Daniel is the Chief Behavioral Officer at Orion Advisors Solutions. He holds a Ph.D. in Psychology and has successfully bridged the gap between the social sciences and the investment world. He's a New York Times bestselling author and runs a podcast called Standard Deviations.
For the full interview please listen to the most recent CM Group- Free Lunch Podcast, Episode 49 “Unbiased Biases with Daniel Crosby.”
Colin and Greg: Daniel can you start off by telling us your story? How did you end up where you are today? What was your path?
Daniel: I am the son of a financial advisor, so my dad is still in the business. He got his job on the day I was born. He dropped out of graduate school and he was cutting yards for a living. And I think my mom was beginning to question her decision making about who she had landed with. I grew up really steeped in the sorts of conversations that you have with clients every day. My dad preached from an early age about being frugal, charitable, investing early, the power of compounding and all the great lessons you teach your clients. I learned at a young age so when I went to college, I was taking general education classes with an eye to becoming a financial adviser like my dad. And I just really fell in love with psychology. After my first year of school, I went on a mission for my church to Southeast Asia.
They were building schools and I was teaching English and I'm helping. And I just sort of fell even more in love with this idea of doing something with my professional life that had people at the forefront. That's what drew me to Clinical Psychology, which is what my PhD is in. About three years into my PhD program, I started to burn out. I was just bringing work home with me. I was dealing with some really rough clients. I wasn't handling it well and I was just internalizing the stress and said, I'm not sure I want to be a doctor, so I was talking to my dad as sort of my friend and career coach, and he said there's a lot of Psychology in the work that I do. I was like, what are you talking about? You're a financial adviser, you're a money guy, you're a numbers guy. He sort of turned me on to the field of behavioral finance. And long story short, that was sort of my first entry into understanding that markets really are about the intersection of mind and money. I didn't grasp that until that point. He set me on the path there.
Colin and Greg: How did you find the transition into that with the research that was being done at that time?
Daniel: I got my PhD in 2007 and I started working for a bank and I was doing pre-employment assessments of bankers. Before a bank would hire someone, I would give them an IQ test and a personality test to make sure that they were a good fit. Inside the bank I discovered the work of people who are still luminaries in the field, like Richard Thaler and Daniel Kahneman and people who had pioneered behavioral economics 40 years. Yet when it came to everyday advisers in 2007, if you had heard of behavioral finance and you were implementing it in your practice in any meaningful way you were a unicorn, I mean, that was just really not happening. So that was sort of the business opportunity that I saw, that it wasn't making it to people like my dad who are in the trenches every day working with clients, but not necessarily benefiting from the insights of behavioral economics and behavioral finance. And so, I said, look, I can speak both languages. I speak advisor and I also speak wonky academician. I can be sort of a translator between this esoteric part of the world in this very applied part of the world. And I think that's basically what I've done lo these many years. That's kind of been my career is translating between those two worlds.
Colin and Greg: Daniel could you explain what exactly behavioral biases are and how important is it for investors to understand these biases?
Daniel: I think the most generous way to think about them is as cognitive shortcuts. If we look at our brains, our brains make up two to three percent of our body weight, but they account for twenty to twenty five percent of our caloric expenditure in a given day. They're not very big, but they are very hungry. And so, one of the things that we're always looking to do is to think less. One of the ways that we can reduce this cognitive load, reduce the drag on our brains, is to rely on stereotypes or heuristics or rules of thumb. And that's really what biases are. Biases are like, oh, Canadians are like this. Americans are like this, when I meet Colin and Greg, I don't have to really do the heavy lifting of getting to know them. I can just apply my “Canadians are nice and overly apologetic lens” and then I can save myself some cognitive load. Now, however, you know, I give sort of this funny example of what you two are like. If I'm operating from that lens, though, I'm going to miss nuance. I'm going to miss subtleties about who you really are. And perhaps you're a lot like the stereotype in my head and perhaps you're nothing like the stereotype in my head. The same way that we have biases about people, we have biases about money. People have all this sort of emotional balance and all of these preconceptions about money. Whether in their personal financial lives or in markets, all of that stuff is stressful, and all that stuff is complicated and highly analytical and takes a lot of work. And most people aren't great at it and they're not schooled in it. And they just rely on these rules of thumb or they rely on emotion. The final thing I'll say about this is that the more extreme, either to the positive or negative a person's emotions are, the more likely they are to be biased. We find that people who are really happy, like in the research, people who are really happy, are also often really biased because they don't want to do sort of the nitty gritty thinking that's going to shake them out of that happy place. Like they just want to stay sort of high and dry, happy, and they don't want to think and get bummed out. The same is true of people who are very fearful or stressed out. Really biases are just cognitive shortcuts, but they're exacerbated by any kind of move away from the middle point in terms of our emotional lives. We get more and more biased.
For more questions and answers with Daniel Crosby please refer to our Podcast.
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-The CM Group