Dr. Daniel Crosby is a psychologist who has been training financial professionals on how biases influence investors for several years. For this blog, I interviewed Dr. Crosby to bring another perspective to the topic of behavioral investing. His first hand experiences are enlightening, and I share the following excerpts in a Q&A format that I found most interesting.
1) What attracted you to Behavioral Finance?
I’m the son of a financial advisor so I grew up steeped in that world. I studied psychology in college and loved the endless complexity of people. It was exciting to be engaged in a field of study that I’d never quite figure out or get good at; people problems defy simple solutions.
In graduate school I started studying clinical psychology, but soon became disenchanted with the business side and personal stress of seeing so many profoundly sad people each week. Behavioral finance allows me full access to what initially drew me to psychology without the heaviness endemic to therapy.
2) The influence of biases on investors has been around for decades. Why has the application of behavioral finance among investors been so slow to take hold?
When I was a clinician, patients were more interested in taking a pill, which is complex and tangible, over a therapeutic intervention such as mediation or communication skills, which takes more personal effort. The pill was the easy way.
Similarly, investors today would rather search for the greatest manager or next “hot dot” than confront a truth about themselves that demands their time and energy. That truth is that human behavior is a better predictor of whether or not we’ll reach our financial goals than anything else.
Behavioral finance positions us squarely as the cause and solution of our financial troubles, which is simultaneously empowering and demanding. But it’s ethereal and it asks something of us, which is tough for a humankind that prefers the less demanding solution.
“The investor’s chief problem – and even his own worst enemy – is likely to be himself”
-Benjamin Graham
3) Do Financial Professionals have an increased ability to control biases?
Rooted firmly in the academic literature, I reject the idea that financial professionals make fewer bad decisions with their own money than retail investors. What financial professionals ARE able to do very well is give advice that they themselves may not be able to follow.
As a human race, we are excellent at seeing other peoples’ lives clearly and making great suggestions, with everything from who to date and how to invest. But when it comes to our money or our love life? We lose objectivity. I spend every week writing and training people how to make better financial decisions, and yet I have my own financial advisor. I’m smart enough to know that as much common sense knowledge as I have about investment decision-making, I’ll lose that objectivity when it comes to my own money.
4) With all the biases that influence our choices, what are the biggest ones facing investors?
My experience and research has caused me to conclude that what investors really want, regardless of the bias influencing them, is simplicity, safety and surety.
The desire and need for simplicity, safety and surety are things we earnestly seek, and they can be met in adaptive or maladaptive ways. For example, the financial media floods us with information. The Fed releases 45,000 pieces of economic data each month. We need to figure out a way to simplify this or it will overcome us. How we choose to simplify it is the key.
When it comes to simplifying investment choices we have a few potential avenues. We could listen to a TV personality (i.e. Jim Cramer) or get investment tips from our barber. That would be simple, but probably not conducive to our long-term wealth creation. Or we could choose to follow the advice of a trusted financial advisor and use personal goals as benchmarks (rather than the S&P 500). These are also means of simplifying, but are more adaptive.
5) Recently you have been shifting your focus from teaching behavior (qualitative) to the quantitative side of incorporating behavioral principles to asset management. Why the change?
The change is promoted by a belief that education is necessary but not sufficient. My end goal is to build tools that can serve as behavioral guardrails for investors and automate the process of “buy low, sell high”. I have developed systems for creating high-conviction portfolios, investing in a values-based and socially responsible way, and avoiding periods of excessive greed. I’m a firm believer that investors will make better decisions about their money when it’s invested in a way that is personally meaningful to them, and I want to be the forefront of combining socially responsible investing with behavioral finance.
6) What books can you recommend on behavioral investing?
I’d be no kind of small business owner if I didn’t mention my own books, “You’re Not That Great” and “Personal Benchmark”. In addition, I recommend “The Little Book of Behavioral Finance” and “Thinking Fast and Slow”.
You can follow Dr. Crosby on Twitter @incblot or add him on LinkedIn at https://www.linkedin.com/in/danielcrosby