Phase 1 - Pre-Account Creation (Why Real Estate/RealCrowd)

Podcast - A Deep Dive On Behavioral Finance

Tyler Stewert
September 14, 2021
Podcast - A Deep Dive On Behavioral Finance

Dr. Daniel Crosby, Chief Behavioral Officer at Brinker Capital, joined us on the podcast to discuss behavioral finance concepts from his book: The Behavioral Investor.

Daniel Crosby is the Chief Behavioral Officer at Brinker Capital. In this role, he is responsible for bringing behavioral tools, training, and technology to financial advisors to allow for the practical application of behavioral science. He is a psychologist and behavioral finance expert who applies his study of market psychology to everything from financial production design to advisor-client engagement. Daniel has more than 10 years of experience in the financial services industry and has published a number of bestselling books that serve as guides to building stronger advisor-client engagement with a focus on achieving better outcomes.

Educated at Brigham Young and Emory Universities, Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby recently co-authored a New York Times Best-Selling book titled, Personal Benchmark: Integrating Behavioral Finance and Investment Management.

He also constructed the “Irrationality Index,” a sentiment measure that gauges greed and fear in the marketplace from month to month. His ideas have appeared in the Huffington Post and Risk Management Magazine, as well as his monthly columns for and Investment News. Daniel was named one of the “12 Thinkers to Watch” by and a “Financial Blogger You Should Be Reading” by AARP. When he is not consulting around market psychology, Daniel enjoys independent films, fanatically following St. Louis Cardinals baseball, and spending time with his wife and two children.


In this episode we discussed concepts from Daniel Crosby's book: The Behavioral Investor

Listen to Daniel Crosby's podcast at: Standard Deviations

Follow Daniel Crosby on twitter: @danielcrosby

Connect with Daniel Crosby on LinkedIn

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RealCrowd (00:00):
All opinions expressed by Adam Hooper, Tyler Stewart, and podcast guest are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only. It should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Daniel Crosby (00:22):
The more complex and dynamic a system, the simpler our rules have to be.

Adam Hooper (00:37):
Hey, Tyler.

Tyler Stewart (00:37):
Hey, Adam. How are you today?

Adam Hooper (00:39):
Tyler, I'm good. Back in the home studio here today with another fantastic conversation that's been in the works for, gosh, almost three years now, hasn't it?

Tyler Stewart (00:46):
Yeah, it's been a long time coming. We were excited to bring on Dr. Daniel Crosby, Chief Behavioral Officer at Brinker Capital.

Adam Hooper (00:55):
I met Daniel at a conference almost three years ago now. I think it'll be three years in the fall. Just a fascinating presentation he gave back then. Super accomplished author, New York Times bestseller. Written a couple books. Certainly look in the show notes for links to those. His latest book called The Behavioral Investor, we talk about some of the concepts that he has in that book today, what's going on in this current COVID situation, and some of his principles about how to create a rules-based investing system, which is just, again, fascinating to me. We could have talked for three hours with him on this stuff.

Tyler Stewart (01:31):
Yeah. I remember three years ago when we saw Daniel speak, I took a ton of notes and that still hasn't changed. Today I took a ton of notes. This is definitely one as you listen, have a piece of paper out, have your pen ready, and be ready to take notes as there's a lot of great information in this episode.

Adam Hooper (01:52):
Yeah, and then on the rules-based system, again, pay attention to the three main components. It has to be backed by data, it has to make sense, right? It has to have a theoretical component to it that makes sense, and it has to be behaviorally difficult to implement, which I think is again fascinating. If it's easy, everyone will be doing it and it's maybe not the best rule. So I think those are just three components to a good rule. I think maybe the most important part about me was sharks versus Big Gulps. You'll have to listen and see what we're talking about, sharks versus Big Gulps.

Tyler Stewart (02:22):
Yeah. Speaking of sharks, I really enjoyed the part of the interview where Daniel broke down how our survival instincts often go against what would be sound investing fundamentals.

Adam Hooper (02:34):
Yes. All such fascinating stuff. Again, we could have spent way longer talking to Daniel about this and hopefully we'll get him back on the show and explore this even further. This episode again, it's a little bit outside of the typical just core real estate knowledge, but I think it's super helpful, super informational general investing knowledge that hopefully all of you out there listening will enjoy. If you have any comments or feedback, let us know. Send us a note to With that, Tyler Stewart, let's get to it.

Adam Hooper (03:08):
Daniel, thank you so much for jumping on today. This conversation's been about almost three years in the making when we met in Tahoe at the Riskalyze Fearless Investing Summit many years ago. So thank you so much for coming on today to talk about what's going on in the world of behavioral finance.

Daniel Crosby (03:24):
It took a global pandemic for us to get together, so sorry about that.

Adam Hooper (03:29):
No worries, no worries. We'll take the silver lining here. You've been through some changes since we met then. You're now with Brinker Capital. Why don't you tell us a little bit about what got you there, what your transition was to get there, and what you're doing now at Brinker?

Daniel Crosby (03:44):
Yeah, so I'm the Chief Behavioral Officer at Brinker Capital. So my stated role there is that I'm in charge of training tools and technology for advisors. I mean, basically the thing that attracted me to Brinker, they were a long time client of mine when I was out on my own. We had a great working relationship. But the thing that put it over the top for me was their willingness to invest in bringing the lessons of behavioral finance and putting them on an advisor's desktop, doing the things that it takes to move behavioral finance out of the ivory tower and put it in the hands of everyday people. So we had a shared vision around that and it's been a fantastic partnership for the last year and a half or so.

Adam Hooper (04:29):
Perfect. Well, why don't you tell us what is behavioral finance?

Daniel Crosby (04:33):
Yeah. So behavioral finance is just finance that accounts for the messiness of humanity. I think a lot of popular econometric and financial models were developed absent people, which is, of course, insane, right? I've written about I hope that when my kids go to college, there's no more behavioral finance because I hope it will be so fully integrated into just regular economics and regular finance, that the notion that finance that includes people as something different than normal finance will be as antiquated as I think it is. It's just the combination of psychology and finance to try and have more predictive, more descriptive models of what goes on in markets.

Adam Hooper (05:21):
How did you get into that? Was it something that was just a passion for you? Was it interesting? What got you into this field to begin with?

Daniel Crosby (05:30):
No, I wanted to be the catcher for the St. Louis Cardinals, but I ended up doing this instead. No, I went to school to be a clinical psychologist, so my Ph.D. is in clinical psychology. I went to school thinking I'd be a therapist, but about midway through my doctoral program, I was just really burning out on therapy. There was a lot I liked about it, but a lot I didn't and it was enormously stressful for me. So I started looking for non-clinical applications of psychology and my dad was and is a financial advisor and he said, "Hey, there's a lot of psychology in the work that I do." I was like, "What are you talking about?" Because at that young age, I thought of finance in sort of black and white terms as this entirely numerical thing. Like my dad was a numbers guy in my mind.

Daniel Crosby (06:27):
I got a job. My first job out of my doctoral program was with a bank doing pre-employment vetting of bankers and basically giving them IQ tests and personality tests and these long form interviews to determine whether or not they'd be a fit for the job. Inside the bank, I got exposed to behavioral economics. I went out my own after only about a year and a half at the bank because I found this huge gap in the delivery of behavioral economics, behavioral finance. I found that there was really, really awesome work being done in academia by people much smarter than me. But nobody was bringing it to people like my dad, right? Like no one was bringing it to people and helping them apply it in a practical way. So I went and started my own business about a year and a half after getting out of grad school and did that for about 10 years. It was just fantastic.

Daniel Crosby (07:27):
So it's been a great niche. So even though I wanted to be the Cardinals' catcher, I've been very pleased with this fallback option as well.

Adam Hooper (07:37):
Yeah, not a bad fallback, I guess. You've had, again, a wonderful career. It's been great to follow you. You published a New York Times bestseller. We'll put links in the show notes for everybody that's listening to get copies of your books. Just awesome, awesome stuff. We want to touch on your second book today, but before we get into that, we find ourselves in a psychologically challenging time right now with very massive disruption and a lot of just unknowns right now both in how we go about our daily life and also within the markets, right? We've seen just these wild swings almost daily up and down that's just volatile like crazy. What have you been able to take from your experience, your background, I guess, in behavioral finance, and how can our listeners maybe start to make some sense of what's going on today? Or is it a fool's errand?

Daniel Crosby (08:31):
I am unable to make sense of what's going on today. I have to be completely honest with you. I mean, we're sitting here on a day where we missed… Our GDP numbers were worse than we thought for Q1 of 2020 and the market's up 2.5%. I mean, I know that the market is not the economy. I'm quite aware of that. But still, it defies explanation. So what I'm taking from this is that there's a reason why, I'm a rules-based investor, there's a reason why I'm tentative, excuse me, there's a reason why we diversify, there's a reason why we follow the rules and we're systematic. Because, I mean, markets, what's the old joke about markets? They work to make the largest number of people look stupid at any given time? I mean, it's just the things that we're seeing really defy my explanations. So at times like this, it makes me grateful that at least the fact that markets are baffling isn't a surprise to me. It's been a good reinforcement to me of just how unpredictable markets are. It certainly keeps you humble.

Adam Hooper (09:50):
You mention the rules-based system and I definitely want to touch on that after we talk about some of the stuff in your book there. But I mean, a rules-based system is basically… I find that juxtaposition interesting, right? You're a behavioral finance guy and a rules-based system is to take our behavior out of it, right? It's to take our emotions and take our humanness out of it, right? So I think that's really interesting that… The more you've studied human behavior, have you found that the more we need to remove ourselves, our emotions, some of these different human components, from these decisions that we make?

Daniel Crosby (10:26):
Yeah, that's exactly right. So there's a paradox at work here. I mean, there's paradoxes all through the markets, which is what makes them so tough. But the paradox that you're mentioning is the more complex and dynamic a system, the simpler our rules have to be. That doesn't make intuitive sense, right? We think there's something like the market, like it's complex, it's dynamic, it's ever in flux, so we think that our rules must be equally as complicated, esoteric, dynamic and there's just nothing to support that. So basically the more complicated a system is, the more simple your rules need to be to avoid over-fitting.

Daniel Crosby (11:14):
So I mean, here's a perfect example. All right, you could make a rule based on recent market action that every time the U.S. sets a new unemployment record, you should go long because every Thursday for the last month, we've had these jaw dropping unemployment numbers and every single day, the market's gone up, right? So you could make that rule, right? I mean, you could make that rule, but it would make no sense. So the rules you need to set in place need to have a couple of things in common. They need to be based in data, right? So there needs to be evidence in data. There needs to be evidence in theory. There needs to be a reason why it works because you see a lot of weird anomalies like there's a 96% correlation between the production of butter in Bangladesh and moves in the S&P 500. If you put enough numbers in a blender, you're going to find some spurious correlations, so it needs to make some sort of philosophical sense. There needs to be evidence in the data. Then it also needs to be behaviorally difficult to implement.

Daniel Crosby (12:30):
So those are my three hurdles for a good rule. But yeah, it's times like this when you realize that being a rules-based investor is the only thing that makes sense.

Adam Hooper (12:45):
The butter and the S&P tracking is fascinating to me. I'm curious to get your thoughts in terms of how machine learning and some of these AI models that are looking at these just insanely vast amounts of data and finding these patterns that, like you said, they might not hold up to that second theoretical test, right? There might be an incredibly high correlation or negative correlation, but it just doesn't make any sense. How have you seen those developments with technology and either, again, machine learning AI applied to your space and is there ever a day where the art of this gets pulled out and it can be completely reliant upon data? How much of it is art and common sense, I guess, from a human's perspective still?

Daniel Crosby (13:34):
Well, I think in order to develop truly smart AI, you're going to need people with a technical and analytical background, the AI background, pairing with people who have more of a critical thinking and philosophical bent to avoid calcifying the very sorts of errors that you might see in the data. So the Fed releases 45,000 pieces of economic data each year. So if you regress those against each other, that's effectively an infinite number. I mean, it'd be a ridiculously high number of permutations of that data. Some things are going to look significant, right? Like there are some things that are going to come out of that computation that are going to appear significant. But if I tell you like, "Hey, you should load the boat every time there's massive unemployment numbers," like yeah, there's a couple of data points to suggest that, but it doesn't make a whole lot of sense theoretically so you may not want to do it.

Daniel Crosby (14:41):
So you've seen already with some of these employment hiring algorithms that they have baked into the cake some of the racial bias and other negative things that are current in the data. So the data is only as good as it is clean and de-biased. Then it still needs to be further de-biased and have this philosophical layer and the behavioral layer because the behavioral layer is what says that it's going to persist. So if you look at the history of market anomalies, there have been hundreds and hundreds and hundreds, but mostly what happens when a market anomaly gets discovered is it quickly gets arbitraged away if it's easy to do. There used to be calendar effects. Like given when bank deposits would hit and when people would rebalance. Just by investing on the 1st or the 15th, you could do better sort of thing.

Daniel Crosby (15:36):
Well, that's not hard, right? Once that's out in the universe, everyone figures it out and everyone does it. But you look at something like value investing which is psychologically difficult and even though values had a tough run, I think that value investing will always be around because it's behaviorally hard to do even when you know that it's worked historically.

Adam Hooper (16:04):
Yeah, which is absolutely fascinating, right? I think the part of the thing that we're trying to figure out now is because there's so much new information coming in, because we're in such an unknown timeframe right now with all these different sources of information, different datasets that we're getting, how do we make sense of those, right? How do we pick ones that are more plausible given the amount of unknowns? We don't know what the post-COVID world looks like quite yet, right? How are we going to be able to make sense of these things? Do you have any metrics that you follow or mental structure that you go through when you're looking at so much new data incoming at such a rapid pace to be able to sift through some of that and see really what does make sense or what should stick?

Daniel Crosby (16:54):
Yeah. So I'll speak to market data and then we'll go into, perhaps, something that's topical, which is this whole idea of fake news or the trustworthiness of the news media more broadly. So the first thing that I want to do is I want to evaluate the source. With the COVID example, people have been so hungry for information about COVID that we have sometimes been relying on unreliable sources. Like I was watching a news program the other day. They had someone on there opining about this new wonder drug, wonder therapeutic that has since turned out to not be useful at all. The person in question was a lawyer. Like when I looked them up, they're speaking as though they're a medical professional and it was an attorney. So the first thing we need to do is we need to evaluate the source.

Daniel Crosby (17:53):
The second thing we need to do is we examine the tone. What people need to understand is we need to see how the sausage gets made. We need to understand how data providers and news providers get compensated. They're not compensated to help you make good decisions necessarily. In many cases, they're compensated to sell advertising. So they can tend to be melodramatic, they can tend to have melodramatic headlines or bury leads or things like this. So that's another thing, is I want to question the tone and the motive.

Daniel Crosby (18:33):
Then I think I always want to double check facts. Throughout the whole COVID thing, one of the things that has kept me grounded throughout and also doesn't allow me to get as excited or as pessimistic is just my ability to read a scientific paper. Some of these things that are in the news, if you understand how research is done, you can read them and go, "Oh, okay. Well, here's the strengths and weaknesses of this study," whereas I think many of us are content to ride off of tweets and sound bites. So there is an element of doing your own due diligence, evaluating the tone, evaluating the source, and just understanding how they get compensated and what ulterior motives they might have for presenting something in a certain light.

Adam Hooper (19:26):
Yeah, no, I guess that's maybe a segue into when we first met, again at the Summit, your presentation there, there were so many just fascinating points. I think that was as you were getting ready to release The Behavioral Investor. I don't think it was out quite yet. I think that was maybe almost ready to be released. But this concept that, again, and what you just talked about, right, our ability as a human to make a decision or our nature as it relates to decision making, we're maybe not wired to be the best at that, are we?

Daniel Crosby (20:00):
No. No, no.

Adam Hooper (20:01):

Daniel Crosby (20:03):
Definitely not.

Adam Hooper (20:04):
So why? Why is that?

Daniel Crosby (20:07):
Well, we are wired for a very specific purpose. In many respects, it's a purpose… The way that we're wired is a purpose that was met many hundreds of years ago. So to say a little bit more about that, our cognitive hardware, our brains, have not have an update in well over 200,000 years and yet life today looks very different than it did thousands and thousands of years ago because for much of human existence, life has been nasty, brutish, and short and the thing that you needed to do was get enough calories and pass your genes on. So I mean, that's really what we're wired to do is to eat and have kids. I mean, we're wired to live long enough to survive and to pass on our genes. Anything beyond that is gravy and we're not really wired for that.

Daniel Crosby (21:09):
So if you think about something like the way we evaluate risk, behavioral finance has shown us that people are two and a half times as upset about a risk, excuse me, about a loss as they are excited about a comparably sized reward. Well, why is that? Well, the reason is your brain holds onto negative information. Negative information is much, much stickier than positive information because if something bad or something dangerous happens to you, if you have one really bad, really dangerous day, that's it for you. You're done. Right? Like you only get one shot at a really negative outcome. But if you have 10 really great days, well, who cares? Right? Great days don't keep you alive. Avoiding bad days keeps you alive.

Daniel Crosby (21:58):
So you see this again and again in our decision making. You see things like the fact that we're wired to hang onto negativity. We're wired to be pessimistic about the future. We're wired to overestimate our own capabilities because it gets us out of bed in the morning. It keeps us pushing forward. There's 100 other things. We're wired to look at emotion as this primitive risk management system. All of these things serve you well if you're just trying to take another breath tomorrow, but they don't serve you especially well if you're trying to be a long-term investor. They don't serve you well, frankly, if you're just trying to be a happy, well-adjusted person, right? So yeah, our wiring is completely backwards of what everyday life looks like today.

Adam Hooper (22:52):
Yeah, and that reminded me of a study they did, and this is, again, maybe not relevant much, but from my prior role in the golf world, again, golf pro 16 years ago before I got into real estate, the PGA Tour players, and I just had to google it just to make sure I wasn't making up numbers, again, this concept of risk avoidance, right? Or the pain of a negative versus a positive? Puts from 5 to 15 feet, they made about 40% of those if they were for birdie. They made 53% if they were par or worse. So there's a material difference in avoiding that negative consequence of a bogey versus the positive consequence or perceived consequence of a birdie, right? These are elite, elite level people that are operating at a level that they should know a stroke is a stroke, right? It's the same at the end of the day, right? So I think that's interesting, this desire to avoid a negative consequence far outweighs the desire to maybe experience that positive, right? That has some pretty big implications when you're talking about making investment decisions.

Daniel Crosby (24:00):
It does, and you see this in football as well. Academics have been writing for years about how teams should go for it on fourth down more. There's been a lot of ink spilled over how football coaches should go for it on fourth down more. But you look like a clown if you go for it on fourth down and you don't make it, right? So nobody questions you punting on fourth down, right? So if it doesn't go your way and you punt, oh, well. The safe reputational bet. But if you go for it on fourth down and you don't make it, right, then you look like a fool. So yeah, it's the very same thing.

Daniel Crosby (24:36):
Of course, yes. When it comes to investing, you think about the public markets are, on any given day, up about 55% of the time and down about 45% of the time. But if you think that we weight a loss two and a half times as heavily as we weight a gain, someone who's looking at the market daily feels like it's down all the time. It feels like it's always down and we're just wired to hang onto that bad news.

Adam Hooper (25:07):
Yeah, which again, it's just the whole area is fascinating to me, so I'm so happy that you're on to talk about this stuff. So there are four components in your book and again, this was a part of your presentation. I pulled out before we hopped on today. I remembered a slide that you had put up and I took a photo of with the first of the four, which is ego. The slide that you had was about paper or plastic bags. Again, that's something that as silly as that is in our daily lives, three years later has still stuck with me. So can you tell us about the paper versus plastic bag as that relates to our ego?

Daniel Crosby (25:44):
Yeah, so I will probably mess up the numbers, but I'll get the general gist of it right. So when you're asked at the grocery store whether you would like a paper or plastic bag, normally, I'll speak for myself, normally I've gone paper because I've thought that was the more environmentally friendly option, right? Well, it turns out there is a robust discussion to be had and that paper takes more water, it's harder to recycle, there's a few other different things, right? It's more expensive, more labor intensive. So if you learn that, if you learn, hey, paper is not a lot better than plastic, you can pretty easily change your mind about that, right? Because it's a low stakes decision. Right?

Daniel Crosby (26:34):
But then I give the example in the book of something like gun violence, right? I give some stats for and against tighter gun control. I say, well, okay, let's say you're for tighter gun control and then you learn these stats. Like X number of people use a gun each year to prevent a crime. More people die each year from knife wounds than guns and more people drown in swimming pools than die in guns and different things like this. That's harder to change your mind about because it's more central, perhaps, to your political philosophy, it's more central to who you are.

Daniel Crosby (27:14):
So we tend to have ego about certainly religious positions, philosophical positions, things that we love. It tends to be very, very hard for us to change our mind about these things. There's actually research among a group of anti-vaxxers, so people who are against vaccines and who are of the idea that vaccines cause autism spectrum disorders and things like this. When they were presented with facts that refuted many of their claims, they actually doubled down on their beliefs. So becoming a good investor is really about having the loosely held opinions and being able to change your mind at the drop of a hat and being open-minded.

Daniel Crosby (28:09):
That's nothing that we do well as a human family because we're not good at being tentative, right? Because if you're tentative, tentativeness is a form of uncertainty and uncertainty is tiring, right? We want our religion, our politics, our everything in bumper sticker format where we can just, say, pound the table and say, "This is what I believe. I know this to be sure." The world of being a good investor, and dare I say a good human, doesn't work that way. There's a lot that we don't understand and the sooner you can learn to say, "I don't know," and be willing to be taught by the world, the better off you'll be.

Adam Hooper (28:56):
Yeah, I mean, it's very hard for us to admit that we're wrong, right? The closer you hold that belief, the more that's a reflection of you having to admit your core might not be right, right? Or might not fit in with this information that's coming in. So how does that manifest itself in the investment world? You said, I guess, maybe the looser you hold those beliefs about any particular investment decision, you can make a more objective? Is that the goal, to make a more objective decision rather than something that's deeply rooted in your personal identity as an investment decision?

Daniel Crosby (29:32):
Yeah, so the best example I can give in the investment world is people who are upset about the Fed and what they perceive to be the Fed's easy money policies, right? So from the time of the financial crisis and to a much greater extent even today, there's a host of people who are upset about the Fed's easy money policies and their decisions to keep rates low and their decisions to "print money." So leaving aside the rightness or the wrongness of that, because there's people who are smarter than me who can talk about how right-headed or wrong-headed that is, but the fact is the Fed is doing what the Fed's doing. The Fed is doing what it's doing and whether you love it or hate it, it's driving the market up. So you can get onboard or you can get left behind sort of.

Daniel Crosby (30:29):
You see these people who are just so angry at what the Fed is doing and they're so opposed to it that they can't set that aside for long enough to participate in the potential upside. So that's the first example that comes to mind, because I think people have such vehemence for or against the Fed in this environment. But yeah, that's just one example. There's a million.

Adam Hooper (30:56):
So how do we manage that ego risk?

Daniel Crosby (31:02):
I think one of the things that was the best for me about my whole education was learning to be a therapist, which is really hard. I mean, the whole notion that you can sit across from someone and heal them with the words that you say is kind of arrogant. So learning to become a therapist, what we had to do is we had to watch tape of our sessions, of our therapy sessions, and one of the things I had to learn to do was take criticism from people in my cohort who would watch these tapes and would break down the film for me and say, "Hey, I liked it when you did this. I didn't like it when you did this. This wasn't very effective." For most of us, we're not really willing and able to hear that criticism. In fact, it was very difficult for me at first. So learning to do that, learning to take that criticism was one of the best things for me as an investor that ever happened to me, even though only peripherally involved.

Daniel Crosby (32:06):
So one of the things I think we can learn to do is to be self-critical, to keep a journal of our trades and our decisions, whether it be a financial decision or another decision. I think we can seek out honest feedback and not punish people for giving it. I think the third thing that people find enormously hard to do is to seek out dissenting opinions. We live in a world where you can effectively curate your newsfeed so you never hear an opinion that disagrees with you. Now, I mean, politically we can certainly go to the cable news channel that scratches the itch that you want scratched. So I think we have to learn to seek out dissenting opinions. That's really, really hard to do.

Adam Hooper (32:57):
Yeah, definitely. With so many, again, like you said, those curated feeds and feedback loops, it is difficult sometimes to get those views. Again, it's hard to be open to that sometimes, right? Because these things that we do hold so personal, to challenge that within ourselves I think can be a pretty big task for sure. And not just in the investing world, just generally, right? So I can imagine that. It makes it more challenging in the investment… I mean, do you have any sources, I guess, that you go to? How do you challenge an investment thesis or how do you seek out… Is it with peers? Is it with other investors that you respect? Is it with just data?

Daniel Crosby (33:41):
Yeah, so I actually find Twitter to be… For all that's wrong with Twitter, Twitter is actually a really good source of information. I have a list there that is called All Signal No Noise and it's just the people I respect in, call it, the bull and bear camps on a given topic and I try and read everything. I mean, I will find myself going, "Yeah, I don't like this," or, "I don't agree with this." You'll have to almost force yourself to slog through it because there was research out of Ohio State that found that people spend about two-thirds longer on information that they like than on information that they don't like. If we look at it at all, we tend to just kind of breeze over the stuff we don't like or we disagree with and we don't really dig down. So you have to be cognizant of curating, whether it's a social media feed or news or whatever, data, on both sides of an opinion. It's tough. Here's a good test. If it doesn't hurt, like if it's not a little bit uncomfortable for you, you're not doing it right.

Adam Hooper (34:57):
Yeah, that again, I think the openness to lean into that discomfort and challenge yourself, any tricks or tips that you know of for someone that's listening to this and, I think, maybe they're not as open as they might want to be? How does one begin to challenge themselves in these things that, again, can be very deeply held?

Daniel Crosby (35:23):
So I think any behavior change is best when it starts small, right? So just dip your toe in at first. The other thing that I would say is start to keep a record of how often you're wrong. Right? We tend to really misremember our decisions. We tend to give ourselves way too much credit, both with our trading and investment decisions and just life decisions generally. So keep a journal. Keep a decision journal about why you did what you did. What was the action and what was the rationale behind the action? Were you right and were you right for the right reasons? Because that's what's crazy about the market, is you can be right about what's going to happen and wrong about the direction or wrong about what's going to happen and right about the direction. There's all kinds of permutations of this.

Daniel Crosby (36:21):
If you look at Trump being elected, there were two consensus views. The consensus view is that Senator Clinton would be elected, Trump would not and that if Trump were to be elected, it would be terrible for the market. At least at first, people were surprised both at the result and at the trajectory of the result. At least, pre-coronavirus. So it's really hard. This stuff is really, really hard. It's hard to figure out what's going to happen and then it's hard to figure out what the market will think about what happened as well.

Adam Hooper (37:05):
At the expense of getting down a tangent here, I'm curious if you lean more process or results? I've got a hunch. But it was Annie Duke's book. Basically if you just look at outcomes, you might get to that outcome, but for the wrong reason, like you said. Right? You might actually lose money when you should have lost more money because if your process worked correctly, if you followed your own set of rules, is your schema working correctly versus those outcomes, I think, like you talked about. So are you more process, again, kind of get back to this rules-based system, versus just looking at outcome? How do you get people to examine process more than just what I would assume the vast majority of people just look at outcome?

Daniel Crosby (37:51):
Yeah, most people just do look at outcome. I think that's why the journal makes so much sense, but the process, I don't know any way around it. You just have to build a process that takes those three things into account that I talked about earlier. It needs to be theoretically sound, empirically data-driven sound, and also make psychological behavioral sense. Then you just have to stick to that process. So I mean, yeah, Annie Duke's book is exactly what I'm talking about. She calls it resulting where you're going off with the result and not by the process. We know that from the data that 94% of the time, a simple process beats or equals human discretion. This is across context. This is everything from trying to judge who should and shouldn't get out of prison to medical diagnostics to stock picking and everything in between.

Daniel Crosby (38:55):
So any place in your life where you have a high stakes decision… I mean, I would even say something like choosing who to marry, right? Choosing who to marry, it's something we are usually not very process-driven about. Usually not something we're very analytical about, but that's a huge decision. Probably the biggest one. So in decision that range from the very small to the very large, I think you can come up with a process and stick with that process.

Adam Hooper (39:26):
We'll let people tweet at you to try to figure out what that process is for finding a life partner.

Daniel Crosby (39:32):
Hey, 14 years, baby.

Adam Hooper (39:36):

Daniel Crosby (39:37):
I'm crushing it.

Adam Hooper (39:37):
You're good. So you'll have to share that process. Okay, so moving on. I know we've got to get you out of here before not too long. Three other main topics in the book: conservatism, attention, and emotions. Maybe we can pick those apart real quick and then I want to do, again, wrap up with a drill down on the rules-based system and how we can apply that today going forward in this world of so much uncertainty. So you may want to put a couple finer points on those other three parts of your book that was out there?

Daniel Crosby (40:08):
Yeah. What I did in the book, the part of the book I'm most proud of is I took this universe of 200-ish behavioral biases and I looked at them and I said, "Look, these are not all that distinct. Many of them load on a common underpinning." So I took the universe of behavioral biases and without any real preconception about how many would shake out, I just tried to group them. The groupings are as you said. So I think you said emotion, attention, and conservatism.

Daniel Crosby (40:41):
So emotion is just this tendency to allow the mood that we're in to color our perceptions of risk and safety. So a great example I love to give is around boating, right? So if people think boating is safe, boating is not safe. I hate to ruin anyone's day. Boating is really dangerous on average. But we think that boating's safe because boating's fun, right? I mean, you look at something like long-term investing. Like being a long-term multi-asset class investor. You go, "Is that risky?" People go, "Yeah. I don't want to put my money in the Wall Street casino." I mean, if you look at being a long-term multi-asset class investor, it's the safest thing in the world historically and yet people think it's not safe because it's boring.

Daniel Crosby (41:38):
So what we tend to do is use emotions to answer an easier question. When we're voting for a president, we don't create a spreadsheet and try and pick apart the finer points of their foreign policy as opposed to the next person's and see how that gels with their level of intelligence and their personability. I mean, we just don't do what it takes to make a good decision. What we do is we answer the question who would I like to have a beer with? When we answer questions about risk, we don't say, "Look at the probabilities." We go, "Is this fun or not?" So emotion really leads us to answer these easier questions. If you're not careful, you can get down a really bad path.

Daniel Crosby (42:29):
So just with emotion, I would just say make you're you're answering the question that's being asked. If you think about what it takes to be compatible with a partner long-term, you need to be on the same page. If you want to have kids, you need to be on the same page with raising and parenting children. You need to be romantically compatible. You need to be financially compatible. You need to like the same TV shows. Whatever. There's all these elements of a good marriage, but when people are dating, they usually ask, "Hey, is this person attractive?" Or, "Are they fun?" Some sort of much simpler variant of that and that's why we run into some of the problems we do and it's really caused by emotion.

Daniel Crosby (43:17):
So attention is our tendency to confuse how likely something is with how salient it is. So salience is kind of this wonky psychological term for psychological vividness. So if you look at something like a shark attack, it's much more vivid than diabetes. So people are worried about getting bit by a shark, but they're not worried about a Big Gulp and they should be worried about the Big Gulp and not about the shark. So it's this tendency for us to confuse the vividness of something with its dangerousness and that happens in markets all the time. The market is in recession. Over the last 100 years, we've been in a recession about 20% of the time. Yet everyone spends all this time with cash on the sidelines trying to time the next recession and missing all the good stuff in between, right? Because it's big and scary, but it's not ultimately all that damaging.

Daniel Crosby (44:22):
Then what was the last one? Conservatism?

Adam Hooper (44:25):
Conservatism, yup.

Daniel Crosby (44:26):
Yeah. So conservatism is this tendency to prefer, we talked a bit about this before, to prefer gain, excuse me, to have asymmetrical preferences relative to loss and gains and also to just prefer the status quo. So we see people doing stuff like over-investing in company stock. They over-invest in home country stock. They over-invest in industries that they know or personally use. What ends up being bad about that is you look at someone like me, I live in Atlanta. So let's say I live in Atlanta, so I buy Aflac and UPS and Coke stock and over-invest in my personal residence or whatever. So it's like now you're sort of loading risk, right? So the Atlanta economy now… My job depends on the Atlanta economy, real estate investment depends on the Atlanta economy, my stock choices now depend on the Atlanta economy. So people really, they think they're doing something safe by investing in what they know, but usually what they're doing is compounding unforeseen risks by being too conservative.

Adam Hooper (45:41):
That was, again, another photo that I took and I'm so glad that it did take these photos because I knew we were going to have this conversation one day. This concept, and again from your slide, more information is more confidence. More confidence equals riskier bets and more confidence leads to difficulty inverting. Talk to us a little bit about this concept of inverting as it relates to these decision making processes.

Daniel Crosby (46:06):
Yeah, inverting is taking the other side, right? So if you're bullish, being able to articulate the bear case and vice versa. So if you look at this, there's fascinating research done on gambling, right? I'm a big college football fan. So they would give people 6, 10, and 15 pieces of information about the two teams that were playing and have them bet on it. So the person's ability to successfully predict the winner did not improve across 6, 10, and 15 pieces of data, but their confidence improved greatly. Sometimes people fail to account for base rates, right? So base rates are just the absolute probability or likelihood that something's going to happen. It's this weird thing about due diligence that sometimes the more time we spend researching something, the safer it can seem and that may not always be the case. There's a threshold for due diligence that gets met pretty fast and then after that, it's just you're just cranking up your competence and not learning a whole lot more new. So you have to be careful to diversify, size your positions, and do all that appropriately.

Adam Hooper (47:30):
I know in this new COVID world that we're in right now, so many people that we're talking with, it's how much information can I consume in trying to get to a place where I can make a decision with some confidence about what that future looks like, which is maybe we can get back into to this rules-based concept of when is the right time to set up these rules, right? In a time of crisis like this where there's so many unknowns and so much new information coming in and changing almost daily, is now a good time to try and put a rules-based system in place? Should it be done in a more steady state or just do it as quickly as you can and try to start sticking with it?

Daniel Crosby (48:11):
Well, so with respect to investing, the best time is peace time, right? Because, I mean, the best time is the most boring sideways market of all time, right? To just dispassionately read, consume information, not have strong feelings one way or the other, and set this in place to run. But you bring up an interesting point. You and I both have families, so we're trying to keep our families safe, we're trying to know how to prepare. Lately there's been talk of food shortages and things like this. So when it comes to trying to prepare on the personal side of these things and trying to prepare to keep your family safe, it's been interesting for me because the first couple of weeks of this, I was just consuming information non-stop. It was really making me anxious, right?

Daniel Crosby (49:07):
I got to the point where you had to draw the line and it's going to look different for everyone, to say, "Okay, I know enough now to take the appropriate precautionary measures and everything beyond that is just silliness." Like everything beyond that, that's sort of just me being obsessive. That's me stoking my own anxiety. So you don't want to bury your head in the sand at a potentially dangerous time, but you want to learn enough to formulate a plan, to act on that plan, and then go to execution mode and go about your business.

Adam Hooper (49:47):
So I guess what from that can we… If people haven't put that in place right now and we're still very much in an unknown territory with a lot of uncertainty going forward, how have you been able, again I know none of us have really made sense of what's going on right now, but how have you been able to, I guess, take comfort in where we're at or how to move forward for people that maybe haven't set up a firm rules-based system yet?

Daniel Crosby (50:17):
With respect to personal care at this time?

Adam Hooper (50:20):
Either that or investing again, right? I mean, there's so much turmoil in the markets and again in our space in the real estate world, there's a lot of unknowns. Are there any kind of mental exercises or things that you've gone through or you might have in your toolkit to help bring some calm or clarity, I guess, to what's going on and not make decision that put ourselves further backwards than just holding tight maybe?

Daniel Crosby (50:47):
Yeah, so I'll give you a couple things that give me optimism right now. So the thing that gives me the most hope is that the entirety of human time, talent, and energy as being poured onto this thing, right? The smartest, best people in the world are all looking for the same thing right now and it's a cure for this. It's a vaccine. It's therapeutics. So we relate this to investing… I almost think about bullishness and bearishness long-term as optimism and pessimism on a personal level. I think in the end, the optimists always win. I don't know what's going to happen this year. I certainly don't know what's going to happen in the next week or the next month. But long-term, I am super bullish on human ingenuity and human goodness. So that gives me strength.

Daniel Crosby (51:53):
I also have looked at the history of pandemics. We have SARS, MERS, Ebola, swine flu. In every single one of those years, the market ended up double digits, right? So again, I have no idea what's going to happen this year, next year. I don't know that we'll end up this year at all. But it does give me faith that we pull out of this, right? That it's a temporary thing. Because there's a strong behavioral tendency to project the current moment into the future indefinitely, right? To take whatever's happening now and think that the future is always going to look just like it does right now. When in markets, the future tends to be mean reverting, right? Like times of great prosperity tend to sow the seeds for times of want and times of difficulty tend to sow the seeds for times of prosperity.

Daniel Crosby (52:51):
So yeah, I see all this about what will the post-COVID future look like and while, yes, we will certainly make changes, like there will certainly be changes, but what will the future look like? I mean, mostly it will kind of look like the past. It will just kind of be boring. It's just not going to be that different. There's maybe less handshakes and more video calls, but I mean, besides that, it's going to be pretty similar. So I think we need to avoid the dramatics, look at the history of humankind. I think being a good investor requires you to be a bit of historian. So read up on previous pandemics, read up on the 1918 flu. Read up on all this stuff and know that for short periods of time, human history can be very scary and very volatile, but over the longer run, I think we come out on top.

Adam Hooper (53:51):
Yeah, and I don't think I'm alone in saying that we look forward to those boring times ahead. Yeah.

Daniel Crosby (53:57):
I would give anything. I would give anything to send my kids back to their boring school.

Adam Hooper (54:03):
Perfect. Well, we'll wrap it up there. How can listeners learn more about what you're up to, the work that you're doing? I know you've got a podcast, you've got a couple books out there. So how can listeners get ahold of all that good content that you're putting out?

Daniel Crosby (54:16):
Yeah, the name of my podcast is Standard Deviations. The name of my books are The Laws of Wealth and the The Behavioral Investor. Super active on LinkedIn, Daniel Crosby, Ph.D., and on Twitter @danielcrosby.

Adam Hooper (54:32):
Perfect, and we'll put links in the show notes to all those. Daniel, thank you so much for coming on today. Again, this was a long time in the making, so we're grateful for your time, very appreciative of you coming on the show and sharing us some insights in the world of behavioral finance.

Daniel Crosby (54:46):
Yeah, my pleasure.

Adam Hooper (54:47):
Perfect. Well, listeners, that's all we've got for today. As always, please send us a note to With that, we'll catch you in the next one.

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