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09 Behavioral Finance with Psychologist Dr. Daniel Crosby

Steve Seid & Kurt Dupuis
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Dr. Daniel Crosby - EP 09

Steve Seid:
Welcome to The Whole Truth everybody. This episode really should be called Kurt Makes A Friend. You made a friend, and it's pretty exciting.

Kurt Dupuis:
You're enjoying that, huh?

Steve Seid:
Yeah.

Kurt Dupuis:
Well, it's my only one. So, it's of note.

Steve Seid:
Well listen, I'm your friend too, Kurt. Actually, I was thinking about it. It's kind of a little bit of a rip off. Have you seen Conan O'Brien's podcast, Conan O'Brien Needs A Friend? We're ripping that off a little bit on this.

Kurt Dupuis:
Oh, I like that. Well, friends are going to come up in the Costanza Corner too. So that's a good tee up.

Steve Seid:
Wow, there's tease. We are really excited today. Our guest is Dr. Daniel Crosby. He is a psychologist, a behavioral finance expert, he's from Brinker Capital, but he does all kinds of different things. He's a PhD in clinical psychology. He's got a lot of great books, which we'll get into. His TED Talks are absolutely excellent.

Kurt Dupuis:
They're awesome, yeah.

Steve Seid:
Definitely check that out. But, the real reason we had him on is, not only do we think he's a great guest, but we really think that this whole topic of behavioral finance is really important.

Kurt Dupuis:
It really is. I also tell in the episode, the story of how we got connected with him, which was actually through his dad and a puzzle.

Steve Seid:
Nice.

Kurt Dupuis:
So, be sure to stay tuned for that. There's a couple of key points about what he is really doing in behavioral finance. So, it has real life applications. We talk about personal benchmark, which is a big thing I know a lot of financial professionals talk about with their clients, and also how to just get better outcomes, how to close that behavior gap of what the markets provide and what clients end up experiencing. So, we'll do the interview and then we'll conclude with the Costanza Corner. As always, remember you can reach out to us at thewholetruth@touchstonefunds.com, send us questions, send us criticism, send us client touch ideas, whatever you want. We love to hear from you guys out there. You could check us out at Touchstonefunds.com/thewholetruth, if you want to check out previous podcast episodes. Without further ado, here's our discussion with Dr. Daniel Crosby.

Disclosure:
The views expressed herein are those of the participants and not those of Touchstone Investments.

Steve Seid:
From the Bay Area, California, I am Steve Seid.

Kurt Dupuis:
From Atlanta, Georgia, I'm Kurt Dupuis. So, we're really excited to have our guest on the show today. He is a PhD in psychology, he's the Chief Behavioral Officer at Brinker Capital, he's the host of his own podcast called Standard Deviations. He's written at least, you can confirm this later for me, four books on psychology and investing. US News has named his book The Laws of Wealth as one of the 15 best finance books for financial professionals. InvestmentNews has named him the prestigious 40 under 40, and he also happens to share the surname of the best hockey player in the world, Sydney Crosby. So needless to say, we are very excited to welcome to the show today, Dr. Daniel Crosby. Welcome Daniel.

Dr. Daniel Crosby:
Yeah, thank you. Hopefully knowing nothing about hockey won't disqualify me from being a good guest.

Kurt Dupuis:
This is a hockey light podcast, so, I think you'll be okay.

Steve Seid:
Despite me being on it, who loves hockey and has had an internship with the New Jersey Devils. My favorite title by the way, going back to your books is your first one, You're Not That Great. I think that's amazing actually, as a title for a book.

Dr. Daniel Crosby:
It turns out that one didn't sell well. It's hard to give as a gift, but I'm proud of it nonetheless.

Kurt Dupuis:
It's probably worth mentioning how Daniel and I crossed paths. His father is a financial professional in Alabama, where we had scheduled a meeting. When I knocked on his office door, his back was turned to the door and he was sitting at a table doing something. He waved me in and I came around the corner to see him putting together a puzzle, right there in the middle of his office, the middle of the day. He never looked up from the puzzle. He invited me to sit down and I did. We sat there for 45 minutes doing a puzzle and chewing the cud, and just talking, hanging out. Does that sound about right?

Dr. Daniel Crosby:
Oh my gosh. I'm laughing so hard. My dad is a legend. Yeah. I didn't inherit his love of puzzles, but that's what he does. He does puzzles all day with his clients. He really does.

Kurt Dupuis:
Maybe we could break this down later. There's got to be a nice little psychological angle to it that kind of disarms people, gets them thinking and multitasking, and maybe not focusing on stuff they should not be focusing on. But, it was probably the most unique meeting I've ever had. I've since got him puzzles. We do puzzles when I go visit him now. It's great. I love it.

Dr. Daniel Crosby:
Yeah, well thank you. Thank you for feeding his addiction. So yes, he really loves puzzles. I think you're exactly right. There is some method to the madness, of getting people disarmed, getting them feeling comfortable, and getting them to a place where they can refocus on their goals and their purpose, and not be so wound up perhaps about whatever's going on in the news of the market. So, there is a method to the madness I think, for sure.

Kurt Dupuis:
Yeah. Well, I had a long intro for all of the things that I have seen online and reading about you, that you have done, but what is your job? It seems like you've got a hundred of them. Do you just like having a lot of bosses or are you just your own boss?

Dr. Daniel Crosby:
Well, I just have one boss, but I have a lot of jobs, but just one boss. That's kind of how I like it. Officially, I'm in charge of training tools and technology around behavioral finance. So, the vision that we're working with at Brinker Capital, we wanted to take behavioral finance out of the ivory tower and really put it on advisors desks, and put it in a client's lap, because there's been all this really cool research that's been done around social science as it applies to investment decision making. But, a lot of it's pretty esoteric. A lot of it is out there. It's not making its way certainly to individuals. Even in many cases, it's not making its way to the likes of folks like my dad, who are financial advisors who are helping these everyday people. So, that's really what I try and do, through my writing, through my speaking and through the development of different assessments and technologies, try to make behavioral finance applied, and try to use it to improve investor outcomes.

Steve Seid:
That's probably a good place to start. Let's back up. What is behavioral finance?

Dr. Daniel Crosby:
Yeah, great question. Behavioral finance is just finance that accounts for the messiness of human behavior. Like, if you look at traditional financial and econometric models, they assume that people always make decisions that are in their best interests. They refer to people as utility maximizers. So, people are going to always do the thing that gets them the most benefit. As anyone who's lived very long can attest, that's not true of you or I, and that's not true of the people we sit next to at the DMV either. So, the study is behavioral finances. How do people make financial and economic decisions under conditions of emotional strain, under conditions of uncertainty, and in an imperfect world. So, I like to think of it as finance that's a little messier than the models, but a little bit more truthful to how things really are.

Kurt Dupuis:
I used to work with a portfolio manager who was highly critical of modern portfolio theory, because the first, one of the first tenets of that is that investors are rational. I'm sure you've seen plenty of evidence that that's not really the case.

Dr. Daniel Crosby:
Yeah, absolutely. If you even look at assumptions that are made about markets, we hear things from efficient market theorists, like asset prices always reflect all available information. Well, that's kind of true. Asset prices reflect all available information, as that information is viewed through the cloudy lenses of that each of us possess. All of that information is filtered through a lifetime of bias and experience, and none of us apprehends the world the way that it truly is. Yeah, there's a big difference between these impartial econs, that's how they're referred to in the literature, econs or homo economic, as this perfectly rational economic person, and then the way that you and I do dumb things with our money. So, that's where I live in that messy middle.

Steve Seid:
So, when you're talking to financial professionals, so we talked what behavioral finance is, and why it's important, but when you're in front of, we're going to call them financial professionals now, what's your message to them? why is this important for them to know or consider?

Dr. Daniel Crosby:
It's important for them because, it's really sort of the last bastion of both what we'll call financial professionals on the advice giving side, as well as financial professionals on the asset management side. If you just look at the advice side, there've been a couple of eras of advice provision. So, for a long time, we were the gatekeepers. You couldn't make a trade without Wall Street. So, you had to come to my office because I had to do the trade for you. Well, technology dis-intermediates that, and so now you can do it for free, or in your underwear. So now we say, "Okay, well you don't need me to make the trade, but now you need me to pick good funds for you, or now you need me to manage your money."

Dr. Daniel Crosby:
So, what we're finding though is, what is enduring is that, people who get financial advice, people who work with financial professionals tend to do much better than those who don't. But, it's not necessarily because they got consistently put in the hottest funds, it's because they were saved from a handful of poor decisions over an investment lifetime. They kept them from making that greedy decision, that fearful decision, from capitulating a couple of months ago, when it felt like the world was going to end. You add up two or three of those decisions over an investment lifetime, and if you can get someone to help you stay out of your own way, it's enormously, enormously powerful.

Dr. Daniel Crosby:
So, all the research suggests that people who work with financial professionals do 2% to 3% better per year, which in aggregate ends up being about two to three times as much total wealth over a lifetime. And, they're more prepared, they're happier. They have greater peace of mind. So, what I tell the financial professionals is that, it's time to start telling a new story about the value that we add, because the value that we add is tremendous. It's just not the value that most people think we add. So, I try and help them to tell a different story.

Kurt Dupuis:
That's the behavior gap, right? That's the definition of the behavior gap. That's what we're talking about, what we're solving for.

Dr. Daniel Crosby:
Right. The behavior gap is this chasm between market returns if you had sort of just taken the ride, and the actual returns that accrue to you and I. There is a pretty sizable gap, if we look. The thing is, that gap widens in periods of great volatility. I know that looking back over the last few months, we're going to see that there was a huge gap, because the more volatile the market, the bigger the gap tends to be, and consequently, the more value you get from your advisor, or from your financial professional that you're working with. You find this again and again - that real talk, there's years where a financial professional may not add a ton of value. It may just be 1%, 1.5%, but there's years where they're adding 5%, 6%, 7%. I think that we're in one of those times right now, where financial professionals are earning their fee and a whole lot more.

Steve Seid:
So, why were you attracted to this? I know you did not... You've got a father who's a financial professional, but you didn't start down this road. So, intellectually what attracted you to this and then, how did you end up in the industry? Because I know you didn't start there.

Dr. Daniel Crosby:
Yeah. My PhD is in clinical psychology, so I went to school, I got a doctoral degree to become a therapist effectively. About halfway through my doctoral degree, I just really hated it. I was just getting sick of the work, of the clinical work. It's so important, like mental healthcare workers are so important and I wish I could have been better suited for it, but I wasn't.

Steve Seid:
It's a hard job.

Dr. Daniel Crosby:
Yeah, it's a super hard job, and it was just taking a toll on me. I said, "Look, I love psychology. I love thinking about why people do the things that they do, but I want to do it in a non-medical setting." So, my dad, I'm like whatever, 25 years old at the time, and my dad says to me, "Look, there's a lot of psychology in what I do. You should see if there's any applications to the market." Now, my dad at the time could not have told you what behavioral finance was. I thought, "There's psychology in what you do? You're a numbers guy. You're an analytics guy. Where's the psychology in what you do?" But sure enough, when I started looking into it, there was a ton there.

Dr. Daniel Crosby:
So, my first job out of my PhD was actually with a bank, doing pre-employment assessments of bankers. So, I would give bankers IQ tests, personality tests, things like that to see if they were a fit for the bank. What I found there is, I discovered within the bank, behavioral economics, behavioral finance. I said, "Oh my gosh, this is everything I've ever been looking for. It allows me to think deeply about why people do the things they do. There's a constant daily tick by tick, minute by minute barometer of how people are feeling in the form of the various indices." Because the other trouble with traditional psychology is, it's a little hazy. Like you don't know. You basically don't know anything your client's not telling you or that you're not observing.

Dr. Daniel Crosby:
So, the market tells you at any given second, just how it's feeling. I loved that it was a data rich environment, and I loved that I could sleep well at night, because no one ever died from behavioral finance questions. So, it was really great data, really interesting work, and it was a load off mentally as well. So, I really found the perfect spot.

Kurt Dupuis:
I have noticed that some, I will say very few financial professionals, have built client centric benchmarks, or kind of custom benchmarks that are more pertinent to long-term goals and not what the S&P is doing. So, you wrote a book on this, “The Personal Benchmark”. So, kind of a twofold question. Why is it so hard for financial professionals to develop these personal benchmarks for their clients? But maybe more importantly, why is it difficult for them to implement them with their clients?

Dr. Daniel Crosby:
I think we want to have it both ways as an industry. When the market's underperforming or when our allocations for our clients are underperforming the S&P, we want to say, "Oh, hey, hey, wait a minute. Keep your eyes on the prize. Be a goal-based investor. Think about what matters, goals-based investing, personal benchmarking." But, then I often see at the same turn, when we have a good year or when our allocation has outperformed the S&P we want to be able to go to that person and go, "Ha ha! Look what I did for you? The S&P got 5% and I got you 12%. Look at me making you money." So, you have to play both sides of that, and it's difficult. I find this again and again, this is one of the hardest reasons, one of the hardest things about embracing this goals-based philosophy is that, you have to give it up when it's beneficial to you. Because if it doesn't matter what the S&P is doing, it doesn't matter what the S&P is doing when you're beating the S&P either. That's not an easy conversation for anyone to have.

Dr. Daniel Crosby:
But, there's so much behavioral power in goals-based investing. One of the things you find about behavioral finance is that, the interventions are not always dramatic, but they're often very powerful. So, something like naming buckets of money, naming this the Daniel's College Fund, and this is the Daniel's Dream Retirement Fund and whatever, that increases people's propensity to save dramatically, it reduces their tendency to go to cash, like to liquidate by two thirds, just by naming these portfolios.

Dr. Daniel Crosby:
So, it's the simplest thing in the world, but what it does is, it re-grounds them in their goals, because people watch the market like it's a video game or something, like it's disconnected from real life. When you can bring it back, people start to reconnect and make decisions that are better for their life when it gets remorged to what matters to them. So, that's what I think we've got to do. It's not hard. It's easy as can be. But the truth is... The concept in psychology is called mental accounting. It's that, people tend to spend and save money differently depending on how it's labeled. Like, if people get a paycheck, they tend to save it. If people get a bonus, if it's framed as a bonus, they tend to spend it.

Dr. Daniel Crosby:
You saw this with the Bush and Obama administration during the great recession, I forget which. Luckily, we won't get political because I can't remember who called it the right thing and who called it the wrong thing. But, one of them called it a rebate and one of them called it a bonus. You spend a rebate and a bonus in totally different ways. They've even done research on criminals that finds that people who have like a day job and then like a night illegal night hustle, they will take their day job and they'll give it to charity, they'll tithe on it, they'll buy groceries with it. Then with the night hustle, all bets are off. It's just spend it however you want. So, the way we talk about these things matters, and it seems simple, but it's really powerful.

Kurt Dupuis:
I never knew. That's a great example.

Steve Seid:
That is. It reminds me of my father. When my father gets gambling winnings, he's not a huge gambler, but he lives out in Reno, and so when he does it, has a good night at the blackjack table, it's free money, it's house money. Yet, it's the same dollar as anything else he has. I'm curious, we're going to transition to some of your TED Talk concepts. But before we go there, I want to follow up on the prior question. Have you worked with your dad on some of these things? As you began to come into our industry, did you work with him? He was a test case for you, right?

Dr. Daniel Crosby:
Oh yeah. Yeah. My dad and I talk all the time. He's my best career counselor. He's very receptive to these things. What's interesting about people like my dad, my dad actually got his job on the day I was born. So, my dad got his now job on the day I was born. So, he's been in the business for 40 years. So, he knew a lot of these things intuitively. He knows that when your client comes in frantic, you take them over and you do a puzzle with them. He knows some of these things intuitively. But, maybe he couldn't put the language behind it or didn't have the numbers to back it up. So, I think a lot of good financial professionals who have made it this far, always already intuit some of these things.

Dr. Daniel Crosby:
Then for me, it's just about giving them some sort of intellectual buttressing to give them some numbers to go with their intuitions. But yeah, my dad's a natural at applying some of these things, and hopefully I've been able to help him some, a bit, to formalize that process.

Kurt Dupuis:
Boy, was he a proud Papa to give me a copy of one of your books. So, I apologize in advance that I didn't pay for it, but it's been a fun read. He's actually promised me more, so maybe you should talk about him, about your marketing strategy there.

Dr. Daniel Crosby:
There you go. If your dad's not a fan of your books, who is?

Steve Seid:
That's fantastic. All right. Let's transition to some of the TED Talk stuff, although we'll bounce around because like I said, we were having fun looking at all your content. One of the things I noticed, and a common thread I saw a couple of times, was how being weird is a good thing. This came up a few different times. Talk about that.

Dr. Daniel Crosby:
One of the things that I think we don't embrace sufficiently, is flying our freak flag a bit, and just embracing our weirdness a bit. One of the things is that, it's a bit of a power move. It's a bit of a power move. There's really interesting research that shows that the people who are most successful in organizations, are like 10% weird. You don't want to be the person that's off in the corner, and everyone's talking about them. But, if you're the person that has like a slightly edgy haircut or the person who has a slightly edgy look, or a beard, or wears the pink shirt, whatever it is, people really like that because they see it as a form of power. So, you want a level of conformity, right? Like you want to fit in enough that you're not ostracized from the group, but you want to be different enough that you stand out.

Dr. Daniel Crosby:
I think people don't embrace that. In markets - forget about it. Markets are all about being weird. I mean, if you want to be a great investor, it's a total exercise in contrarianism and loneliness and divergent thinking. I could go on all day about how that's the case, but just elsewhere in life, I think people are so hungry to conform that you kind of get lost in the shuffle. So, having an opinion, making a statement, being 10% weird, is powerful.

Dr. Daniel Crosby:
There's also something, sort of a related concept called the Pratfall Effect. The original research on the Pratfall Effect, was done with politicians. They were pretend politicians. So, they had three conditions for these politicians. One was just a bumbling idiot. Like they're going to go give a speech. So, one is just an idiot, just falling all over himself. Nobody likes that guy. The other one is smooth as can be, goes up there, polished delivery, nails every line, totally rehearsed, kills it. The people like him, but not a ton. Then, the third politician goes up there, trips a little bit walking up the stairs, spills a little bit of coffee on his shirt, makes a joke about it and then delivers a competent speech. That's the person that the people like.

Dr. Daniel Crosby:
People like people who are competent, but human. So, weirdness has a humanizing effect on us. It doesn't mean you can be a joke or a clown, but it just means if you're competent at your job, don't be scared to let your individuality show a little bit, because that's going to endear you to people in a big way.

Kurt Dupuis:
I saw in an interview, when you were talking about this, there was a line that I think a friend told you about growing up, "Niches make riches." I liked that. Another concept that I know I run into all the time, is the idea of volatility, meaning your dollar value volatility or your market volatility - as a proxy for risk. I've often had conversations with clients about trying to reframe that, with limited success. From your work, what's a better framework and how can we better describe how that's not what people should be focusing on when it comes to risk?

Dr. Daniel Crosby:
So, it's not nothing, but it's just not the most important thing. In fact, the biggest thing about volatility risk is that it can induce behavioral risk. So, across every reputable study, behavioral risk, like the risk that you will blow yourself up through your own poor decisions, that's the biggest risk of all. So, volatility risk becomes risky because some people say, "Hey, when my portfolio is down 20% or something, I can't take it anymore," and then the behavioral risk enters in. So, I think we have to do a better job of educating people to say, if we look at volatility, the average drawdown of the market in any given year over the past 35 years is 14%. So, we get a correction on average as regularly as Christmas. As regularly as your birthday, you get a correction.

Dr. Daniel Crosby:
Yet, every time we get a 10% or greater draw down, they have a markets in turmoil special, like it's never happened before in the history of humankind. It's crazy. So, we have to educate clients that, on average, you're going to get this every year. Every year, you're going to have to take some tums because it's going to suck and you're going to be hurt when you look at your portfolio. About every five or six years, you're going to really have heartburn, because it's going to be down. We're going to be in a full blown bear market. But over that time, the market's returned about 10% a year, despite the fact that we've had a bear market every five years, and 10% or greater draw down every single year.

Dr. Daniel Crosby:
So, we have to help people understand that volatility is the norm and not the exception. We have to help them understand that the biggest threat to their long-term wealth creation, is not a dip in the market, because it's coming. If you're starting to invest, you're going to live through 8 bear markets and 50 drawdowns. You're going to just live through it. There's going to be tons of them. So, just take that for granted, know that the biggest risk to your portfolio is you and not the market.

Steve Seid:
Yeah. I've also seen you comment, which is spot on, about how volatility is incorrect. Like you take something like standard deviation, you get penalized when your stock goes from $10 to $30. That counts as volatility, but who really cares about that? But I'm curious, one of the other comments you made in terms of volatility was the idea that everyone likes to smooth the ride, but that doesn't really matter. Does it?

Dr. Daniel Crosby:
Well, smoothing the ride, again, to kind of beat this horse, smoothing the ride matters if it matters to you. The best investment is the ride that you can take. If you want to just talk about the best investment outcomes, it's not a very smooth ride. If you're trying to maximize your returns, I promise you, the ride will not be smooth. But, I talk about anxiety-adjusted returns. The best returns for you are the returns that will let you sleep well enough at night, that you won't muck it up. So, for some people, that's going to be a very conservative portfolio. For some people, that's going to be wild and crazy. But, we have to divorce ourselves from this notion of optimized returns, because the optimization is going to look different for every single person.

Kurt Dupuis:
It seems like you write a book every two years. Is that about right?

Dr. Daniel Crosby:
That's been about right because, I just have this need to do difficult things that pay me poorly. Just do it and do it.

Kurt Dupuis:
As a clinical psychologist, how do you break yourself down and make those kind of decisions?

Dr. Daniel Crosby:
I'm working on a new book. I'm deeply flawed and broken. No one goes into psychology because they're normal. If you meet a psychologist, you should just run far away, because they went into it without exception to figure themselves out. That's 100% the case.

Kurt Dupuis:
So, your weirdness is greater than 10%. Is that what you're alluding to?

Dr. Daniel Crosby:
I'm the weird guy at the party in the corner. I'm taking the weird way too far. It's way too far.

Kurt Dupuis:
This might be a little too soon to ask, but I'll ask it anyway. In some of your work, you talk about a concept of new era thinking, where it's like, "We're in a new era and all the lessons that we learned before are out the window," and new normal sort of thinking. In the COVID world in which we live now, are there any new era thinking things that you think we'll look back and will completely be flipped on their head?

Dr. Daniel Crosby:
Yeah. We know that in the short term, the market is a voting machine, and in the long term, the market is a weighing machine. So, I think that the moment that we find ourselves in right now, we are squarely in voting machine territory, where sentiment reigns Supreme. I talked earlier about asset classes reflect all available information, but they reflect that information as viewed through the lens of sort of the predominant narrative of the moment. The predominant narrative of the moment is that, the fed and the government will make everything right forever.

Dr. Daniel Crosby:
Now, that may always be the case and that may not always be the case. But, I think that is undeniably the lens through which we're viewing everything today. Nobody knows how the future will play out, but there's no denying that people are glossing over some negative fundamentals, because of this meta-narrative on... It's TBD whether that remains the meta-narrative or whether they're a new one enters into the conversation.

Steve Seid:
I'm going to give you a broad question here. We talked a little bit about your dad and you observing him, and him being such a role model and mentor with you. But, talk about financial professionals on the whole. What are you seeing that's good? What are you seeing that needs to improve? I know that's a broad question, but I'm just curious how you would respond to that.

Dr. Daniel Crosby:
I think one of the things that I've always been frustrated with as a profession is, I think our hiring, the way that we hire financial professionals is kind of ridiculous. I think we could do a much better job. As we start to understand that the story we need to be telling is a behavioral story, I think we're going to get more and more focused on hiring people who have a lot of emotional intelligence, people who are great educators and people who are great communicators. I think those are the financial professionals that are going to win the day going forward. I think we're going to start to rely less on things like perhaps academic pedigree or analytical skill and things like that, which are just candidly not as important as we perhaps thought they were, or are consequently being replaced by AI and machine learning and things like that.

Dr. Daniel Crosby:
So, I think there is hopefully a brighter day coming with respect to how we hire and train financial advisors. I hope that that story starts to change, but I'm really encouraged by the fact that I think it is. One of the things that's so cool about my job is, when I started doing this whatever, 12 years ago, I remember the first time I ever gave a talk on behavioral finance, someone came up to me and said, "This isn't a thing. This thing that you're talking about, this is not real." I had to sort of make the case, and I'm not making the case anymore, right?

Steve Seid:
Yeah.

Dr. Daniel Crosby:
One financial crisis and one Coronavirus later, nobody's wondering whether or not investors are emotionally driven. So, I'm glad that there's some sort of fundamental agreement. I just think there's a lot of work that remains to be done to build out the infrastructure that lets advisors and clients benefit from this - moment to moment, day to day.

Steve Seid:
Yeah. You're definitely getting agreement on it. It's been a few years since I did the CFA program, but behavioral finance has become a bigger and bigger and bigger part of that as well. It's a huge, huge deal. So, I think you're in a very, very cutting edge field. So, what we're going to do right now again is, we're going to bounce around a little bit, but it's almost like a lightning round. We're just going to throw a couple of quick questions on you, concepts that you've covered over time. So comment on this, a lot of what we believe is wrong.

Dr. Daniel Crosby:
If you look back over history, we laugh at stuff that folks used to believe that we now think is wrong. So, the example that I used in my TED Talk was, it wasn't that long ago that people believed, like the intellectual consensus was that if women studied too much, that their reproductive organs would atrophy, that they couldn't have children because they were too smart. I mean, that's laughable. That's ludicrous.

Steve Seid:
Imagine the guy who came up with that, like the first guy who said, "Here's what I'm going to think about it."

Dr. Daniel Crosby:
I've got an idea. We all laugh about that now, but not that long ago, that was like scientific consensus. There are things that the three of us believe today, that our kids and their kids will laugh at. So, I think it requires a lot of humility to go through the world. I think the most profitable words in investing are, why might I be wrong? That's nothing that we are programmed to deal with, right? So, we've got these brains, our brains account for like 2% to 3% of our body weight, but are 25% to 30% of our caloric expenditure. So, we're always looking for ways to think less.

Dr. Daniel Crosby:
One of the ways that we do less thinking is just by believing that everything we already think is right, not revisiting any of our assumptions. That's a really bullheaded and sad way to move through the world. So, you have to embrace your own inherent errancy, and you have to think about why you might be wrong, and it's not easy to do. But I promise you, we believe something equally dumb today. I promise you.

Kurt Dupuis:
That's such a better answer than I was expecting. There a guy that has a financial blog, that every year writes down like, these are the 10 things I learned this year that I didn't know before, that I've always looked at and thought, "Wow, that's really, really thoughtful and difficult to put together." I'm going to put you on the hot seat for a second. So, what's something that you do that's irrational? We covered one with the book writing, so maybe you want to expand or give a different example. Some irrational decision that you make that you know you probably shouldn't.

Dr. Daniel Crosby:
No, I do all kinds of dumb things. One of the reasons I have a financial advisor, like I work with my dad, is because even though I've written four books on behavioral investing, it doesn't mean that I do any of it right. So, one of the things that's hard to grasp for most people is that, there's almost no relationship between knowing what to do and doing the right thing. So, most people think like, "Oh, we just need to educate people, and then when they know what to do, they'll just go execute." Okay. America started labeling food in 1993. So, starting in 1993, you could see how much fat, sodium, whatever was in your food. So, ostensibly you could make perfectly rational, perfectly efficient choices with your eating. Since that time, America's twice as fat and three times as morbidly obese, because it doesn't matter.

Dr. Daniel Crosby:
When I'm traveling and I'm tired and I miss my family, and I'm beat up and I'm walking through an airport and I get a Cinnabon instead of a salad, it's not because I was like, "Oh, this Cinnabon is probably good for me. It's just I didn't care." My emotions overcame me. So, that to me is the... I do all kinds of stuff. I make all the same mistakes as anyone else with my eating, with my money, with every other behavioral thing, because knowing what to do and doing the right thing have next to nothing in common. So, you have to put people in your life, people and processes in your life, that'll keep you from doing the bad thing.

Steve Seid:
Talk about the idea of being a principled contrarian.

Dr. Daniel Crosby:
So, we live in a world in which at least in the US and probably the West, contrarianism is valued. People like individuality in a way that is not the case, I think in some Eastern and other cultures that are more collectivist in nature. So, because we already value a form of contrarianism, contrarianism can lose its bite. Like being a rebel, being different can become as lame and as uniform as being the same. If you look at a group of punk rockers, I used to be in a punk band when I was in high school.

Steve Seid:
Is that right?

Dr. Daniel Crosby:
Yeah, yeah. We dyed our hair and had Mohawks and whatever. So, the way that I looked as a kid in a punk rock band, was no less a uniform. Me wearing a black shirt every day and having red hair, was no less a uniform than the kids that were wearing Brooks Brothers and whatever every day. So, principled contrarianism is where you are different for a reason. It's not the lame like, I'm going to give you the middle finger and be different just to be different. It's being different for a reason that moves society forward, helps you make money, whatever. So, that's my take on principled contrarianism, because so many people think they're contrarians when what they're doing is putting on a new kind of uniform.

Steve Seid:
Have you released your children's book yet? Can you remind us what the proposed title of your children's book is or was?

Dr. Daniel Crosby:
Oh, this is terrible.

Kurt Dupuis:
I love this.

Dr. Daniel Crosby:
I wrote a children's book. It's done. It's illustrated. I wrote a poem called Everyone You Love Will Die. I'm a big believer in existential philosophy, and I have a pin that I wear on my suit, except when my wife is around, because she thinks I'm weird, but I have a pin that I wear that says, "Memento Mori," which is this word that effectively means, remember you will die. So, I have this skull and it says Memento Mori. It's taken from something the Romans used to do. So, the Roman warriors, on their best day, they conquer something, they're parading them in a chariot around the Colosseum, they would put a commoner or a slave in the back of the chariot, and that was that person's job to whisper in their ear, "Memento Mori."

Dr. Daniel Crosby:
Basically on your best day, have your moment in the sun, but remember this is all fleeting. Because, I believe that understanding how fleeting this all is, is a key to energizing life, giving it its appropriate vibrancy, and leading us to act with the appropriate sense of urgency. So, I don't do it out of any sense of morbidity. I do it out of a sense of reminding me to get up and try and make every day meaningful. So, I wrote this book, Everyone You Love Will Die, that was a poem I wrote for my children. Psychologists kids and preachers kids are always very messed up.

Dr. Daniel Crosby:
So, I wrote this years ago, I wrote this poem for my children and I put it on Facebook. A friend of mine loved it, and she's an illustrator, and she did illustrations for it. I said, "Well heck, now we've got words and we've got pictures. So, let's make it a book." So, we put it on Kickstarter. Kickstarter made it their pick of the day, it got funded in 36 hours. So, we were able to print a couple hundred copies, and give them out to friends and family. So, it was going to go live. We got a legit publisher for it to give it a wider distribution this year, and then Coronavirus hit, and it did not seem like an appropriate time. Even though the book is ultimately hopeful, even though the book is basically saying, "Look, we're only here for a little time, so, make the most of spending time with the people you love." It still just felt too irreverent and too pointed to release now.

Dr. Daniel Crosby:
So, it'll come out one day. It felt like the wrong time to share it with the world. Because, I felt like the tendency of it to get misunderstood was pretty intense, and it could have been viewed in an insensitive manner, which is not my wish. So, we're sitting on it for a little while, but it's a sweet book, believe it or not.

Steve Seid:
That gets to, you closed one of your TED Talks and you were talking about goals you had, you set goals. You realized, "Wait a minute, what are these goals?" Then, you came up with some other ones including writing that children's book. So, talk about the goals that you set, why that was problematic, and then what you changed them to. It was something like, I want to make more money and I want... It was something like that.

Dr. Daniel Crosby:
Like six pack abs and like more money or something? I think this is only audio, but we can assure the listeners that I do not have six pack abs. So that goal was not met. I set these goals around, I think probably, working out and making more money. Basically, just going back to the research about how money does and doesn't buy happiness, what we find is that, money basically buys you the absence of sadness, but it doesn't buy happiness. It can buy you a roof over your head, food in your stomach and a good enough neighborhood that your kid can go to a safe school, that kind of thing. That's about it. Then, it plateaus really fast. Once you have those things met, it's kind of up to you.

Dr. Daniel Crosby:
So, I changed the goals, and it was to write the children's book that we just talked about. So I did that. It was to officiate a wedding, which I have since done. I got my little online, I am the Rev Dr or whatever.

Kurt Dupuis:
Yeah. I had no idea, is it doctor, is it reverend? There are so many names we can call you.

Dr. Daniel Crosby:
I don't think it's reverend. I feel like Reverend is... I feel like in the 15 minute preacher school that I went to, I didn't really learn the difference, but I feel like reverend is something more than what I got. I got whatever multi-denominational $20 certificate I needed to officiate the wedding of two friends who I'd introduced. So, I introduced a couple of friends who ended up getting married, and that was exciting. Then, the last goal was to do standup comedy, which I've not yet done, which I aspire to do, but it's so hard, man. I have a couple of friends who I would consider really, really funny, funny online, funny in conversation, and I've seen them do standup comedy. I hope they're not listening, because they were awful.

Kurt Dupuis:
Really?

Dr. Daniel Crosby:
I think it's really difficult. So, that one remains undone, but I'm two for three so far.

Steve Seid:
Even the good comedians will tell you, you've got struggle for a real long time before you get any kind of... I think Chappelle's the only one where people saw him go on stage and he was good right away. But outside of him, it takes a long time. But that's why it's a goal. You said you wanted to fail at standup comedy, right? You want to bomb, was the goal.

Dr. Daniel Crosby:
Yeah.

Steve Seid:
Which is a hilarious goal to have by the way. Let's just take a moment to thank Dr. Daniel Crosby for coming on. You are awesome. We really, really appreciate your time.

Kurt Dupuis:
Awesome.

Dr. Daniel Crosby:
No, I appreciate it. It was just fun. Thanks for having me.

Kurt Dupuis:
Well, my last question, just to end on some awkwardness is, we're both in Atlanta, can we be friends in real life?

Dr. Daniel Crosby:
Yeah, we can be friends in real life. You live in the cooler place. You live in kind of the hipster haven, I live in the lame suburbs, but listen, I'll have my lame guard at my lame gate let you in so we can be real friends.

Kurt Dupuis:
I like it. Look forward to that, thanks.

Steve Seid:
It's pretty funny because we write up... We want to prepare for these interviews and we have a bunch of questions that we want to make sure we have a structure to the conversation. Literally, the real last question is, can we be friends? No, really, on our sheet, right? Before we let you go though, tell everyone, because Daniel's work is just a must. It's a must. You've got to see the TED Talks, you've got to read what he's doing. Where's the best way for our audience to find you?

Dr. Daniel Crosby:
Read the books, The Laws of Wealth and The Behavioral Investor, are where I would start. TED Talks, I have a lot of talks. If you just go to YouTube and google my name, you should find some good stuff there. I have my own podcast called Standard Deviations, and you can follow me on Twitter @DanielCrosby or on LinkedIn just Daniel Crosby PhD.

Steve Seid:
Awesome. Thanks again to our guest Dr. Daniel Crosby. I want to summarize, we've talked about a lot today with Dr. Crosby. Let me see if I could summarize and then also give you your key takeaway. The first is check out Dr. Daniel Crosby's works, his books, his TED Talks they're all really good. 

Kurt Dupuis:
His podcast.

Steve Seid:
His podcast as well. Good point.

Kurt Dupuis:
Standard Deviations.

Steve Seid:
There you go. I don't think I've really watched or consumed any of his content and not took something away. They're all really, really good.

Kurt Dupuis:
They're all bingers, yeah.

Steve Seid:
His books, I listed a couple of them here, The Behavioral Investor, You're Not That Great, Personal Benchmark, Laws of Wealth. The next takeaway is just behavioral finance as a subject. We talked about in our intro, how important that is, if you are not thinking about bringing these behavioral elements into your business, whether it's how you go about your investments, how you go about interacting with your clients, you really, really should.

Kurt Dupuis:
The science of that area's really coming around to not being academic and kind of “ivory tower”, but there's real world applications that are getting more and more exciting, that if you're not incorporating them in the coming years, your competition probably will be, and you might be left behind.

Steve Seid:
Yeah. It really is the frontier, like the cutting edge. If I think about where academia is going with finance, FinTech is clearly a big one, but behavioral finance is just as big in terms of where the academic world was looking. It was interesting, he-

Kurt Dupuis:
Yeah, your money and your brain.

Steve Seid:
There you go. It was interesting, he was talking about how some of the things that we know from behavioral finance, and I'll share a couple of them, clients do two to three times better with financial professionals. He talked about maybe starting to tell a different story about value. It's not just that you work with me so I can get you into the hottest and best funds.

Kurt Dupuis:
And beat the S&P.

Steve Seid:
Exactly. It's about appropriate decision making, it's about not letting our emotions get in the way, it's about avoiding poor decisions, things like that. I thought that was great.

Kurt Dupuis:
And how that might only come along three or four times in the life of a relationship.

Steve Seid:
That's right.

Kurt Dupuis:
So, you might pay that fee every year, but you might only realize that benefit only a few times in a multi decade relationship.

Steve Seid:
But boy is it worth it. Kurt just mentioned a personal benchmarking, he talked about the idea of mental accounting. That's a really good one. Talking about like putting things in bucket and how that can affect the way that we think about pools of investments and things like that. I thought that was great. I loved being about 10% weird. Because, I feel like I'm maybe more than 10%, I'm at least 10%.

Kurt Dupuis:
You are. You are, minimum.

Steve Seid:
So, I love that, and I loved how he talked about the benefits of that. You want to not conform to your organization or your company or your culture. You don't want to-

Kurt Dupuis:
Niches get riches.

Steve Seid:
There you go. But, being a little bit weird, being a little bit different I think is beneficial. Then, much of what you believe is wrong. I see a lot of people really, really confident at what they absolutely know.

Kurt Dupuis:
I hear that all the time.

Steve Seid:
If you're not questioning what you know, if you think you have all the answers, you don't.

Kurt Dupuis:
And your children are one day going to laugh at you or your grandchildren, at what you think you know today.

Steve Seid:
Yeah. That was just some of my takeaways from the episode, but let me give you your specific takeaway. It's to start incorporating some elements of behavioral finance into your business. Here's a good starting point, reach out to us, we'll talk to you about all of Daniel's different books and we'll get you one. Touch base with us, we'll go through them and we're happy to send our podcast listeners a copy of one of his books. So, we look forward to hearing your feedback on that. Costanza Corner is next, stick with us.

Kurt Dupuis:
Welcome back to The Whole Truth. We're going to close out with our Costanza Corner for this episode. Steve, I've got to ask you, are we friends?

Steve Seid:
Yeah, I think so. I think so. I know so.

Kurt Dupuis:
You think so? I love the conviction. I love the conviction.

Steve Seid:
Well, you made me think about it. Yes. I think we're friends. Definitely. Why do I keep saying I think? What is wrong with me?

Kurt Dupuis:
At least you're not saying I feel like.

Steve Seid:
That's right. You know what's funny is, since we did, I'm digressing, but since we did that episode of Just Stop It now, when I listen back to the episodes and I know that I actually do so many of the things that I rally against, I feel a little pathetic. Continue. Sorry to derail us.

Kurt Dupuis:
I saw a story circulating around in the last week or so, about a guy that won the Powerball. He won like $22 million, and he decided to split it with one of his buddies based off a handshake deal that they made 28 years ago. Did you see this story?

Steve Seid:
No. Tell me about that.

Kurt Dupuis:
It's a couple of buddies named Tom and Joe up in Wisconsin. In 1992, they shook hands and said, "If either one of us wins the Powerball, we'll split it with the other person. It doesn't matter who won it." So, both guys are close to retirement, and rather than touring the country in their PT convertible, they said they're probably going to get a little bit of an upgraded vehicle to go do a road trip in retirement. So, just a cool story to show that friendship still matters, even though we're all on lockdown and maybe seeing our friends less than we would like. But, also handshake deals still matter and they still have an impact on society.

Steve Seid:
I want to let you know right out Kurt, and I'm going to say this in front of you and the whole audience. If I win the lottery one day, I'm giving you half. Now, you should know I very rarely play the lottery. I very rarely do. But, if I do-

Kurt Dupuis:
So, my 1 in 3 million chances are really, really low.

Steve Seid:
You know what though? I'll tell you. You could talk about how the lottery, I've heard people call it an idiot tax and everything, I never say that because, people win it. Like my mother, when she goes to the casino, she likes to play the slot machines. Historically, I'd be like, "Why are you playing slots? I mean, that's just how all the casinos make their money."

Kurt Dupuis:
Awful bet.

Steve Seid:
It's an awful bet.

Kurt Dupuis:
Awful odds.

Steve Seid:
You want to know something? That lady wins. She really wins a lot. So, I'm not going to judge. I know the stats are against us Kurt in this a lottery situation, but you never know. I would split that with you, and I think that is a great Costanza Corner.

Kurt Dupuis:
Coming full circle, Mr. Crosby talks about the effects of gambling and winnings in one of his TED Talks, so check that out on YouTube.

Steve Seid:
Excellent. Well, thanks everyone. We'll see you. Next time.

Kurt Dupuis:
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