[00:02:24.2] MB: Today we have another exciting guest on the show, Dr. Daniel Crosby. He is a psychologist and behavioral finance expert as well as the author of the New York Times bestseller, Personal Benchmark: Integrating behavioral finance and investment management, as well as, The Laws of Wealth: Psychology and the secret to investing success. He was named one of the 12 thinkers to watch by monster.com, “A financial blogger you should be reading” by the AARP, and listed on the Top 40 Under 40 by Investmentnews.com.
Daniel, welcome to the Science of Success.
[00:02:53.6] DC: Thank you, it’s great to be here.
[00:02:55.6] MB: Well we’re very excited to have you on. So for listeners who may not be familiar with you, can you tell us a little bit about your background and your story?
[00:03:05.1] DC: Yeah so I have sort of a varied background, I went to school initially to be an investment manager. After a year in school left to go on a mission for my church, so I spent two years in the Philippines. I came back with I think a bigger heart than I left with and decided I wanted to go into a helping profession, so I choose psychology.
About two or three years into a PhD program in psychology, it was getting a little too heavy for me. I was taking work home with me. It was bumming me out talking to sad people all day and so I said, “You know, I love thinking deeply about why people do the things they do but I think I need to look for a business application of behavioral principles,” and so long story short, I’ve landed in sort of this middle ground of behavioral finance, which is a blend of psychology and decision making and finance.
[00:03:54.2] MB: That’s fascinating. So for listeners who have never heard that term, behavioral finance, tell us a little bit more about that?
[00:04:00.6] DC: Yes, so behavioral finance is really just trying to integrate the messiness and the irrationality of human decision making into the financial planning and investment management process. It’s hard to believe I think for people who come from the outside but for years and years, hundreds of years economic models were built on this idea of rational man. So built upon this mistaken notion that people are thoughtful and prudent with their money, which I think we can all point to instances in our own lives when that hasn’t been the case.
So behavioral finance study is basically the mistakes and the fears and the heuristics that drive decision making and tries to incorporate them in and help people make better decisions. Then on the flip side, some of what I do is how do you make better investment decisions, how do you pick better stocks by taking the other side of trades where people are being greedy or fearful? So there’s a lot to it but basically it’s about integrating humanity back into finance.
[00:05:04.0] MB: I think that’s so important and something that we talk about a lot on the Science of Success is the idea that many fields, and I think economics, finance, etcetera were definitely guilty of this 10 or 15 years ago, really don’t incorporate the actual reality of human psychology into their evaluation of human behavior.
[00:05:25.2] DC: Yeah, that’s so true and I mean really, this was done frankly not because anyone believed it per say because, like I said, I think it’s fairly simple to think of reasons of why you could contradict a rational man type theory. But really, I think it was done this way to build elegant, beautiful mathematical models. So your math gets a lot harder, the algorithms don’t get as elegant when you have to plug Joe six pack into the equation and so it’s not quite as pretty but it’s maybe a little more realistic.
[00:06:00.6] MB: So you have a TED Talk where you talk about the concept of understanding money and how people think about money through the lens of love, can you share that idea or explain that?
[00:06:14.3] DC: Yeah, so I find it to be my life’s mission to make these things more accessible, some of these notions more accessible. Because I have done, I’ll be honest, basically none of the primary research on the things that I write about. It’s been done by people far smarter than me typically in academic settings but what I have done is I’ve taken these ivory tower concepts and have broken them down in a more simplified way that people can understand.
Because I am from Alabama and that’s what we do in Alabama, we make things as simple as possible and so yeah, I have done three TED Talks and one of them was called Sex, Funds, and Rock and Roll and it’s in that TED Talk I compare romantic love, the irrationality of romantic love to the way that you invest or make decisions around your money. Talk about everything from the irrationality of playing the lottery all the way down to things like the way that emotion colors risk perception.
When you’re in love with someone, the reason we have a 50% divorce rate or whatever is when you’re in love, you’re not very critical. You’re not a very good assessor of risk when you’re in love because our emotional states tend to dictate how much risk we do or don’t see in our environment and so if we’re feeling great, the world looks great and we don’t tend to see much risk in the world around us, and so in investing and in love, maybe we need to be a little more critical and a little more even-headed but it’s certainly easier said than done especially in romantic love.
[00:07:50.8] MB: And you shared a couple different biases in that talk, one of them was the, as you called it, the “fixer upper bias”. Which is the idea that if you’re dating somebody that you can change or transform them and how that applies to people’s personal finances as well.
[00:08:03.7] DC: Yes, so the fixe — sort of the analog, I mean I think we are all familiar with the love part of that equation. You know, we’ve all probably had the experience of dating someone with an eye to changing them or hoping that they would become more the person that we need them to be. The way that that plays out in our investment lives is that we tend to over invest in things that are proximal to us. So this takes a couple of turns, right?
One is called the “home bias” where we find that people dramatically over invest in stocks of their own country and it’s actually less of a problem in the US than elsewhere just for the simple fact not that we do it any less but the US is a bigger part of the world economy than say Greece. But someone, like people in Greece, tend to invest in Greek companies which is only a very, very small part of the world economy.
Likewise people in the US tend to be overweight the US economy, which accounts for about half of the stocks and half of the market capitalization of stocks globally. So we tend to think things that are closer to home are safer, that’s not always the case. The other way that this applies is that we think that if we work for a company, we can single handedly make it better. So I spoke with someone recently who had $5 million in one stock, all of their money, $5 million was all the money they had and it’s a great deal of money.
But they had all of the $5 million in one stock because that was the large publicly traded company they worked for and his thought was, “Why would I spread it around? Why would I diversify where here, I can put it in the company where I worked directly?” well of course the irrationality there is your one person. You’re the 372nd accountant in this large multinational corporation. You can’t move the needle all that much, but just like a bad romantic partner, we think that because we’re involved things will get better by virtue of our involvement alone and that’s not the case.
[00:10:07.3] MB: Another bias you touched on, and I found this one really fascinating, was the idea of “this time it was different”. Or I think another term for it might be the concept of “new era thinking”?
[00:10:17.6] DC: Yeah, so “this time it’s different”, those words have been called the most expensive words in investing. So “this time is different” with respect to romantic love, I talk about Elizabeth Taylor who was married, I don’t know and I can’t remember, four or five times at least and the thought there is that, “Well yeah, those past guys were bad for XYZ reasons but this time it’s different,” and we’re always just plunging forward never taking the time to look back and see what happened.
So we see this type of new era thinking and investing as well in every major bubble and crash has had this new era thinking. You know, if you go back to the turn of the century when we had the “dot com” bubble, I think this sort of new era thinking of the day was that traditional metrics, like price to earnings and even sales and profitability didn’t matter because we were in this brave new world where things like eyeball share and clicks and things mattered in this sort of new economy.
And the thing that’s so tricky about new era thinking is that a lot of times it is characterized by half-truths. Because as we know, the internet was indeed a big deal. I mean it did revolutionize life and business in ways that I think we probably couldn’t have even imagined 15 or 20 years ago. But what isn’t the truth is that traditional metrics like earnings and profitability and things would be out the window, right? So a lot of the danger of bubbles and bad economic decision making is that they are half-truths.
And if you go back in history, if you go back to Amsterdam hundreds of years ago, there was a point in Dutch history where a single tulip bulb was trading for as much as a town home and that’s because they were engaged in this new era thinking that says, “Hey, we have this scarce commodity. People will never be sick of tulips. They’re going to appreciate forever, and we’re going to be a very wealthy county.” So we have to check ourselves and say, “Look, there are certain laws of the universe and these things tend to come back down to earth and this time may not be so different after all.”
[00:12:28.5] MB: So in the context of the current financial markets, where do you think that kind of framework applies?
[00:12:35.3] DC: I think we are in a dangerous position right now I think because we’ve got two things going on. For a lot of people, I don’t know how old you are. I am in my mid-30’s, get it creeping towards late 30’s but in my mid-30’s and some of my first experiences of investing were bad. I mean some of my first experience as an investor, having a job and having enough money to put a little aside and then you’re talking 2008-2009.
So there is that primacy and recency effect, right? So I have an early memory of a very bad time and I think no matter what people’s age, people still are a little gun shy from such a dramatic come down, what is it now? Seven or eight years ago now. But then I think we have the recent past which is seven years of extremely good returns, very little volatility over the last seven years. So people are simultaneously scared because of what happened seven or eight years ago, and spoiled because of seven or eight years past of really nice returns with very little volatility by historic standards.
So I think we’re ripe to be frightened and make really poor decisions the next time the market takes a dip and I mean it will. It will, this is already one of the longest bull markets of all time and it’s really a matter of when and not if and so people need to prepare themselves a bit for the inevitability of that.
[00:14:08.2] MB: So tell me the story of one of your first consultations as a psychologist? You had a grad student who wanted to become an epidemiologist, and how do we create self-fulfilling prophecies that can create negative outcomes in our lives?
[00:14:24.2] DC: Yeah, so my very first every client, so my PhD is in clinical psychology even though I work in a very different field now. I had to get thousands of hours of face to face consultations at clinical hours with clients and so my very, very first client was a beautiful college student, very bright, very talented and very intimidating to me as a brand new therapist. So she walks into my room and she brings with her six envelops and says to me, “Look here is the story.” I go, “Well hey, what did you got there?”
And she says, “Here’s the story. I wanted to be an epidemiologist all my life. I’ve always wanted to go get a PhD in this. I’ve brought you this six envelops because these are the six programs that I have applied to, to get into a PhD program. They have all written back to me and I cannot bring myself to open these letters because if it’s bad news, I’m going to be crushed. I’m going to be just heart broken by this bad news because this is what I wanted since I was very young.”
And so very inelegantly and articulately I’m sure, we sort of worked around over the course of the next session or two, to the point where I helped her try and understand that often times in life in our very efforts to manage risk and make ourselves safe, we bring about the certainty of the very thing we’re trying to avoid. So in her efforts to spare her feelings and avoid potential bad news, she was running up against a deadline. You of course have to respond to these schools and tell them if you are coming or not.
She was running up against the deadline that was going to lead her into a certainty of a bad situation, and as a clinician and as a financial adviser, I see that again and again. I very, very commonly saw people who had been hurt in romantic relations say, “Well I am never going to love again because if I never love again, that’s how I keep from being lonely,” right? And it’s of course very paradoxical because in the act of trying to avoid heartache and loneliness, the possibility of heartache and loneliness, you bring about the certainty of those very things.
And I see the same thing in financial markets. People fail to invest, they fail to take the ride and endure the volatility because they are scared of losing money and it’s very scary and we all work very hard for our money and it is scary but in their failure to do that, they bring about the certainty that they’re not going to be able to retire. We’re losing 3% a year, you’re losing 3% a year on your money if you are not invested just because of inflation. And so in love and in finance, I think people try and manage risk too closely and in their efforts to do so, bring about negative realities that could have been avoided all together.
[00:17:21.7] MB: So how can we let go a little bit and not manage those risks so closely?
[00:17:29.9] DC: You know, in The Laws of Wealth, my new book, I talk about a couple of ways I think in the first couple of chapters. I think one thing that people can learn is that the title of chapter one is You Control What Matters Most, and I think that’s an empowering message that’s little understood by the average investor. Just a couple of stats on that, a recent study by a big asset manager, they surveyed financial advisers and then they surveyed their clients.
So of the financial advisers, 83% of them thought that the best thing that they could do for their clients was manage their behavior, help them manage their emotions, and make good decisions. Not picking stocks, not managing taxes, not doing any of this. Managing behavior and decision making was what financial professionals perceive to be the number one value add and the research, without getting too boring, the research backs that up.
But then they turn around and asked the clients of these financial advisers, “Is it important to you to get help around behavior and decision making from your adviser?” And only 6% said “yes”, and so the average investor over the past 30 years the market’s given us about eight and a quarter percent a year over the last 30 years and the average investor has only kept 4% of that because they’ve entered and exited the market at exactly the wrong times.
They’ve bought in when things were expensive, they’ve jumped out when things were cheap and scary, sort of rinse and repeat and so I think if people better understood that, “Hey, I have more control over this process just by virtue of doing a couple of boring things, like putting aside money every month, staying the course, being calm and collected.” I think the average person thinks it’s in the hands of Janet Yellen or Warren Buffett or the European Central Banks or just some far flung, exotic, hard to understand entity. If people understood that they are in more control than they think, I think that would be a positive first step toward them taking back control of their financial lives.
[00:19:37.5] MB: So when you say that they have more control than they realize, is that a focus on the process of investing itself instead of the outcomes?
[00:19:47.0] DC: Yeah, absolutely. I talk a lot about process versus outcomes in the book and there’s this great story that I share in the book by a guy who used to work in the LA Dodgers front office. A guy names Paul DePodesta. He was featured in Money Ball. So he talks about going out with a friend who had had too much to drink and they are playing black jack one night and his friend was drunk and he has a 19 and his friend wants to hit.
His friends wants another card and so DePodesta is like, “Man, you cannot hit. You are sitting on 19, you can’t hit. Don’t do it, stay put,” and so the friend says, “Get lost. I am doing it, I’m going in.” So he hits and he gets a two and so the friend is ecstatic. He’s jumping up and down because he wins a big hand and he says to DePodesta like, “See? You’re an idiot,” and DePodesta makes the point in his article, you can have a good outcome and still be a moron.
And that’s what I am trying to help people guard against in the book. I give 10 commandments of investor behavior in The Laws of Wealth to just say, “Look, if you manage the process, if you control the controllable, things are going to come out in your favor overtime,” and the thing about the market is, it is uncertain, it’s unpredictable in the short term. But people who are process oriented and have a behaviorally sound process went out over long terms. So yeah, a lot of people get in trouble in the market because they have early success for the wrong reasons, you know, just getting lucky and they end up chalking that up to skill.
[00:21:24.7] MB: And being process oriented is something that I am a huge fan of and we actually talked about in previous podcast episodes. We had an interview with an amazing insightful guest, Michael Mauboussin who’s another person actually in the financial world about how you can really be processed focused. So for listeners who are interested, I would definitely recommend checking that episode out.
One of the 10 commandments that really jumped out of me that I thought was really interesting was the commandment that “you are not special”. Can you tell me about that?
[00:21:52.1] DC: Yeah, it really goes to being process oriented because I think a lot of people who get into investment management or even retail investors think they have some sort of special edge and you harken back to the gentleman I mentioned earlier with the $5 million dollars. His special edge in his mind is was he had some control over this. I know people who work in tech who invest heavily in tech because they say, “Hey, you know this is my world. I understand it.”
And being a great investor is about driving out this idea that you have special knowledge or that the rules don’t apply to you because I, again and again, meet people who understand the rules of investing. I mean simple things like diversification, staying the course, dollar cost averaging, which means putting a little money in each month or each year and they just fail to do it because they think that they’re somehow different.
And this is a very human tendency to be overconfident and in fact, the research shows that you are basically either overconfident or you’re depressed. There is not a whole lot of middle ground unfortunately. So most of us, aside from the sort of clinically sad, have a great deal of overconfidence and I sight research in the book that talks about 94% of men thinking they’re better looking than average and 100% of men thinking they’re more inner personally savvy than average.
Most of us have a vested interest from an ego and self-esteem standpoint of thinking that we’re better than average. But bring that human tendency to the world of investing is very dangerous. I talk in the book too about our tendency to delegate the dangerous and own the optimistic. Delegate the dangerous, own the optimistic. When we’re asked to rate other people’s likelihood of getting cancer or getting divorced or losing money in the stock market, we can do a very good job.
But when it comes to rating our own likelihood of getting cancer, of getting divorced, whatever, the numbers get very, very scute because we don’t see ourselves as clearly as we ought to and so this is why I think working with a financial adviser, getting a second opinion, having a partner to check your thinking, I think that’s the reason that all of these things are so important in the world of finance.
[00:24:18.8] MB: It reminds me of that famous study about drivers, right? It’s the same thing that the majority of drivers think that they are above average.
[00:24:25.5] DC: Absolutely.
[00:24:26.8] MB: And it also makes me think of something, I previously used to work on Wall Street and one of the things that I always think when somebody tells me that they think they can beat the market or whatever is, “Do you really think that you can beat these hedge funds that have billions of dollars invested in algorithms and data farms of computer that are micro timing all these trades?” There’s almost no way that you are ever going to actual generate meaningful alpha as a result of what you think is a novel insight that you just saw on CNBC about some company.
[00:24:58.6] DC: Yeah, I mean it’s a zero sum game and so if hedge funds are winning, someone else is losing by a comparable margin and the odds are it’s you, right? I mean there’s the old saying about “if you get in a card game a few minutes in and you don’t know who the sucker is, it’s you,” right? And I think that the same could be said of investing.
[00:25:18.6] MB: So you touched on this briefly, but how do we combat that bias or how can we help mitigate some of that overconfidence?
[00:25:26.4] DC: I think that one of the most important ways, one of the things that I advocate for in the book a whole lot is just being rules based. The book is really, I mean it’s called The Laws of Wealth and it really is a book of rules and so there’s fascinating research in the book and I just give the whole book away I guess at this point. Because one of the things that we talk about in the book is how often expert discretion is beaten or mashed by just simple rules.
One of the studies that I talked about in the book is actually a meta-analysis. So it’s a study of all the studies, it’s a study of over 200 studies on simple rules-based decision making versus human discretion. So like you making your own choice and it studies everything from studies about prison recidivism and parole to stock picking to making a medical diagnosis and it’s found that simple rules beat or match expert, like PhD level discretion, 94% of the time.
And so following the rules is such a big deal and so what I’ve tried to do in the book is set forth rules for managing money and managing your behavior and just try to put that on autopilot to the extent possible. I like reading about really successful people and one of the hallmarks of really successful people is that they try and automate their day and free up cognitive room for thinking about more important stuff.
There’s been a lot of talk about President Obama just wearing two types of suits. He just doesn’t want to think about it. He doesn’t want to think about what he’s going to wear, he’s got bigger problems and then I’m from Alabama, so we’ll use Alabama football one. Nick Saban eats the same thing every day. The same thing every day for breakfast, same thing for lunch because he wants his mental energy and his time streamlined and he wants that available to think about other things.
So I think that investing is one place where the rules be discretion almost all the time and that’s one of the best ways around introducing negative emotion into the process.
[00:27:32.1] MB: And we talked about, in previous episodes, the importance of meta-analysis studies and how valid they are. One of the things that fascinates me is research by people like Phillip Tetlock who talk about how wrong experts are. Can you dive a little deeper on that topic?
[00:27:49.9] DC: Yeah, so Tetlock wrote a recent book that everyone should check out called Superforecasting where he refines some of his early studies. But Tetlock’s early work, which really put him on the map showed basically how bad expert judgement intended to be and some of the parts that I like about his original work was he showed that the more popular a pundit was, the less likely they were to be correct.
So if we think about how a pundit or a talking head comes into notoriety, let’s say in my world of finance and investing, often times it’s by making a dramatic call about sort of an unexpected event. So people who correctly called 2008-2009, if you watched The Big Short, some of those people that profited so dramatically from the housing crisis. So that’s how someone gets famous from making a big improbable call.
Well probability being what it is, a lot of times those people tend to keep making large improbable calls and then are increasingly off in subsequent years and you saw this with John Paulson, the big hedge fund manager who made the biggest trade of all time, more or less. Made a billion dollars shorting the housing market and then in subsequent years, lost 36% when the market was up double digits. So again, a lot of times people are perma-bullish or perma-bearish.
They run into one, they run into a nice opportunity where reality coincides with the thing they’ve been saying for five years but then those things tend go away overtime. So yeah, Tetlock found that expert judgment wasn’t all that great. Found that the more famous an expert was, the worst they tended to be, and also found that most experts were very resistant to feedback about how to improve their processes and had lots of excuses like, “I was too early.” Or, this is my favorite, “My prediction actually changed the course of history. You know, I would have been right but because everyone listened to what I said, I actually moved the market or changed history, messed up the space time continuum, as it were.”
[00:30:03.7] MB: It’s such an important finding because people so often just defer to these experts or authorities, these talking heads, especially in the case of financial news many times and it’s so critical to be aware of your own biases and understand your own thinking to the level where you can see, “Hey, I am clearly falling prey to some serious bias right now.” Like those experts who are coming up with a ridiculous justifications for why they are consistently totally off base.
[00:30:31.8] DC: Yeah and I think this is where we almost can’t do this ourselves. Chapter two of the book is titled You can’t do this alone and we are programmed not to see our biases. Again, if we think about this optimism bias, that’s in place for a very good reason. I mean we’re happier people because we have this optimism bias and if you think about entrepreneurship, if entrepreneurs correctly assess the probability of having a successful small business, no one would ever start a business, right? It’s only because we have this over-optimism that we see stuff like entrepreneurship because the odds are crummy.
So what we need to do is enlist an outside view. We talk about the inside and the outside view. So run your idea by that friend of yours that’s such a good friend that he or she can give you critical feedback and it won’t damage the relationship. In the case of finances, I found and I talk in the book about how people who work with financial advisers tend to do two to 3% better per year than those who don’t and it has nothing to do frankly with the financial acumen of those advisers. It has to do with keeping you from doing stupid stuff. So having that trusted outside voice is, I think, the only way. You can educate yourself about the basics of biases but man, it’s awfully hard to white knuckle that when you’re in your own head.
[00:32:01.9] MB: The idea of not being stupid is something that Charlie Munger, who’s one of my favorite thinkers and Warren Buffett’s business partner. He talks a lot about that both he and Buffett focus on is the idea of that they’re not setting out to be the smartest and greatest investors of all time. They just want to eliminate bias from their thinking and try to be consistently not stupid.
[00:32:23.3] DC: Yeah. I think that sort of defensive, that first do no harm approach is the hallmark of a good investor and when I look at my own process, the very first thing I do is screen out stocks for risk. I mean that’s the very first thing I do. Because a lot of people don’t see risk in return in finance and elsewhere in life as opposite sides of the same coin.
So I am wholly on board with this first do no harm, first root out the bad stuff approach to money and to life. I think there is a lot of wisdom there, and like you said, those guys have gotten very rich off what is a decidedly unsexy approach of just buying beaten down every day Staple stocks and it’s worked out extremely well for them clearly.
[00:33:12.5] MB: Changing gears completely, you wrote a fascinating children’s book called Everyone You Love Will Die, tell me about that?
[00:33:20.4] DC: So I have three kids. I have a seven year old, a soon to be three year old and then a tiny baby, three months old and so being a dad is the greatest, my favorite thing to do. But one thing I’ve learned with my seven year old is that they start to have tough questions. And so the other day, she’s asking me about God and the nature of life and evil and why do bad things happen to good people and all these different things that her little mind is beginning to take in.
So we had a friend passed away and so one of the things that I found useful when talking to my kids about everything from the impermanence of life to marriage equality and everything in between is to write poetry. That’s a way that I can communicate with my kids. So I wrote this poem that’s the basic gist of it was there’s lots of ways, everyone dies so you’re here today and so am I. It sounds like a depressing title, Everyone You Love Will Die and it’s of course meant to be provocative.
But it is actually a sweet book in practice and the gist of it is look, we’re not here forever so let’s make the most of it and let’s put first things first. Put family first and do what matters first and so I wrote this poem that lists all of these funny ways that people could die and then in the end says, “So hey, let’s spend today together.” So I wrote this poem, I put it on Facebook and a talented friend of mine liked it and sent me all these mocked up drawings of the different humorous ways in which people die in the poem.
And so she said, “Hey we should make this a book,” and so I said, “Okay, what the heck.” So we put it on Kickstarter. It became the Kickstarter whatever, editors pick of the day and it got funded in 10 hours and we printed a book. So it was very fun. I actually made no money off of it. It’s obviously hard to get a book called Everyone You Love Will Die published by a big publisher but it’s one of the professional things I am most proud of. So thanks for bringing it up.
[00:35:38.8] MB: You know it is such an important lesson and something that I think is easy to be intellectually aware of but really hard to internalize and live. Which is, for somebody who is listening, how can they snap out of the day to day grind of their life and really embrace that lesson that we only have a fine amount of time here and you really have to live your life fully?
[00:36:04.6] DC: Well for me, it’s funny for me I know that it’s hard for most people to grasp, I was born on the day that my grandfather died. I am named after him, I look just like him, I never met him, he died two years to the day that I was born. So I feel like because of that, I’ve always had this weirdly more acute sense of impermanence than most people. So for me, the things that work are the following: First of all I try and I really read literature that considers the inevitability of that.
Maybe that’s a really heavy for most people but I find that the inevitability of death does more to energize my life than just about anything else. So for me, literature, art, movies that speak to that and our fears around that are powerful and then other thing is I don’t know what the layperson’s term for this is but the shrink term for it is an existential boundary experience. So to explain, let’s say you’re driving and someone’s texting and they almost hit you.
You’re like, “Holy crap! It was almost over for me there,” and you have this moment and maybe it’s half an hour, maybe it’s 10 minutes, you have this moment where death is a little closer to you or maybe it’s a death of a friend. You have this moment where everything comes into focus and you say, “Look if I have been hit by that car today, did I do enough?” Like, “Did I tell the people I love that I love them? Did I spend enough time with my family? Did I prioritize work to the exclusion of things that were more important?”
And I think in those moments, they’re fleeting because you quickly get back to life and busyness, but in those moments, I think you have to journal, catalog them, write them down, make commitments when those moment happen to say, “Hey, I’m going to do things differently,” and have people hold you to those things. Because you’re right, I mean I think a lot of people — I think we live in a society that glorifies business in maladaptive and unproductive ways. I think a lot of us, unfortunately, just stay busy until we pass away and we live a lot of life on the table. So I think it’s an important thing to think about, like you said.
[00:38:26.5] MB: What would an example be of one or two pieces of literature or movies or whatever that you think might examine that topic?
[00:38:34.9] DC: I just finished The Dead which is very on the nose, right? I just finished The Dead which is part of James Joyce’s Dubliners collection of short stories. I’d absolutely recommend that. There’s a gentleman by the name of Irvin Yalom who’s a psychiatrist in California who writes very beautifully about death and existential boundary experiences so those are the two off the top of my head that I think I’ve read most recently that put me in that frame of mind.
But Yalom is sort of the, in my mind, the Freud or the Jung of our day. He’s probably the best guy doing it right now so he’s who I’d point you to in addition to all the Russian literature and other people who are notoriously good at bumming you out.
[00:39:26.7] MB: Well we’ll definitely include both The Dead and a few of Yalom’s books in the show notes. Kind of broadening that question out, other than The Laws of Wealth, which is a great book about a lot of the topics we’ve talked about goes much deeper into the research and is an incredibly useful tool. What would you recommend for people who want to do a little bit more research and dig into some of these topics? Where would you suggest they start?
[00:39:52.2] DC: So I get asked this question all the time. So at the risk of plugging my own thing, I came up with my own reading list. So if people just Google “Nocturne Capital Reading List” I have all my favorite behavioral finance books and I have them categorized by the sub-category they speak to. I think just some of the classics though, just off the top of my head, Daniel Kahneman’s Thinking Fast and Slow is about the best and most comprehensive thing out there. It is a little bit of a heavy read. I mean it is a long book but it is very fascinating.
Richard Thaler and Cass Sunstein’s book Nudge is about the best around in terms of speaking to policy nudging and pushing behavior in a good direction in everything from kid’s school lunches, to smoking bans, to safe driving, so if you are interested in that. And then in terms of the more financial side, I read some of the classics. I read Ben Graham and The Buffett Letters and things like that but I have a pretty comprehensive list of 15 or 20 if you just look up “Nocturne Capital Reading List”.
[00:41:04.0] MB: Well we’ll definitely include the reading list in the show notes as well.
[00:41:06.8] DC: Great.
[00:41:07.9] MB: So for somebody who is listening here, what is one piece of simple actionable homework you would give them to implement that they might be able to use to improve their personal finances?
[00:41:19.2] DC: I think there’s two. I will double down and give you two there. So I think one would be to pick five of the books off of the list, which will be included in the show notes and read five of those books. The interesting thing about investing is there’s such a quickly diminishing marginal returns on investment knowledge like if you read three, four, five books you will have 90% of all the knowledge you need to be a savvy investor and you can read a hundred more books to get to the next five to 10% of the way.
Just because I think investing is simple, but not easy. So I think that people would do very well to educate themselves on the fundaments of that and I’ve tried to give a good starter with those books and then the second thing I would say is get a financial adviser and look for someone who charges a reasonable fee who emphasizes planning and handholding and behavioral coaching because the other stuff is honestly a dime a dozen.
You can get anyone to put you in a well-diversified portfolio, that’s not hard to do. What you really need is someone who’s a good fit and is going help you get that extra 3% a year that the research says you get when you work with an adviser by virtue of them helping you to make better decisions. So those are the two easy pieces of advice. Educate yourself, three to five books, and then find someone to help take you the rest of the way and then read books about more interesting things like The Impermanence of Life.
[00:42:53.4] MB: Where can people find you online?
[00:42:55.6] DC: Twitter, @danielcrosby and Nocturne Capita,l with an E like the music, nocturnecapital.com.
[00:43:04.6] MB: Well Daniel, thank you so much for being on the show. This has been a fascinating discussion and I have learned a tremendous amount and we’ve really enjoyed having you on here.
[00:43:12.6] DC: Thank you, it’s been my pleasure.