27 October 2021

Robert Leonard chats with Daniel Crosby about behavioral finance, the psychology of money, Daniel’s most important money lessons after studying countless investors, common misconceptions about money, Daniel’s framework when selecting individual stocks, and much, much more!

Daniel Crosby earned his Ph.D. in Psychology, is currently the Chief Behavioral Officer at Orion Advisor Solutions, and is a USA Today and New York Times bestselling author. He is a psychologist and behavioral finance expert who helps organizations understand the intersection of the mind and markets. Dr. Crosby recently co-authored a New York Times Best-Selling book titled, Personal Benchmark: Integrating Behavioral Finance and Investment Management.

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  • What behavioral finance is and why behavioral finance has a big impact on one’s success as an investor.
  • Why behavioral finance is becoming more mainstream and why it wasn’t initially accepted in academia.
  • Daniel’s most important money lessons and why investors need to get them right.
  • The biggest mistake that Daniel sees from investors.
  • Whether money can buy happiness or not.
  • The most common misconceptions around money and human psychology today.
  • Daniel’s framework on how to pick individual stocks.
  • Why stock picking can be very difficult for individual investors and might not be for everyone.
  • How you can avoid FOMO and stick to your investing plan.
  • The four primary psychological tendencies that impact investor’s behaviors.
  • Why the most successful people believe that they aren’t special.
  • And much, much more!


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Daniel Crosby (00:03):
And you end up never living, right? So I think we are just not wired for adequacy. I mean, we’re wired for striving. We’re wired to keep putting one foot in front of the other. So the idea that you have enough money is contrary to that, and it’s hard for people to grasp. And one of the reasons why is this idea in psychology called the hedonic treadmill. If you think of the word, hedonism, that’s right. The pursuit of pleasure.

Robert Leonard (00:36):
On today’s show, I chat with Daniel Crosby about behavioral finance, the psychology of money, Daniel’s most important money lessons after studying countless investors, common misconceptions about money, Daniel’s framework when selecting individual stocks, and much, much more. Daniel Crosby earned his Ph.D. in psychology, is currently the chief behavioral officer at Orion Advisor Solutions, and is a USA Today and New York Times best-selling author. He is a psychologist and behavioral finance expert who helps organizations understand the intersection of the mind and markets. This is Daniel’s second time back on the show. If you want to check out his first episode, that was episode number 14. I really enjoyed chatting with Daniel this time, just like I did last time. And I hope you guys enjoy this one just as much. Let’s dive in.

Intro (01:28):
You’re listening to Millennial Investing by The Investor’s Podcast Network, where your host, Robert Leonard, interviews successful entrepreneurs, business leaders, and investors to help educate and inspire the millennial generation.

Robert Leonard (01:49):
Hey, everyone. Welcome back to the Millennial Investing Podcast. As always, I’m your host Robert Leonard. With me today I bring back Daniel Crosby. Daniel, welcome to the show.

Daniel Crosby (01:59):
Thank you. It’s great to be back.

Robert Leonard (02:01):
Our last episode together was episode 14 for anyone that’s interested in going back and checking that out. But for those who are just hearing you for the first time today, tell us a bit about yourself and your background.

Daniel Crosby (02:13):
It’s great to be back. I’m Dr. Daniel Crosby. I’m the chief behavioral officer at Orion Advisor Solutions. In my work there, I really study money, mind, and meaning. I study how people make decisions with money. I study consumer psychology, and all of the ways that we sort of get sideways with money, and how investors can make poor decisions, and how we can design technology and even products to help them make better decisions.

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Robert Leonard (02:42):
The quantitative side of finance has intrigued me for years and years. But lately, I’ve been really enjoying learning about how psychology impacts money and investing, which is why I wanted to connect with you again. What exactly is behavioral finance, and why does it have such a big impact on one’s investing success?

Daniel Crosby (03:02):
Well, behavioral finance is just I think the study of finance in a way that accounts for the messiness of the human condition. A lot of the old school models were based on this assumption of perfect rationality or people maximizing utility. Basically, people operating in such a way so as to sort of always give the best result for them financially. And we know from our own experience, I think each of us can look at our lives and understand the ways in which that’s not the case.

Daniel Crosby (03:32):
So I think there’s a couple of reasons why behavioral finance is so interesting, and why you’re right to be so interested in it. But the first thing it helps us do is it really helps us hang on to more of our hard-earned cash. It helps us hang more onto the money we do have by avoiding these investment pitfalls that we’ll talk about today.

Daniel Crosby (03:53):
The second thing it helps us do is it helps us know how to spend and save it in a way that’s really edifying, in a way that improves life and really gives us maximal happiness. And then finally I think, and probably least appreciated is that it can be a path for self-exploration, right? It can be a way for us to get to know more about ourselves in our financial lives, and actually, teach us quite a bit about our personality and who we are deep down. So I think all of those reasons are reasons to be interested in behavioral finance.

Robert Leonard (04:26):
Why has it taken so long for behavioral finance to become as mainstream as it is today? And why didn’t academia accept it at first?

Daniel Crosby (04:37):
I think there’s a couple of reasons. One is that we suffer from this physics bias. Every discipline wants the predictive and explanatory power that’s available to us in the physical world. But of course whenever humans sort of enter the loop, that’s not really available to us. So it sort of lacks the uniformity and the simplicity of some of those old-school econometric models. And because of that physics bias, I think that maybe we were slow to see it.

Daniel Crosby (05:09):
And then I think maybe the second and the more profound reason why we were slow to adopt behavioral finance is that it asks something of us. I’m a clinical psychologist by education and I spent years in private practice meeting with people as a sort of clinical psychologist. And people were always looking for the pill, right? They were always looking for the magic words, or the pill, or the whatever that would sort of bring them out of whatever funk they were in. And it was sort of my job to tell them that the process of getting unstuck was likely going to be arduous, that it was going to be imperfect, that there would be some back and forth, and that it would ask a great deal of them. And there was no pill. There was a magic word I could say.

Daniel Crosby (05:59):
And I think that’s what behavioral finance teaches us, right? It’s not just about picking the right stocks. It’s not about calculating a discounted cash flow or knowing what a PE ratio is. It really asks something and requires something of us in a way that is ongoing and is imperfect. And that’s not as sexy as the more mathematical approaches to finance.

Robert Leonard (06:22):
Back in March, you shared an awesome infographic with a summary of some of the most important money lessons. You said that if people can get these things right, they’ll be okay. Talk us through the most important ones from that list.

Daniel Crosby (06:36):
Yeah. That list is actually something a reader created. That list was from my first book The Laws of Wealth. So in that book The Laws of Wealth, I set forth 10 commandments of investor behavior I call them. Which are just as you described them, try and pick some of my favorites.

Daniel Crosby (06:52):
The first is that in every market, you control what matters most. That’s the first chapter. That’s where I wanted to really help investors take the power back, to help them understand that they were more powerful and more in control than perhaps they understood. Because I think when people find out that I work in finance, they do things like ask me about what’s the president going to do, or what’s the fed going to do, or what’s the debt ceiling going to do? And it’s always externalities. It’s always things outside of themselves that they have no control over. And yet all of the research shows making the right decisions, working with someone, automating your process, keeping your fees low. All these things that are within our power are really what’s predictive of whether or not we reach the finish line. So I wanted to help people take that power back.

Daniel Crosby (07:50):
The next thing I talk about in there is that diversification means always having to say you’re sorry. What does that mean, right? We know we’re always supposed to diversify. So how do I always have to say I’m sorry? If you’re diversified, there’s always going to be something in your portfolio that’s kind of sucking. There’s always going to be something in your portfolio that’s frustrating to you at least on a relative basis because it won’t have done as well as some of the other screaming, on-fire portions of your portfolio. And we have to actually understand that that is a feature and not a bug. That’s something that we should really be looking for in a well-balanced portfolio.

Daniel Crosby (08:34):
And then the last one that I’ll talk about is that excess is never permanent. One of the things that we do as a human race is we tend to extrapolate the present moment into the future indefinitely, right? So I meet you. The first time we talk, you’re intelligent, you’re engaging, you’re kind. So the second time I come back on your podcast, I go, “Okay, well he’s going to be all those things again.” Because I expect that history will repeat itself. Well, that’s often true of people. That’s often true of other things in our lives, but it’s not true of markets. The truest phrase in investing is this too shall pass. And this phrase this too shall pass in a bear market, it gives us hope for the future. And in a bull market, it sort of chastens us and tells us to manage our risks. So I wanted to break that psychological trap of thinking that the future would always continue in the same vein as the recent past. So those are three of the 10.

Robert Leonard (09:39):
Whether it’s one of those three, or maybe it’s one of the other seven that we didn’t talk about, which of the lessons on that list are the most common for people to fail at?

Daniel Crosby (09:48):
Oh goodness. I think in terms of failure. If I had to kind of pick a failure, there’s one of those that we didn’t talk about, which is you’re effectively…you’re not special, right? You’re not different. You’re not better than the next person. Because one of the things that we have to understand is that being a great investor really is contingent on us understanding all of the ways in which we’re not that great of an investor, and understanding that we are susceptible to all the same pitfalls and shortcomings as the next person. And it’s only once we own that lack of specialness or own that lack of greatness that we are paradoxically able to be great. And that’s really hard for people to do.

Daniel Crosby (10:35):
We’re good at kicking ourselves. We’re good at saying, “I suck. I shouldn’t get started.” We’re good at being self-aggrandizing. We’re good at being overconfident. What we’re not good at is this measured middle ground of saying, “Yeah, I should do this. I should start this. And I’m no different than the next person fundamentally.” That balanced humility is nothing that humankind does very well.

Robert Leonard (11:03):
I’ve talked with a few guests about the relationship between money and happiness. But I think you have a unique perspective or qualifications to really talk about the dynamic of happiness and money. So do you think that money can make people happy? And if so, how does it do it in a way that people might not think?

Daniel Crosby (11:25):
So I’m going to introduce a funny psychological term here. I kind of hate it, but it’s worth knowing. The term is hygiene factor. So money is a hygiene factor. And what a hygiene factor is in psychology means that the absence of it will make you miserable. But a surfeit of it, right, a surplus of it won’t necessarily make you happier. And that’s exactly what money is.

Daniel Crosby (11:53):
If you have no money, that is a truly miserable condition, right? You can’t live in a safe place. You can’t send your kids to a good school. You don’t have enough to eat. The roof is leaking. The absence of money can rob us of an immense amount of happiness.

Daniel Crosby (12:12):
But a mountain of money won’t make us much happier than adequate money. We find that that sort of satisfaction and happiness around money plateaus at a relatively low base. So money, will it by happiness? Kind of. We can talk about a few ways that it does in a moment. Mostly what it buys though, is the absence of misery. That’s worthwhile, right? I think more so than maximizing happiness in the world, we want to minimize suffering. And money does a very good job of minimizing suffering.

Daniel Crosby (12:50):
Now when we look at the research around where money does buy happiness, there are really basically three ways. One is getting you out of stuff that you hate, right? So if you hate whatever, washing your car, cleaning your house, cutting your yard, paying someone money to get out of doing things that you hate absolutely brings you happiness. The other thing is using that money to buy experiences with people you love to spend time with, that buys happiness. Those experiences can contribute to legitimate happiness. And then finally, we know that giving money away also can bring a great deal of happiness. So aside from those three ways, money does not buy happiness I think in the ways that we conventionally think like a big house or a big car.

Robert Leonard (13:39):
What have you found to be that threshold? You mentioned there’s a relatively low baseline. I’ve heard things like 70,000 in annual salary. I’ve heard that that might be a moving goalpost, it might change. So what do you think is that baseline?

Daniel Crosby (13:54):
The seminal research that was done on this was done by a Nobel prize winner at Princeton. And he found that it was about 75,000. And it’s not that there’s no happiness to be found after $75,000. It was that it plateaus quite significantly, right? So if you look at the difference between someone who makes $5,000 and $50,000 in terms of their happiness, it’s enormous, right? The person who makes $50,000 is enormously happier than the person who makes five. But if you look at the difference between someone who makes 50,000 and 500,000, it’s quite different. Newer research says that that number maybe a little bit flawed. But I think whatever the number is, it’s what’s the number that it takes for you to live in a safe home, provide for your healthcare needs, provide for your children, and put food on the table? That’s effectively what money can do. It’s going to look different from geography to geography. But if you can do those things, and I don’t mean send your kids to private school. I don’t mean live in a seven-bedroom house. And if you can provide for the necessities of life and you’ve got that much money, you’ve got about all the happiness you can buy with money, aside from those three very particular things that we talked about.

Robert Leonard (15:14):
I was going to say it’s probably very geographically dependent, right? New York City versus somewhere in the middle of Iowa or Idaho is probably going to be significantly different.

Daniel Crosby (15:23):
Sure. There will be certainly some differences based on the purchasing power of your dollar.

Robert Leonard (15:30):
What do you see as some of the most common misconceptions that surround money and how people think about money and psychology today?

Daniel Crosby (15:37):
For me, the biggest one has to do with the idea that we’ll ever have enough. Right? I think a lot of people, I know I do, right? Have a number. Here’s my number. This is my fire number. This is my retirement number or whatever. What I’ve observed, both in the research and in my own life is that when you approach that number, it’s no longer the number anymore. You continue to move the goalpost. And if you’re not careful, you live this life of I’ll be happy when, and you end up never living. Right? So I think we are just not wired for adequacy. I mean, we’re wired for striving. We’re wired to keep putting one foot in front of the other. So the idea that you have enough money is contrary to that. And it’s hard for people to grasp.

Daniel Crosby (16:31):
And one of the reasons why is this idea in psychology called the hedonic treadmill. If you think of the word hedonism, that’s right. The pursuit of pleasure. And then of course the treadmill, where you’re just running and running and staying in the same place, the hedonic treadmill says that as you make more money, your tastes and what you consider a necessity will rise alongside that increased wealth. Right?

Daniel Crosby (16:56):
So I eat very differently at the age of 42 than I did at the age of 22 when I was in college. And if I had to go back to the way I ate then, if I started having ramen for dinner every night and Hot Pockets, I would be upset, right? It was perfectly fine for me at the time, right? It was consistent with my place in the world. It was consistent with my peer group. But after you’ve been eating steak for a few years, it’s hard to go back to the Hot Pockets. So our expectations and our tastes tend to rise alongside our income. And it’s hard for that not to be the case.

Robert Leonard (17:36):
How do we keep that in check? How do we make sure that it doesn’t grow faster than our income, or we don’t get stuck Keeping Up With The Joneses on the way up? And then once let’s say we hit that number, we make as much money as our goal is, or we’ve saved as much as we want, how do we stop that field post from moving?

Daniel Crosby (17:54):
I think it’s always going to move a bit. I think you can keep it from moving gratuitously. And I think a couple of the ways that you do that are…first of all, you lock in higher savings percentages with hiring incomes, right? You do what’s called save more tomorrow. So you’re making $50,000 a year, you’re saving 10%. You automate the process, right? Of saying, “Well, when I get bumped up to $75,000 a year, I’m going to save 15%. And when I get to $100,000, I’m going to save 20%.” So your income is rising, yes. But your saving is rising right alongside it. So I think as your income rises, you should become more and more aggressive with your saving and your investing. And give yourself this feeling of artificial scarcity. Have it never hit your account. Have it go straight to your saving and investing account so that it’s not like it’s really there.

Daniel Crosby (18:50):
And then the second thing that I think you have to do is examine, do a deep dive on the reasons why you spend the way you do. All of my personal spending habits are things I couldn’t afford when I was a kid, right? I want to buy shoes, guitars, and baseball cards. At 41 years of age, I’m over here buying the Jordans I couldn’t afford when I was 10 years old. Right? And that’s fine, right? If I can afford it. But it’s also me trying to scratch a psychological itch that I might not be able to scratch in that way. So I think if you understand the reasons why you spend the way that you do and the psychological needs that you’re trying to get met, I think oftentimes, there’s going to be a more direct way to meet those needs than buying something.

Robert Leonard (19:44):
On Twitter, you shared another infographic I liked about picking individual stocks. It walked the viewer through a series of yes-no questions to help them decide if they should buy individual stocks or not. Talk us through that framework and some of the questions that should be asked before buying individual stocks.

Daniel Crosby (20:04):
I know what you’re talking about. I actually deactivated my Twitter account this morning, so I can’t pull it up. But I can walk you through how I think about picking individual stocks. Right? So first of all, all of the research shows that it’s a very hard game, right? There’s research out of Taiwan to show that 1 in 360-day traders, individual stock pickers show levels of skill that are any appreciable level of skill. We know even in a professional context, that these folks that are picking different horses to bet on if you will, different asset managers to bet on, only about 5% of them show skill. So I think if you want to engage in stock picking, you have to do it in a very particular way. And I give it my three C’s, right?

Daniel Crosby (20:56):
So my first C of stock picking is consistency. You need a rules-based, systematic, robotic approach to picking stocks. It doesn’t need to be whatever’s blowing up on Twitter that day. It doesn’t need to be whatever your friends are talking about, or whatever the meme stock de jour is. You need a systematized process, whatever that looks like. And we’ll talk about a few of those in a minute. And you need to stick to those rules in good times and bad.

Daniel Crosby (21:29):
So the second thing you need is clarity. There are a million different ways to invest your money prudently, right? You can be a momentum investor. You can be a growth investor, a value investor, index. There are many different ways. All of them make money over the long term, right? But you have to know what your religion is, right? You have to know your faith. You have to know your signals. And again, you have to stick with those signals in good times and bad.

Daniel Crosby (21:58):
So for me, a signal needs to pass really a three-part test. It needs to show up in the data, right? We need to see that the numbers back it up. There needs to be a good theory behind it. And it also needs to have a behavioral component to it. Because there’s this long history of folks discovering different stock anomalies, right? Like calendar effects and different things. But if there’s no behavioral component to them, right? If there’s not a reason why it’s hard to do, then it tends to disappear.

Daniel Crosby (22:33):
So something like value investing has a behavioral component to it, right? It’s hard to buy stocks that are on sale. Because necessarily, they look cheap. So we sort of tell ourselves that they’re no good. So the data’s there to back up value investing as a system. The theory is there. And there’s also a behavioral reason why it works.

Daniel Crosby (22:55):
And then the final C is conviction. You need to find the sweet spot between diversification and conviction. Because if you are going to pick stocks, if you’re going to bother to pick stocks, we know that we need to diversify, right? But we also know that if you’re going to bother to pick stocks, you need to have enough conviction in what you’re doing to have it look different than an index fund, or else you should just go buy the index fund, right? Because that’s a very prudent way to invest. So you need to find that sweet spot between not taking an overly concentrated bet, and having it be different enough than an index fund that it’s worth your time. So consistency, clarity, and conviction are really the three things I think you need if you’re going to pick stocks.

Robert Leonard (23:42):
Given how active and involved you were on Twitter, I have to ask, why did you deactivate your Twitter account?

Daniel Crosby (23:50):
Compliance. I work for a large financial institution. Compliance kind of makes it no fun. That’s the reason. You got to run everything through compliance, and you just lose some of the spontaneity. So it’s just hibernating. I’ll be back one day. But it’s just sort of sleeping for now, but I haven’t lost my followers or anything like that.

Robert Leonard (24:10):
I was thinking it had to be either compliance, or you’re just spending too much darn time on it. And you were like, “I need a break.”

Daniel Crosby (24:17):
There’s probably a bit of that too. But it’s tough. Compliance sometimes can get in the way of sort of the quick back and forth that makes Twitter worthwhile.

Robert Leonard (24:26):
So would you say that the best alternative strategy to individual stock picking for most people is just to buy a low-cost diversified index fund?

Daniel Crosby (24:36):
Oh yeah. You got to think about the value of your time too. Because let’s say you have a $200,000 account, and you’re able to add 1% of alpha to your account each year through your stock picking. Which by the way, would be incredible and somewhat rare. You’re still making less than minimum wage. If you’re spending a couple hours a week on this, you’ve got a $200,000 account and you’re consistently adding alpha, which again is not a given. You got to think about what’s the opportunity cost of that time. Because your brain, and your body, and your effort is really the engine of your wealth. So 99 times out of 100, you’re going to be much better off just doing something low cost and diversified, and taking that couple of hours a week and whatever. Teaching a course, writing a book, getting a second degree, starting a side hustle, doing a million things are going to get you more money than actively managing your account.

Robert Leonard (25:37):
How do we get out of this mindset of having to pick individual stocks? Or maybe it’s not even individual stocks. Maybe it’s just FOMO events. Maybe it’s Bitcoin, maybe it’s the most recent IPO. Whatever the situation is, NFTs currently are going crazy, things like that. From a behavioral finance or a psychological perspective, how do we really stick to our investing principles and try to forgo some of these other FOMO events?

Daniel Crosby (26:07):
Well, I’ll speak to kind of my specific approach to that. Because I love markets, right? I love trading. I love individual stocks. I love taking a bet on an individual name. And, I also have done the research to know that it is by and large a stupid impulse.

Daniel Crosby (26:26):
So the thing that I do is I do sort of a 95/5 solution. With 95% of my money, it’s boring as can be, right? It’s a multi-asset class, it’s low fee, it’s highly diversified, and I never touch it. And then with 5% of my money, I’m a total gunslinger, right? Buy and sell in short holding periods, concentrated positions, whatever, right? 5% of my money, I’m giving rise to all of my worst impulses. And it’s a little bit like a cheat day, right? On a diet, right? Six days a week, you do what you should. And then rather than saying you never get a cookie again. You say, “Okay, I’m going to bake in one day a week for a cheat day or one day a month or whatever it is,” so that you don’t cheat all the time. And also so that you don’t ever cheat, which is probably unrealistic. So that’s personally how I handle it is I carve out 3 to 5% of my money for mad money. And then with the bulk of it, do all the things that I know I should.

Robert Leonard (27:30):
What are the four primary psychological tendencies that impact investors’ behavior? How can a complex creature like humans in a complex system like financial markets be summarized by just four tendencies?

Daniel Crosby (27:46):
So one of the things that we know about a complex dynamic system like a human or a market, is that we have to actually look for fewer rules and simpler rules to describe the behavior of that market or that person. Because if you try and over-engineer it, you actually overfit it. Right? So the statistical term overfitting, there are 35,000 pieces of economic data that are released by the fed each year, right? You could throw all those in an SPSS blender and come out the other side with some stuff that’s highly correlated with market movements. But the odds are there wouldn’t be much to it, right? There’s a 96% correlation recently between the production of butter in Bangladesh and moves in the S&P 500. And yet I wouldn’t invest my money in a Bangladeshi butter production hedge fund, because it’s just a statistical artifact.

Daniel Crosby (28:48):
Same thing’s true of people. My research in my book The Behavioral Investor, I took the 200 and something individual biases there are, and I boiled them down to four primary behavioral tendencies.

Daniel Crosby (29:03):
So the first is ego, which is our broad tendency to be overconfident. And there’s a couple of different ways in which we’re overconfident. The second broad tendency is emotion, which is our tendency to go with our heart over our head when making financial decisions. The third is attention, which is our tendency to attend to things that are loud over things that are likely, right? We’re sort of more focused on the news or the headline than we are on actual probability. And then finally, there’s conservatism, which is our tendency to just sort of over-index on things that we know. And our tendency to want to play it safe, our tendency to be risk-averse, loss-averse, and favor comfort and the known or the status quo.

Robert Leonard (29:57):
You briefly mentioned earlier this concept that I want to bring up next. And it’s from your book that you have called You’re Not That Great. And I love that name. And in that book, you say, “It’s about realizing the less you need to be special, the more special you become.” Talk to us a bit about this idea and the other main concepts that you really want people to take away from that book.

Daniel Crosby (30:19):
Yeah. So You’re Not That Great was a TEDx talk that I did that turned into a short book. And what I found in my research into decision-making, and stock picking, and bias, and all these things that I study was that one of the most common cores was this idea that we’re special, that we’re different, or we’re lucky, or better. And very consistently, I’ve found that the most successful people, the most ethical people, the most moral people had not a low opinion of themselves, but sort of understood the ways in which they were average, and then took pains to surround themselves with people, and processes, and environments that made them better than average. But all of that effort was rooted in an acknowledgment of their own inherent mediocrity.

Daniel Crosby (31:09):
So again, it’s this weird paradox. You’re not beating yourself up, right? Because that’s counterproductive. But you’re also not moving through the world in a way that says that you’re bulletproof. And I found really consistently that people who are able to balance those two things were super successful. Interestingly, it even came down to the ways in which people acted ethically or morally. Kids who were told they were special or gifted were way more likely to cheat than kids who were told that they were hardworking or disciplined. So we all need to learn to trust the process and to be curious about the rules of whatever system we’re in, and to seek to follow those rules, rather than trying to skirt or circumvent the rules in service of our own imagined specialness.

Robert Leonard (32:03):
And do people that get classified as special tend to cheat more because they’re trying to keep up with that narrative and the expectations that they have been set on them?

Daniel Crosby (32:11):
That’s exactly right. Once you get crowned with this crown of specialness, you never want to let it go. So the two things that we find that they do is A, they cheat more for the very reasons you suggested there. And then the second thing we found is that they quit more. So the minute things get hard, if you’re told you’re a gifted child, right? The minute math starts to get hard, you go, “Well this can’t be right, because I’m a special gifted snowflake. So I quit, right? I’m not going to engage with this problem at all if it’s going to be hard or there’s a chance that I’ll fail.” So this crowning of people, this crown of specialness leads to all sorts of unintended consequences like cheating, lying, and quitting. So again, it pays to know the ways in which you’re average.

Robert Leonard (33:01):
And so are people quitting because they feel like they’re special, so it shouldn’t be hard for them? So when it is, they’re like, “Well, something must not be right here”?

Daniel Crosby (33:09):
Yeah. And they’re quitting to save face, right? They’re like, “I’m not going to stick around and suck at this game.” Right? “I’m not going to stick around and be there to get bested by someone. I’m not going to stick around and be there to get the F in the class. I’m going to drop out, pretend to be above it all, and never have to lose my crown.”

Robert Leonard (33:30):
From your podcast, talking to all the smart people you have on Twitter before you deleted your account, what have been some of the biggest things that you’ve personally learned about money and investing?

Daniel Crosby (33:40):
The first thing that I’ve learned is that living it is harder than learning it, right? So I came into the world of finance [as] an outsider. I was this clinical psychologist. My Ph.D. again is as a clinician. So I came into the world of finance early in my career, and I read everything I could get my hands on about money management and behavioral finance. And I was like, “This is easy. Look how irrational people are, and look how silly they are, and look at how they make errors in the face of uncertainty and risk. And I just won’t do that because I know better.” But I tell you reading about it in a book and then living it are very different things like. Reading about a 25% drawdown in an account, and knowing the end from the beginning, and knowing that the market came back two years later and all that, is very different from looking at your account, opening it, and seeing yourself down 25% and going, “Oh my gosh. I just lost as much money as three years of my old salary,” or whatever it is. It’s a very, very different thing.

Daniel Crosby (34:47):
So one of the things that I’ve learned a lot about is the difference between this cold, logical education, and that hot, emotional reality. And I think we really need three things in place if we’re to overcome this tendency. And I call it my three E’s. The first is education, right? We need to know what’s up. We need to know the system we’re a part of. The second is the right environment. One of the things that we find again, and again, and again is that environment is a much better predictor of people’s behavior than their goals, or their intentions, or their willpower. So surrounding yourself with the right people, the right sources of information, and in the case of an investor, the right portfolio, all constitutes the environment.

Daniel Crosby (35:36):
And then the last thing is encouragement, right? Whether it’s a podcast that you check in with every week, or a financial advisor, or a coach, or whatever that may be. All of us, even if we’re in the right environment, even if we have the right education and the right know-how, there’s going to be moments of weakness. And we need that personal touch of someone to kind of bring us along, slap some sense into us.

Robert Leonard (36:00):
For all the reasons you just mentioned, that is exactly why I created this next segment of the show. Because I think people consume too much, and they’re not necessarily ready to put it into action, or they think they will be when the time comes. But that time either never comes, or when it comes, they’re not actually ready. I just think people consume too much and don’t take action. So we created this segment called the action plan, where I ask you for a habit or principle that people can implement in their life, a book for them to go read. And then the first action step they should take when this podcast is over. So first thing, what is a habit of principle that you follow in your life, whether it be in your professional life or your personal life that has had a big impact, do you think on your success that not enough people do, but should?

Daniel Crosby (36:44):
So this is a little counterintuitive, but realizing that none of this matters that much, and that no one will remember your name in 100 years, right? I think each of us can get super wrapped up in how huge the things in our daily life seem. Even small slights or small annoyances can seem very big in the moment to moment. But I think when you learn to laugh at how silly a lot of what we do every day is, and the fact that none of us gets out of here alive, I think that puts it all in perspective in a way that is weirdly calming for me. So that’s my stoic philosophy. Remember that everyone you love will die and that none of this is forever.

Robert Leonard (37:32):
What has been the most influential book in your life? Doesn’t necessarily have to be your favorite. Think there can be a difference there. So what has been most influential?

Daniel Crosby (37:41):
It’s easily Man’s Search for Meaning by Viktor Frankl. He’s just an incredible thinker, incredible perspective on life. He’s an Austrian psychiatrist, a Jewish man who survived the Holocaust. And writes about his experiences in the concentration camps from a psychological perspective, and talks about the power of why and the power of meaning to illuminate and elevate a life. So Man’s Search for Meaning is an all-time favorite.

Robert Leonard (38:10):
I’m rereading 7 Habits of Highly Effective People, and Frankl is a big piece of that. At least up to about 150 pages in, he’s talked about Frankl quite a bit in there. So I haven’t read his book yet, but I’m really looking forward to diving in. Now when this episode is over, before the listener quickly jumps to the next podcast they have queued up, what is one action they should take that can help improve their life, career, or business?

Daniel Crosby (38:35):
So the best thing you can do going back to that second E of environment, from a behavioral perspective, the best thing that you can do is automate everything in your financial life. Automate how much money gets taken out of your check every two weeks. Automate the fact that it should escalate over time as you make more money. Automate the way you select your securities and then the asset classes you choose to invest in. Again, and again, and again, we find that about 94% of the time, automation beats discretion. So there are going to be times when you’re going to want to override your system. There are going to be times when you want to say, “No, I don’t want to save this month.” But we know again, and again, and again that if you can automate this, it tends to work. And the reason that it works is it takes a human bias towards conservatism that we talked about earlier, this tendency of ours to be lazy and status quo prone, and to just sort of let stuff ride. And it makes it work for us instead of against us. So automate everything in your financial life, and you’ll be off to the races. And you can go spend your time on more important stuff.

Robert Leonard (39:41):
Before we give a handoff to where people can find you, I like to wrap up the show by turning the tables and letting the guest ask me a question. So Daniel, what question do you have for me?

Daniel Crosby (39:52):
So my question is you’re young, you’re talented. You have a big audience. Why talk about money? Why talk about money and not curing cancer, or charity, or 100 different things that maybe could do more to enrich humankind?

Robert Leonard (40:09):
That’s a great question. And the reason that I do this is twofold. One, I want to be the resource that I didn’t have growing up. There are quality resources out there, and there’s more and more coming every day. But I think everybody can describe things differently. I describe things differently than you do, and I describe things differently than everybody else on Twitter or social media. So I think I just provide an interesting perspective that I hope a lot of people can connect with. I think my background is not necessarily the typical background that a lot of people that go into finance come from. So I think I can try to connect with a lot of people in that way.

Robert Leonard (40:47):
And then second, I want to use this platform that I’ve built and we’re building to do some of the other things that you mentioned. So I think a lot of charities are great, but I actually just last month or the month before got my own nonprofit 501(c)(3) approved, tax-exempt from the IRS. Because I want to do my own thing that way too. So I want to kind of use my combination of this community and this podcast to be able to do all kinds of different things and really impact people. And you mentioned that charities might do more technically to help people. And I think that’s probably true, but I would also argue that by helping people get their own financial future in order, I’m not sure if there is a bigger impact than that. Because then they can do their own thing, and make their own impacts, and their own changes in their own lives. So I’m not sure, I guess I haven’t really given much thought as to what’s more impactful. This just seems to be a way that I can connect with people, and provide a different insight, and help as many people as possible.

Daniel Crosby (41:44):
It’s a cheeky question. I actually think you do have a huge impact, and that every voice has people that you will reach and you won’t reach. And I do agree that if people can make money and remain philanthropically minded, they can do an enormous amount of good of course. I just had to give you a hard question, you know? Got to.

Robert Leonard (42:03):
Yeah, it was a difficult one, but it was a good one. And I appreciate it. For those who have enjoyed this conversation, those who go back and listen to our last episode and enjoy that one as well. For anyone that might’ve missed it at the beginning of, that episode together was episode 14. So you can go check that out. But other than that, Daniel, where’s the best place to find you?

Daniel Crosby (42:24):
The best way to learn about what I’m up to is I have a podcast called Standard Deviations that talks all about the psychology of money. Love to see you over there. And then to read my books. The best two are The Laws of Wealth where those 10 rules we talked about came from. And The Behavioral Investor where those four primary biases came from.

Robert Leonard (42:44):
I’ll be sure to put a link to Daniel’s podcasts, as well as his books in the show notes below for anybody that’s interested. Daniel, thanks so much for joining me.

Daniel Crosby (42:53):
My pleasure, man.

Robert Leonard (42:54):
All right guys, that’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week.

Outro (43:01):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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