Do you ever follow a routine which proves successful for you, but get over-confident and start making bad choices based on your gut-instinct or arrogant thoughts? A lot of us disregard successful techniques because we think we know better. How do we avoid unnecessary mistakes and stick to what works?
Human Nature: The Foundation of Our Lives
“I think a correct understanding of human behavior is a prerequisite to almost any successful endeavor.” – Dr. Crosby
Dr. Daniel Crosby is a psychologist and behavioral finance expert who understands where the human mind and financial markets meet. He recently authored the book The Behavioral Investor, a book where he offers valuable insight into the psychology of investment science. Dr. Crosby points out that human nature lies at the foundation of every human creation, such as financial markets.
With the core of so much of our lives being human nature, then it’s easy to see how an understanding of human psychology and behavior would be an invaluable asset. In his most recent book, he attempted to clarify a lot of the incorrect “folk wisdom” he heard trading coaches spout to their trainees which was inconsistent with the available research.
Even though it appears counterintuitive and is often more difficult, he believes an evidence-based approach is ultimately more effective. He brings up studies which demonstrate how the least successful investors are those who adjust their accounts more often, while the most successful were those who forgot they had an account or even… died.
Dr. Crosby cites another study from Taiwan where only 1 in 360 day-traders are successful, despite their constant focus on every financial chart available, they were getting outperformed by investors who just went about their lives and left their investments alone.
When Success Begets Failure
“At some point, this rush of testosterone kind of goes to their head and they lose their critical thinking and decision-making skills and they’ll bite off more than they could chew.” – Dr. Crosby
Dr. Crosby brings up the physiological response of testosterone that rams have when competing for mates, a hormonal response us humans experience as well. When fighting for mates, a successful ram produces more testosterone which leads to a more difficult fight. If successful again, then the increase in testosterone continues until the ram takes on an opponent beyond its ability and loses.
This sequence of events can be seen in traders on the stock exchange, which was discussed by John Coates in his book The Hour Between the Dog and Wolf. Successful trades lead to a rush of adrenaline and testosterone, which leads to bigger and bigger risks until their arrogance causes them to disregard the rules which provided them with success in the first place.
This leads Dr. Crosby to discuss the importance of creating a decision-making system that we can’t override when gut or brain tells us to. He has a heuristic to demonstrate the importance of designing an effective system to guide our decision-making:
Bad Designs -> Bad Decisions -> Bad Outcomes
He poses the notion that we might be better off if we spent almost all of our time contemplating and reflecting on these systems of behavior to ensure we design it right the first time. But simply creating the system isn’t enough, we also must stick to it even when our momentary feelings or thoughts suggest to us that it’s crazy or wrong.
Take Ownership of Your Time
“I think the very first thing you have to do is take ownership of your time - to take ownership of how busy you are or not, and then allocate that time to stuff that has long term impact and not try and snow yourself as to how busy you really are.” – Dr. Crosby
In order to design an optimal decision-making system, we must make the most of our time. Dr. Crosby brings up studies which show that we have more free time than any civilization has had in history, but we replace that time with watching TV.
Though we might under-report how much free time we have, many of us spend it staring at our phones or the television. He asserts we must be honest with ourselves about how much opportunity we actually have to improve ourselves and our productivity.
The Physiological Component of Stress
“Part of stress is mental and part of it is physical and such an under-appreciated way of managing stress is to watch what you eat, to manage your sugar intake, to decrease your consumption of caffeine, and to get regular exercise.” – Dr. Crosby
Dr. Crosby brings up something he saw a lot from his patients when he was a clinical psychologist, which is how they commonly experienced general anxiety yet also drank caffeine excessively, slept poorly, didn’t exercise, and didn’t spend time with people that cared about them. This illustrates peoples’ common misconception that stress and anxiety are only psychological.
However, when you become aware that our mind and body feed off of each other, your approach to dealing with stress and anxiety begins to incorporate physiological components. But despite the obvious lifestyle changes which could help, everyone wants a magic pill to cure them. Unfortunately, just like finding success in performance and achievement, there are no magic pills.
The R.A.I.N. Model
“Emotional states are, of necessity, fleeting and so this doesn’t define you. You know you’re not defined by your anxiety. You are not defined by your depression - whatever emotion it is that you’re feeling.” – Dr. Crosby
Next, Dr. Crosby discusses a model for dealing with stress: The R.A.I.N. Model.
· R – Recognition: Identify and recognize the stress you’re feeling.
· A – Acceptance: Accept it for what it is.
· I – Investigation: Investigate what you may be able to do about it.
· N – Non-Identification: Do not attribute your momentary feeling to your self-worth.
He compares this model to cognitive behavioral therapy which focuses on recognizing and challenging our beliefs. By experiencing the event which activates us to respond in a way we dislike, we can then choose to respond differently. This becomes an act of taking power back from the situation which previously made us a victim.
He discusses how this relates to the core message of Viktor Frankl’s famous book, “Man’s Search for Meaning is this reality that we are more than what happens to us and that in any place and at any time, we can choose our response to a stimulus. And I think it is a powerful way to move through the world that takes back ownership of your choices and your emotions and says, ‘I am not a victim of my circumstances.’”
Self-Esteem Science Debunked
“You know the only way that I am going to really feel good about myself is taking risks, putting myself out there, putting in the hours, doing the work, and then hoping the rewards come.” – Dr. Crosby
Dr. Crosby then discusses a meta-analysis of 15,000 studies regarding self-esteem which revealed most of the research to be “junk science”. While he was raised where everyone got a medal and showered with praise regardless of their performance, it turns out self-esteem doesn’t predict anything and there’s no substitute for feeling good about yourself other than taking risks.
However, taking risks is hard when our ancient brains are hard-wired to be loss-averse (afraid of losing anything). This type of thinking leads people on what he calls “The Quest for Certainty”, this is a representation of our being more comforted by negative certainty than a potentially positive uncertainty.
He argues we should embrace uncertainty and not settle for the lowest common denominator of familiarity. He also provides a question we can ask ourselves, “Look, am I truly protecting myself or am I bringing about the absolute 100% realization of the very thing I am scared about?”
“Controlling everything that is controllable and realizing that there is much that is out of your control and this is sort of the best you can do.” – Dr. Crosby.
People want a sure thing, they’re always trying to ensure they’re making the perfect decision. But the potential for death always exists right around the corner. There is an unavoidable uncertainty to life that must be accepted. Once we have come to terms with uncertainty, the best thing we can do is control the controllable. By doing so, we can tilt probability in our favor.
Despite uncertainty, there is still the possibility of making evidence-based decisions. Dr. Crosby suggests that when we’re looking for decision-making models for living, we make sure they contain an element of intuition (they feel right from a common-sense perspective) and they are supported by whatever data is available.
Looking for Truth in the Right Places
Next, Dr. Crosby brings up a study from Princeton which shows how peoples’ brains react when telling and listening to a story. When the act of storytelling begins, the brains of the participants become actively synced. This can mislead us into looking for truth through a seductive story, especially one that tells us things will be easy.
This susceptibility makes it easy for people to sell us a story that sounds too good to be true. He states, “You know the truth about personal progress and investment success is that they both require an element of sacrifice, of discipline, and hard work, and any formula that doesn’t include those ingredients, I think, is one that is set up to fail and it is likely profiting someone at your expense.”
The Backfire Effect
“I think the way that you change someone’s mind is through relationships.” – Dr. Crosby
He then begins to explain something called “The Backfire Effect”. This is where a person’s beliefs are strengthened when someone directly rebuffs it with facts. By attacking someone’s beliefs with data and information, all you do is make them double down on their own position. He recommends that we bring people into contact with others who have a different world view.
Dr. Crosby says, “As people with different world views work shoulder-to-shoulder and we can see that we are not the demons we made each other out to be, I think that’s how ideas change. And I hope the listeners to your program will be proactive about seeking out both opinions and especially people that they wouldn’t normally because I think that’s the most powerful way to bring about change.”
Action Steps for Better Decision-Making
Dr. Crosby ends by offering a couple of pieces of advice. First, go somewhere uncomfortable, such as a different religion’s service, a political rally of an opposing party, or watch your non-preferred news channel. He highlights the importance of focusing on changing your own beliefs.
Instead of targeting or attacking someone else, turn the bright light of introspection on yourself. He recommends setting your own house in order first. Challenge your own assumptions, expose yourself to new situations, and be cognizant of your own responses.