One of the smartest people writing and speaking about investing and behavioural finance is Dr Daniel Crosby.
Educated at Brigham Young and Emory Universities, Daniel is a psychologist and behavioural finance expert who helps organisations understand the intersection of mind and markets. His first book, Personal Benchmark: Integrating Behavioral Finance and Investment Management, was a New York Times bestseller. His second, The Laws of Wealth, was named the best investment book of 2017 by the Axiom Business Book Awards and has been translated into five languages.
Daniel’s latest work, The Behavioral Investor, is a comprehensive look at the neurology, physiology and psychology of sound financial decision-making.
I recently caught up with Daniel and asked him about his work and what his new book sets out to achieve.
Daniel Crosby, thank you for your time. How did your interest in investing and behavioural finance develop?
I am the son of a financial adviser so grew up very much steeped in the world of investing and personal finance. I entered college with an eye to becoming a financial adviser myself but was captivated by the study of psychology when I first introduced to it as part of a general education requirement my freshman year in college. When I first became aware of behavioural economics and then behavioural finance, I was thrilled that there was actually a field that was the direct embodiment of my two greatest interests.
Your new book, The Behavioral Investor, has just been published. What were you looking to achieve in writing it?
I wrote in the preface that I hoped that it would be “the most comprehensive guide to the psychology of asset management ever written”, which is audacious but true. In specific, I hoped to fill two gaps that I saw in the extant literature: a lack of coverage of how external factors like our bodies and our society contribute to how we make financial decisions and concrete, practical tips for what to do and why to do it when it comes to creating behaviourally informed portfolios. So, I hope that the book covers new ground and does so in a way that is immediately applicable.
You’re certainly not a pop-psychologist; you have a PhD in it, for a start. But there are lots of people — me, for example! — who write about behavioural finance without a formal background in it. Is that a concern?
I think that it’s potentially a strength, but as is the case with many personal traits, a strength overextended can become a weakness. Behavioural finance is such a mutt of a discipline that people from a diverse array of backgrounds — psychology, economics, finance — have laid some claim to being experts and that confluence of ideas has the potential to serve us well. However, part of the reason that I wrote The Behavioral Investor was to try and put to rest some of the spurious folk wisdom that I was hearing being set forth as gospel truth at conferences. I welcome all comers but hope that they will bring the best of their areas of expertise to try and build and grow what is truly a multidisciplinary field of study.
I interviewed Greg Davies, Head of Behavioural Finance at Oxford Risk, recently, and he was telling me he thinks we make too much of behavioural biases — almost as if we have a bias bias. Do you agree with that?
The growth and trajectory of behavioural finance has largely mirrored the path of the broader study of psychology; it began with the study of the broken and pathological and only later worked toward the beneficial and applied. Freud and others studied pathology for a century before Seligman and company began to answer questions like, “What makes a great leader?” or “What makes us happy?” Likewise, behavioural finance, almost of necessity, began with a study of how we are flawed, irrational and deviate from the perfect “Economic Man” set forth by traditional economists. That was an important distinction to be made but it has been well and truly established now and the next step is to work towards something more solution-focused and that’s where I hope books like The Behavioral Investor can help.
This is a big question, I know, but for you, what are the main reasons why investors behave irrationally?
One of the recurring themes of the book is that processes that have served us well evolutionarily may not serve us well in an investment context. Irrationality is domain-specific and so what makes you a good spouse, employee, or small business owner may not serve you well as an investor. I reject characterisations of humans as these Homer Simpsonesque dolts who can’t do anything well. It’s simply a matter of learning which tools apply to which job, and the tools that work for investing are fairly unique.
As investors, we tend to assume that the professionals are immune to these sorts of issues. And yet they aren’t, of course, are they?
The research here is interesting and suggests that while a professional adviser may not be better at making decisions for her own portfolio, he or she is on average better at helping you make decisions for yours. In The Laws of Wealth, I cited a number of studies that suggest that those who work with a financial professional tend to outperform those who do not fairly consistently and for reasons that are almost entirely behavioural (i.e. they outperformed for reasons of discipline and not stock picking). It’s a bit like being in love; we know how to give our friends good dating advice but may not apply those same lessons to our own romantic choices.Teaching and coaching someone how to act is an entirely different thing than acting that way yourself.
I recently saw a suggestion of yours that financial advisers insist that their clients sign a contract, agreeing to good behaviour. Are you serious?
I’m quite serious! This idea came from research done by Robert Cialdini, the godfather of research on influence and persuasion. He found that when people make a written commitment, they tend to act in ways that are consistent with that commitment. Our local baseball team, the Atlanta Braves, has even taken to asking people to sign a commitment not to drink and drive after the game based on this line of research. The commitment not to drive drunk has no legal teeth or any heightened penalty, it’s just an acknowledgment that people want to do what they say. For investors and advisers, it’s something they can look back on to revisit the calm, collected emotional state in which they initially set the course and it’s a natural way for an adviser to say, “Look, there was a time when you thought this was a good idea.”
Finally, if there’s just one thing you’d like people to take away from your book, what would it be?
That knowing yourself and growing your wealth are parallel and complementary pursuits.