things. Oh, okay, gotcha.
Speaker 3: Well, but to us was informed by the former. So
Speaker 3: years ago, probably about fifteen years ago, I was working
Speaker 3: with a company that had an online brokerage for their clients,
Speaker 3: and we were likewise running this longitudinal study that said,
Speaker 3: like every quarter, we're gonna come out and we're going
Speaker 3: to ask you some questions about the decisions you made,
Speaker 3: about how you invested in, what you're looking, what your
Speaker 3: forecasts are for the next quarter. And interleaven with these
Speaker 3: various sort of practical investing questions, we asked them some
Speaker 3: personality questions, one of which the Neuroticism scale, which is
Speaker 3: a very well established Big five personality scale that we
Speaker 3: thought might be linked to specific behavioral aspects and a
Speaker 3: base model that we were building off of. There was
Speaker 3: a research paper that was done by I believe George
Speaker 3: Lowenstein in some colleagues years back that said, how do
Speaker 3: people when do they pay attention to their accounts? And
Speaker 3: it was a very easy model that was like, well,
Speaker 3: they want to pay attention when it's going to make
Speaker 3: them feel good, and they're going to not pay attention
Speaker 3: when they think it's going to make them feel bad.
Speaker 3: So they predicted whether or not people were going to
Speaker 3: log in to check their accounts based upon how well
Speaker 3: the market had been doing recently, and they found, you know, yes,
Speaker 3: it's true. People log in more when it's doing good
Speaker 3: and log in less when it's doing bad. And they
Speaker 3: coined it the Ostrich effect. There's less attention paid when
Speaker 3: it feels like things are going to be bad. They
Speaker 3: did this with Vanguard client data and love Vanguard. Wonderful company,
Speaker 3: wonderful clients. They are a very specific type of client.
Speaker 3: You don't get day trader active management clients at Vantage.
Speaker 3: So we had access to online brokerage clients who were
Speaker 3: the counterpoint, people who for whom volatility and day trading
Speaker 3: were the reason that they were there. And so we
Speaker 3: found a mix of things, you know, like some people
Speaker 3: were high neuroticisms, some people were low neuroticism. In almost
Speaker 3: all cases on our platform, when returns were bad, people
Speaker 3: also logged in more. So it wasn't like the ostrich.
Speaker 3: It was a mere cat. Whenever there are big moves,
Speaker 3: whenever there's danger, you're more likely to pay attention. So
Speaker 3: hence we called it the meerkat effect contra to them.
Speaker 3: But also we found that the higher neuroticism was, the
Speaker 3: more sensitive to it you were, the more of a
Speaker 3: sort of anxious personality type that you had told us
Speaker 3: you had, the more likely you were to log in,
Speaker 3: especially when things aren't going well, and likely to react.
Speaker 3: So it's a great example of like, yes, if we
Speaker 3: have good dimensions that we can kind of measure you on,
Speaker 3: like neuroticism, we could give you a pre screener to
Speaker 3: learn about you and say, okay, this person's at more
Speaker 3: risk of this kind of behavior, we should help them
Speaker 3: out more in this specific setting.
Speaker 1: That yeah, I mean, I guess you could run some
Speaker 1: sort of personality tests for everyone signing up for the platform,
Speaker 1: and then you'd be able to cater to them more directly.
Speaker 1: But that also might be a like they might not
Speaker 1: want to sign it on the platform.
Speaker 2: It's like yeah, yeah, you gotta find the happy medium
Speaker 2: between like finding the best data to collect from people,
Speaker 2: but at the same time, like you said earlier, if
Speaker 2: they don't want to be helped in that way, well
Speaker 2: then you're just turning people away at the door.
Speaker 1: Like I'm gonna go somewhere else where. They're not asking
Speaker 1: me all these weird questions exactly. Yeah, I was struck Toure.
Speaker 1: I was reading on your blog and you write something
Speaker 1: the effect of purely rational people have a really hard
Speaker 1: time making decisions, which I thought was interesting too. We're
Speaker 1: talking about, you know, neuroticism, but the flip side of
Speaker 1: that is like incredibly rational people. It seems like the
Speaker 1: opposite would be true. And then you go on to
Speaker 1: write about the role of faith in investing and how
Speaker 1: important that is, and I was like, I don't know.
Speaker 1: I think I need Dan to explain that some more.
Speaker 3: It sounds fascinating, though it is absolutely one of I
Speaker 3: don't know, like what are the foundational papers or ways
Speaker 3: of thinking about how we make decisions. Demasio is the
Speaker 3: researcher's name, and he has some very technical name for
Speaker 3: like the somatic mirth hypothesis I believe, which is basically
Speaker 3: that there are some people who, unfortunately, for one reason
Speaker 3: or another, the part of their brain that kind of
Speaker 3: like tells them if things feel good or bad has
Speaker 3: been disconnected. They don't experience pleasure and playing to the
Speaker 3: same degree that you or I would. They're still perfectly rational,
Speaker 3: they can do math, they can have conversations, et cetera.
Speaker 3: So you can almost think about these hyperrational Spock people,
Speaker 3: And in studying them and working with them, he noticed
Speaker 3: that they had a hard time making decisions because they
Speaker 3: couldn't kind of like be like, well, what do I want?
Speaker 3: What's going to make me feel good? Because I don't
Speaker 3: have that internal representation of good or bad or pleasure
Speaker 3: or pain. So they would hem in hall on endlessly
Speaker 3: about like, well, you know, like this has these good qualities,
Speaker 3: and these have that's good qualities and just not make
Speaker 3: a decision. So part of the interesting thing is like
Speaker 3: that sense of I don't know, frustration when things take
Speaker 3: too long, or an instinctive reaction to something being good
Speaker 3: or icky is actually a core part of the decision
Speaker 3: making because it forces you. It gives you a real
Speaker 3: motivation to make a decision rather than try and list
Speaker 3: all the pros and the cons out and one of
Speaker 3: the things that I've looked at a lot. You know,
Speaker 3: probably most people who are listening to this are familiar
Speaker 3: with investing. They have gotten over the hump of saying
Speaker 3: I am going to invest in some fashion. It might
Speaker 3: be through a four to one K, through the IRA,
Speaker 3: diversified individual stocks, whatever. Most people don't get to that point.
Speaker 3: The set of people who invest, especially in some kind
Speaker 3: of a hands on fashion outside of their four oh
Speaker 3: one K is targeted funds pretty small. And that's because
Speaker 3: investing is scary and it's risky, and you come into
Speaker 3: it and that first decision you have to make where
Speaker 3: you're like, how am I going to invest? There are
Speaker 3: so many different competing ways of talking about it, Like
Speaker 3: I like value stocks, I like growth stocks. I have
Speaker 3: this strategy that one et cetera. And we don't know
Speaker 3: which one of them is going to do well over
Speaker 3: the next any period of time. Right, you almost have
Speaker 3: to say, like, I am going to put my faith
Speaker 3: in this way of approaching things. Maybe it's the low
Speaker 3: cost diversifies the only thing that matters, and I'll be
Speaker 3: okay over the long run. I have faith that this
Speaker 3: will work out so that I can pull the trigger
Speaker 3: and get invested. Because in the absence of some kind
Speaker 3: of short circuit that says like, just get in there,
Speaker 3: just do it, have some way, we would sit there
Speaker 3: and be like, well, I don't know, but the FED
Speaker 3: might do this, but China's importance to doing that, but
Speaker 3: this company's done really well. You would just end up
Speaker 3: going back and.
Speaker 1: Forth endless analysis paralysis. And I think that's probably the
Speaker 1: case for a lot of people, and they're like, well,
Speaker 1: there's a hundred differ people telling me one hundred different things.
Speaker 1: How do I know which one I should believe? And
Speaker 1: sometimes the thing is just to get started and then
Speaker 1: you can learn as you go. But part of the
Speaker 1: part of the deal is you got to like get
Speaker 1: the first domino off, make.
Speaker 2: The daying decision. Yeah, And I think a big part
Speaker 2: of that too, Dan, I mean, correct me if I'm
Speaker 2: wrong here, is not just making that decision, but then
Speaker 2: sticking with the decision. And I think that's where maybe
Speaker 2: a part of where that faith come comes into play too,
Speaker 2: because by receiving new data, like, yes, you need to
Speaker 2: absorb that information and take that into account, but it
Speaker 2: doesn't necessarily mean that you're going to immediately be reactive
Speaker 2: to the market because you've got a game plan, you've
Speaker 2: got an investment strategy, and there's.
Speaker 3: No strategy that never underperforms no matter what is. You
Speaker 3: have to be willing to sit there and say it
Speaker 3: isn't working right now, but I think it will work
Speaker 3: out in the long run. There's no strategy that has
Speaker 3: a perfect track work, so you have to have faith
Speaker 3: through in those tough periods.
Speaker 2: That makes sense. So in addition to kind of having
Speaker 2: that game plan, that strategy that faith talk to me about,
Speaker 2: I guess expectations of what we should expect from the
Speaker 2: market because like a lot of folks out there preach
Speaker 2: an average of eleven to twelve percent when it comes
Speaker 2: to returns, even what we've seen recently, right like you
Speaker 2: look at last year, you look at this year. It's
Speaker 2: been great for investors. But how do our expectations for
Speaker 2: our investment returns impact our decision making and how it
Speaker 2: is that we react or hopefully don't react to the market.
Speaker 3: So a couple of different points. One is that it's
Speaker 3: always nicer to be surprised to the upside than the downside.
Speaker 3: So when we go through sort of financial planning, how
Speaker 3: much return should you expect from the market, or maybe
Speaker 3: how much return should you plan on from the market.
Speaker 3: Don't go with the most optimistic figure. Don't go with
Speaker 3: ten percent. Say I'm going to plan on five percent.
Speaker 3: And one of the nice things about this is that
Speaker 3: you know if you set that out and say I
Speaker 3: expect a five percent growth over this many years, as
Speaker 3: time goes on, you'll know half of it. Right, You'll
Speaker 3: know like half of the way through your investment. Okay,
Speaker 3: actually I averaged out about nine percent returns. I'm ahead
Speaker 3: of where I thought I would be. This is great.
Speaker 3: I can take on a little bit less risk because
Speaker 3: I'm ahead of the game, or de vice versa. But
Speaker 3: number one is don't focus on or try for requiring
Speaker 3: a high expected return because that puts you into a
Speaker 3: very fragile position, not just from a planning point of view,
Speaker 3: but also from a I don't know, like a take
Speaker 3: being being able to be taken advantage of point of view.
Speaker 3: There's a great story by Barry Rittolets from when he
Speaker 3: was a young advisor where he was, you know, he
Speaker 3: had a prospective client who was chatting with him, and
Speaker 3: the client was like, so, what are your expected returns?
Speaker 3: And Barry was like, what like for the S and
Speaker 3: P five hundred and then guy was like, yeah, yeah, yeah,
Speaker 3: what are your expected returns? And Barry was like, I
Speaker 3: don't know, man, like nine percent, And the the client
Speaker 3: was like, well, this other guy I'm talking to you,
Speaker 3: he says he thinks twelve percent. And Barry was like,
Speaker 3: what are we talking about here, Like, what like are
Speaker 3: we talking about who's more optimistic about the economy or
Speaker 3: is he saying that he's going to like beat my
Speaker 3: portfolio by three percent? But because the other advisor gave
Speaker 3: this sort of like strength, like just more optimistic figure
Speaker 3: about what's going to happen, the client went with them
Speaker 3: and they probably were disappointed when that didn't meet materialize.
Speaker 3: So a good way to think about it, I think
Speaker 3: is just like keep your expectations low so that it's
Speaker 3: easy for them to be outperformed, and as that outperformance happens,
Speaker 3: you'll be closer to your goal, you'll be closer to
Speaker 3: retirement or whatever it is. It gives you more optionality
Speaker 3: later in life to pivot and change and use the
Speaker 3: extra money that you probably hopefully have gotten for other
Speaker 3: things and not be in the position of saying like,
Speaker 3: oh no, those twelve percent returns didn't materialize. I'm in
Speaker 3: a bad place, all.
Speaker 2: Right, Well, steal man the argument for me, Dan, because like,
Speaker 2: when you do look at the like the last ten
Speaker 2: years of the S and P specifically, you're looking at
Speaker 2: something like over twelve percent nine something, I guess when
Speaker 2: you account for inflation. But what are the dangers then,
Speaker 2: two folks who might be thinking that, like, hey, I'm
Speaker 2: only going to see five percent, I could see a
Speaker 2: downside to that.
Speaker 3: And I think what's the downside? It's that they save
Speaker 3: more as a percentage now than they would have needed
Speaker 3: tom And it's.
Speaker 1: Not the worst downside but the worst outside.
Speaker 2: But I guess you know, life is both trade offs, yeah, right,
Speaker 2: And so when it comes to individuals, especially maybe folks
Speaker 2: who are listening to the show, and they're the ones
Speaker 2: out there who are really getting after it, and man,
Speaker 2: that is awesome. We love hearing that, We love hearing
Speaker 2: all the wins that folks are in, all the progress
Speaker 2: that folks are making. But there's a certain amount of
Speaker 2: life that you're giving up if you are thinking, okay, man,
Speaker 2: i've got to see you know, a saving rate of
Speaker 2: x amount in order to retire by age whatever, when
Speaker 2: maybe there might be an ability to take your foot
Speaker 2: off the gas a little bit, maybe do a little
Speaker 2: bit of coasting.
Speaker 3: I think the good thing there is to do that
Speaker 3: coasting when you know that you can, rather than you
Speaker 3: hope that you can. So there's a very there's a
Speaker 3: big difference between saying I am in a position where
Speaker 3: I know, even if market's returned three percent, I'd be
Speaker 3: fine because you've you've got to like you. There's such
Speaker 3: a neat thing do you guys talk about lifestyle creep
Speaker 3: at all?
Speaker 2: Oh?
Speaker 3: Yeah, okay, So there's such a neat thing about like
Speaker 3: the triple powered impact of making sure that you save
Speaker 3: more as your earnings grow in terms of keeping your
Speaker 3: lifestyle small, which means you have to bankroll less lifestyle
Speaker 3: in retirement. That just gives you this freedom, this optionality
Speaker 3: later to say I can always increase my spending later
Speaker 3: when I know I'm good, rather than now when I
Speaker 3: hope I'm good. And I think that's the difference is
Speaker 3: if you are saying I am counting on I am
Speaker 3: depending on a high rate of return to make the
Speaker 3: decision I am making today, make sense, you are putting
Speaker 3: yourself in a position where you can end up in
Speaker 3: a bad spot if it doesn't materialize, if this return
Speaker 3: doesn't turn out that way. And you know, for most
Speaker 3: of us that we're talking about is either like is
Speaker 3: it ten percent or is it six percent? In the
Speaker 3: most extreme cases, there are people who, you know, the
Speaker 3: investment that they made was only going to make sense
Speaker 3: that they could guarantee you twelve percent return, and you know,
Speaker 3: they bought a house and we're trying to airbnb it
Speaker 3: and that didn't materialize, and then they took a humongous
Speaker 3: loss because they had to sell the house in foreclosure,
Speaker 3: they couldn't afford it anymore, et cetera. One of the
Speaker 3: big parts of pain a lot of the times is
Speaker 3: when you have to deleverage, when you have to let
Speaker 3: go of something that was a highly leveraged investment in
Speaker 3: one way or the other because the returns didn't materialize,
Speaker 3: And that's very, very painful. So again, it's it's giving
Speaker 3: yourself breathing room and free optionality. You can always live
Speaker 3: richer later if you kind of like had low expectations,
Speaker 3: but it's very hard to recover if you had high
Speaker 3: expectations that didn't materialize.
Speaker 1: I like that. I like the way you said that,
Speaker 1: and I think you're right, And I think you might
Speaker 1: be trying to talk yourself into being able to invest
Speaker 1: less of your income if you're saying, oh, I'm going
Speaker 1: to get fourteen percent returns and so I can only
Speaker 1: invest seven or eight percent of my income and I'll
Speaker 1: be just fine. But then you might be, yeah, setting
Speaker 1: yourself up for failure. All right, Dan, We've got a
Speaker 1: few more questions we want to get to with you,
Speaker 1: including like do robo advisors eliminate the need for real
Speaker 1: life advisors? We'll get to that and more right after this.
Speaker 2: We are back from the break talking about how you
Speaker 2: can fix your broken financial behavior that that bad behavior
Speaker 2: with Dan Egan and Dan, like Joel alluded to before
Speaker 2: the break, let's talk about robo advising because I think
Speaker 2: you're probably a bit biased. You've worked at better men.
Speaker 1: That's a behavior of flaw that Dan Egan has. That's
Speaker 1: that's true that I'm assuming.
Speaker 2: How is this going to impact his response to this
Speaker 2: question I'm about to ask him? But for over a
Speaker 2: decade you've been doing this, but like, do you see
Speaker 2: robo advisors as a solution That just completely eliminates the
Speaker 2: need for more of a one on one relationship with
Speaker 2: a financial advisor.
Speaker 3: No, absolutely not. I think they're wonderfully complimentary. That's that's
Speaker 3: kind of like being like, do I not need an
Speaker 3: accountant if I have Microsoft Excel? Most of us a
Speaker 3: lot of us, And I think this is one of Also,
Speaker 3: it's one of the tough things for humans in general
Speaker 3: to grasp, is like when a new service or product
Speaker 3: comes on, it creates a market that didn't previously exist.
Speaker 3: It doesn't necessarily take away from existing ones. So I
Speaker 3: think most of the growth in robo advisors has been
Speaker 3: from people who were either not investing at all because
Speaker 3: it was too intimidating or they weren't sure how to
Speaker 3: do it, or DIY investors who are like, okay, you know,
Speaker 3: time to go to the chores. It's Friday. I'm going
Speaker 3: to go in and rebounce my portfolio. Got to get
Speaker 3: it done. I don't think many many people kind of
Speaker 3: like left their advisor because of robo advisors. I think
Speaker 3: it just served a new space, but also betterment offers
Speaker 3: our platform for advisors, and that's one of our largest
Speaker 3: growth areas is advisors who you know, we're like the
Speaker 3: more updated, powerful Microsoft exell for managing their clients' finances.
Speaker 3: They say, why would I ever want to spend time
Speaker 3: rebalancing or tax loss tarvesting or asset locating or putting
Speaker 3: together goals and saving plans myself when I could offload
Speaker 3: all that stuff onto a robo advisor And that means
Speaker 3: I get to more spend more time talking with my
Speaker 3: clients and you know, going for hikes with them, playing
Speaker 3: golf with them, whatever is meaningful, talking to them about
Speaker 3: like the really big prioritizations have to make in their lives.
Speaker 3: So this is a very common model of kind of
Speaker 3: like what happens when some better technology comes onto the scene.
Speaker 3: What it does is it pushes the existing service providers
Speaker 3: up the value chain so that they can do more
Speaker 3: at a higher level with a more human overtone. And
Speaker 3: I think that's really what's happened here.
Speaker 1: So basically robo advisors similar to ATMs, Like, they didn't
Speaker 1: lose a lot of jobs, They just changed the jobs
Speaker 1: at the bank that people were doing, yep. And that
Speaker 1: was the fear right when ATMs came about, was like,
Speaker 1: who's We're not gonna need banks anymore. People are just
Speaker 1: gonna go to this robot and not true.
Speaker 2: And what do you think the future of behavioral finance
Speaker 2: looks like? And I guess not even just behavioral finance,
Speaker 2: because in the end, I mean, behavioral finance is interesting,
Speaker 2: but what's most interesting, I think to individuals is how
Speaker 2: that impacts their own personal finances. And so do you
Speaker 2: think through behavioral finance and some of the insights and
Speaker 2: studies and apps that that y'all are able to implement,
Speaker 2: that it's possible to account for and not only account for,
Speaker 2: but even eliminate all of the just all of the
Speaker 2: mistakes that we tend to make as investors.
Speaker 3: I think the biggest issue with it right now is
Speaker 3: figuring out the business models to allow those sorts of
Speaker 3: things to be sustainable. So it is very hard to
Speaker 3: sustainably tell people that they should trade less a they
Speaker 3: don't want to pay you for that advice, and somebody
Speaker 3: who's in a trading model doesn't want you to give
Speaker 3: that advice either. Where I think there's some really nice
Speaker 3: possibilities is that more and more we're coming up with,
Speaker 3: I don't know what to call it, like protocols or
Speaker 3: systems where the incentives are better aligned to allow people
Speaker 3: to do that. So if you think about how open
Speaker 3: source software works. Sorry, this is a very nerdy side case,
Speaker 3: but like they aren't necessarily paid, it's not necessarily business model,
Speaker 3: but there's a lot of kudos involved with it and
Speaker 3: pride in like writing a package and you can add
Speaker 3: to other packages over time in a way that it's
Speaker 3: like an open source project that people can contribute to.
Speaker 3: I have contributed to open source projects where I'm like, hey,
Speaker 3: here's a behavioral angle on this that I think could
Speaker 3: help and I want to add to it, and it
Speaker 3: maintains itself because it's they're really interesting things. I actually
Speaker 3: think Crypto had some of this, where you know, here's
Speaker 3: the open blockchain. I'm not an expert in the stuff,
Speaker 3: but here's the open blockchain. Anybody can go in and
Speaker 3: analyze your trading records for your wallet and tell you
Speaker 3: when you've done well and when you've done poorly. The
Speaker 3: same thing is true if there's new like at protocols
Speaker 3: that things like blue Sky run on. So I think
Speaker 3: it's been historically very hard to have really good aligned
Speaker 3: business models that serve a behavioral oversight function because people
Speaker 3: don't kind of understand how to pay for it. One
Speaker 3: of the few outstanding cases is dual lingo, which is
Speaker 3: very behaviorally informed in getting you to come back and
Speaker 3: keep your streak up and continue to learn the language.
Speaker 3: But there are very few of them where we pay
Speaker 3: people to tell us like how to behave better. On
Speaker 3: the other hand, something where you can set up and
Speaker 3: work off of, like publicly available data, or something that
Speaker 3: doesn't require money changing hands quite so often. I think
Speaker 3: I have a lot of hope that there's more work
Speaker 3: that we can do there to help people.
Speaker 1: All right, final question, would you suggest to our listeners
Speaker 1: who maybe they're like, Okay, cool, I'm not expecting an
Speaker 1: algorithm or some sort of new technical feature to help
Speaker 1: me in my pursuit of being better at my finances.
Speaker 1: What are maybe just kind of some normal, run of
Speaker 1: the mill things that people can basically funnel into their
Speaker 1: daily lives to improve how they're handling money, aside from
Speaker 1: the work that you do you're doing, and aside from
Speaker 1: the work that's being done in the payproal finance space.
Speaker 3: The base one is a budget, and I am a
Speaker 3: big believer in what I would consider sort of pay
Speaker 3: yourself first or a top down budget. I want to
Speaker 3: minimize how much regret and how much how many decisions
Speaker 3: somebody has to make, how much self control they have
Speaker 3: to have over the course of a month. And the
Speaker 3: way that I find it's easy to set that up,
Speaker 3: you know, like you sit down and you're like, okay,
Speaker 3: you know roughly, how much do I get paid every month?
Speaker 3: What are my required outgoings? How much is leftover? I
Speaker 3: want to save this much of it and whatever is
Speaker 3: leftover after that, after I pay myself first, I can
Speaker 3: spend how I want. Do not sweat the coffees, Do
Speaker 3: not sweat the movie tickets. Do not look and micromanage
Speaker 3: the individual things of your budget, because all that matters
Speaker 3: is that you have been saving ahead of time, so
Speaker 3: you can spend how much you want on whatever you want.
Speaker 3: And I think that that sort of setting up a
Speaker 3: budget and saving however much you can from it a
Speaker 3: starts to build up some really nice muscle around like Okay,
Speaker 3: I've got a budget, I've got inflows, outflows, I know
Speaker 3: what they're going to look like. It allows you to
Speaker 3: build further into Okay, what are the other things that
Speaker 3: I want to save for in the future, and how
Speaker 3: do I trade them off? Against what I'm consuming now,
Speaker 3: So I actually I think a lot of it starts
Speaker 3: with some kind of process system, basically a budget that
Speaker 3: makes it easy for you to spend and save intentionally.
Speaker 1: Very cool.
Speaker 2: Yeah, start with those rocks, then all that other sand
Speaker 2: will fit.
Speaker 1: Dan.
Speaker 2: Obviously, folks can head over to Betterments. But is there
Speaker 2: like a specific page or a new tool that y'all
Speaker 2: are excited that about brings online soon for our listeners
Speaker 2: to check out.
Speaker 3: Definitely if you want to come check out Betterment, my
Speaker 3: work is kind of like suffuse throughout it, and I
Speaker 3: have quite a few of our blog articles that you
Speaker 3: can read. You can also come to my personal site,
Speaker 3: which is Dpegan dot com and I've started to spend
Speaker 3: some time on blue Sky with my handle is that
Speaker 3: Dpegan dot com. So come there and heckle me and
Speaker 3: say I need a voice coach.
Speaker 1: Awesome, Dan, thanks so much for joining us today. We
Speaker 1: really appreciate it.
Speaker 3: Thank you very much.
Speaker 2: I loved it all right, Joel fun conversation with Dan
Speaker 2: Egans for sure. I think we knew that we would
Speaker 2: like him, but I ended up liking him so much more.
Speaker 2: It's always a nice surprise when you feel like, truly
Speaker 2: you could sit down. We kind of were making plans
Speaker 2: to get beers after we hit after we hit stop
Speaker 2: Recording's got to get plane tickets, go to New York,
Speaker 2: I know, or vice versa the next time he comes
Speaker 2: down to Atlanta. But do you have a big takeaway
Speaker 2: from our conversation with Dan Egan of betterment to know?
Speaker 1: So much good stuff in here. But I love when
Speaker 1: he said, you know, we have to admit that we're
Speaker 1: and we have to kind of let go of some
Speaker 1: of the ego. I think humility is a big part
Speaker 1: of what it takes to be successful with money, realizing
Speaker 1: that there are varied outcomes and that we don't control
Speaker 1: all of the end results, and we can control to
Speaker 1: a certain extent the input, but don't have the full
Speaker 1: picture of where things are going to end up. And
Speaker 1: I think actually sometimes we undersell our abilities of where
Speaker 1: things could go, at least I think I did.
Speaker 2: Early on.
Speaker 1: I was like, well, I'll never get here or I'll
Speaker 1: never get there. I can't imagine I'll ever get to
Speaker 1: this point in life. And it's amazing how much just
Speaker 1: doing the right thing over an extended period of time
Speaker 1: will take you in that direction. Into a positive trajectory
Speaker 1: with your money, but just emitting some clause, letting go
Speaker 1: of the ego, staying humble. I think it's going to
Speaker 1: allow us to have a more of a healthy disassociation
Speaker 1: from the final outcome. And I think it's going to
Speaker 1: allow us to do the right thing, even though we
Speaker 1: might not have one hundred percent conviction. We have to
Speaker 1: exercise some of that faith he talked about, too sure.
Speaker 2: Yeah, recognizing that you've got a problem or maybe that
Speaker 2: you aren't making the best decisions.
Speaker 1: That's the first step.
Speaker 2: But I don't know what my big takeaway is from this.
Speaker 2: But when he was talking about we're talking about coasting
Speaker 2: and having enough, and I was kind of pushing back
Speaker 2: on the five percent number that he threw out there
Speaker 2: and something he says, so he said, there's a difference
Speaker 2: between knowing that you can coast versus hoping that you
Speaker 2: can coast. And he's talking about having breathing room. He's
Speaker 2: talking about optionality, which is man, he's like speaking our
Speaker 2: language like and that's maybe that's why it was fun
Speaker 2: to talk with him, But like there is a difference
Speaker 2: though between like, Okay, what does it mean to say
Speaker 2: I know that I can coast. What does that mean? Well,
Speaker 2: it means that you don't have to take any risk. Okay,
Speaker 2: well what does that look like? It means having enough
Speaker 2: in the bank to say, well, I don't have to invest. Actually,
Speaker 2: I can just count on what the bank's going to
Speaker 2: give me. Well a the rate that banks are paying.
Speaker 2: It's varying, as you know, and what we've seen lately
Speaker 2: is that is going down. But even still, I don't
Speaker 2: think anybody would make the recommendation that you should have
Speaker 2: all of your bank all of your money in the
Speaker 2: bank earning interest from what the banks are paying, as
Speaker 2: opposed to actually putting it at risk. And so I
Speaker 2: guess what I'm saying is that, And I'm still processing
Speaker 2: and chewing on what he said. But it's not quite
Speaker 2: as binary as knowing that you can and hoping that
Speaker 2: you can. There's there's a spec there's a it's a
Speaker 2: dimmer switch in between, and you have to figure out
Speaker 2: where along that continuum that you, as an individual feel
Speaker 2: comfortable taking on the risk associated with that. So it's
Speaker 2: good food food for thought for me, but hopefully for
Speaker 2: all the listeners out there that maybe think about where
Speaker 2: along that continuum they are as well.
Speaker 1: Yeah, no, I think that's a really good point. And
Speaker 1: I think even you've already talking about something like Coast Fire,
Speaker 1: where somebody has invested enough early on in their life
Speaker 1: where hey, I don't have to invest in other diamond
Speaker 1: I'm I'm pretty sure I'm gonna have enough money in retirement.
Speaker 1: Well typically they're pretty sure, right, they can't be certain
Speaker 1: because they still have decades left to go of the
Speaker 1: growth to prove out in that account. So we're we're
Speaker 1: all doing the best we can with the information we
Speaker 1: have on with.
Speaker 2: The limited amount of information on hand, because we don't
Speaker 2: know the future. Like that's the other thing, Like you
Speaker 2: might have more than enough, but then what if something
Speaker 2: comes up that completely derails your finances and all of
Speaker 2: a sudden, Yeah, I don't want to go into like
Speaker 2: worst case scenarios, but like they're out there. What about
Speaker 2: best case scenario? You're like, man, I could have saved
Speaker 2: lesson those earlyiers, and it's like, yeah, well you can't take.
Speaker 1: That back either.
Speaker 2: All right, real quick, let's mention Dale's American pale Ale.
Speaker 2: What a classic. If you had a guess, when was
Speaker 2: the first time you had a Dale's Oh my gosh,
Speaker 2: back in the day.
Speaker 1: Definitely one of the first craft beers I ever had
Speaker 1: from the good folks over at Oscar Blues, and they
Speaker 1: forget where they're they're originally out of Colorado, and then
Speaker 1: they have a second facility in North Carolina and Brevard.
Speaker 2: I think that sounds fraz because I'm not. Actually, I
Speaker 2: don't think they were one of the ones that's actually
Speaker 2: in Asheville, but they're like, I think they're out there
Speaker 2: in Bravard, which.
Speaker 1: I love Brevard, but I haven't actually been to God's
Speaker 1: Conjury to date to the Oscar Blues facility. But the
Speaker 1: Dale's palel is in my mind. It's it's darker than
Speaker 1: I remember it. It's multier vibes.
Speaker 3: Yeah, when we're.
Speaker 2: Ported, I was like, that doesn't look like a pale,
Speaker 2: almost like a light brown. Looks like a yeah, or
Speaker 2: at least an amber. Yeah, dude, this is in Longmont
Speaker 2: or at least this that's where the specific camp came from.
Speaker 1: I'm not sure.
Speaker 2: I feel like I would have stuck in my mind
Speaker 2: because that's where mister money Mustache and all of our
Speaker 2: friends live.
Speaker 1: That's right, long Mont, Colorado. I know, Well, yeah, that's random,
Speaker 1: but yeah, I mean to me. This is like an
Speaker 1: old school pale al but it still holds up. It's
Speaker 1: it's still tasty, even though maybe it's not as overly
Speaker 1: hopped as a lot of the modern ones. Yeah, super solid.
Speaker 2: It's good American drinking. I highly recommend it. But that's
Speaker 2: gonna be it for this episode. You can find our
Speaker 2: show notes up on the website at howtomoney dot com.
Speaker 2: We'll also link to a couple of the studies or
Speaker 2: maybe some of the articles that Dan has written. If
Speaker 2: you are I don't know, if there's a few things
Speaker 2: that we discussed that stood out to you, you can dive.
Speaker 1: Deeper, put on your bifocals, and get in those white papers.
Speaker 1: That's gonna do it, Matt for this episode. Yes, until
Speaker 1: next time, best friends, I'm best friends Out