When Dr. Daniel Crosby was in his 20s, he had a fateful conversation with his father about what he should do for a living. Dr. Crosby’s father was a financial advisor, but young Daniel didn’t think finance was a good fit for his interests and skill set.
“I remember saying to him, ‘Dad, but I’m a people person. I like to study human behavior and you just think about math,’ Dr. Crosby says. “He laughed and said, ‘Read these books and tell me if you don’t think that emotion and human behavior plays into finance.’ And there was no turning back after that.”
Today, Dr. Crosby is the chief behavioral officer at Brinker Capital. He’s also a psychologist, a New York Times bestselling author, and a behavioral finance expert who really understands what’s happening at the intersection of our minds and the financial markets.
On today’s show, we talked to Dr. Crosby about his latest book, “The Behavioral Investor,” and the four psychological tendencies that he has seen prevent folks from building a bigger and better nest egg.
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“Go to someone on their wedding day and ask the happy couple what’s their likelihood of divorce, and if they tell you anything less than 50%, they’re not being honest with themselves,” Dr. Crosby says. “We think that cancer happens to other people and big losses in the market happen to other people. Because we have these various shades of overconfidence, we don’t manage risk well.”
A further complication is that people who are successful in business and life usually get that way because of some amount of ego. If every engaged couple, would-be restauranteur, and prospective small business owner let failure statistics get in their way, we’d have no married couples, local restaurants, or small businesses! The only folks who buck these trends are the ones who have enough ego to say, “I’m different, I can do better.”
But many successful folks are too smart and too egotistical for their own good when it comes to investing. Trying to buck trends and strategies that have generated wealth for decades leads to folks dabbling in risky tactics like market timing that may have a higher probability of hurting your nest egg than growing it.
“There’s a lot of misinformation out in the world about how emotion can be tapped into as this ‘sixth sense’ that will give us premonitions about what to do in the stock market,” Dr. Crosby says.
“Spoiler alert: no, it doesn’t. Extreme emotion is almost universally the enemy of good decision making.”
One eye-opening example: Dr. Crosby’s research has discovered that when we are making decisions under stress, we lose 13% of our IQ!
“When you think that the average IQ is 100 and a developmental disability would be 75, you’d be halfway there just by being under stress,” Dr. Crosby notes.
I certainly understand that investing can be stressful, especially when the markets are experiencing volatility. It can be very tempting to make emotional decisions when you feel like factors beyond your control are jeopardizing your retirement.
However, in fact, the most important thing you CAN control in investing are your emotions. Remember one of our mantras at Keen Wealth: “volatility is normal.” You should never hesitate to call up your fiduciary advisor if you’re feeling really unsettled. Yes, you hire us to create and monitor your financial plan and manage your investments. But I believe two of the most important services we offer clients are our perspective and experience, especially when the market is going through fluctuations.
Dr. Crosby agrees. “All the research suggests that if your advisor can save you from four or five bad decisions over an investment lifetime, they’ve made you a ton of money,” he says. “That’s the other role of the advisor, to provide that ‘just in time’ advice that keeps you from making a catastrophic mistake.”
According to Dr. Crosby, there was a big uptick in fatal car crashes in the months after 9/11. Why?
“People were so scared to fly because of this singular, high-impact, memorable terrorist incident that they started driving everywhere,” he says. “Well, probabilistically speaking, driving is far more dangerous than flying. 1,600 people died right after 9/11 because people took to the roads trying to avoid this high-impact, low-likelihood event.”
So, the more sensational something is – the more it grabs our attention – the more we believe that it’s going to happen to us, even if the numbers say it’s unlikely.
In investing, this can translate into FOMO: The Fear of Missing Out. When a new stock or commodity makes a big splash, some investors try to jump in with both feet because they don’t want this wave to pass them by.
About a year ago, some people were calling up asking us if they should invest in Bitcoin, because, at the time, the price of Bitcoin was soaring. We counseled against making major investments in Bitcoin or other cryptocurrencies because they appeared more volatile than the stock market.
Since then, the cryptocurrency market has dropped quite a bit. We’re not getting quite as many calls about Bitcoin these days because Bitcoin isn’t grabbing attention the way it did last year. And, for most folks, that’s probably best.
In Dr. Crosby’s context, this isn’t a political designation, but the idea that we tend to over-value what we know. Much like Attention, Conservativism can cause some folks to sacrifice healthy diversification in their portfolio by investing too much in one or two buckets.
As examples, Dr. Crosby notes that in the US, “people in the northeast tend to be overweight in financial stocks, people in the Midwest tend to be overweight agricultural stocks, and so forth.” I’ve also seen problems arise when people invest too much in large companies headquartered in their hometowns, or in the companies they work for. No matter how good you feel about your employer, it’s generally not a sound strategy to have too much of your financial future depending on one or two companies. The landscape of business is changing faster than ever. If you’re overinvested in your employer and something catastrophic does happen, then not only are you out of a salary and benefits, you’re out of your nest egg too.
If you think that these or any other bad habits might be having a negative impact on your financial planning, come in to Keen Wealth. We can help you sort through your feelings about your money and zero in on a plan to help you achieve your retirement goals.
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Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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