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Daniel Crosby: 'If You're Excited About It, It's Probably a Bad Idea'

The psychologist and author discusses making big financial decisions in times of emotional extremes, how risk-taking can affect asset allocation, and his thoughts on just-in-time education.

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Our guest on the podcast today is psychologist and author Dr. Daniel Crosby. Daniel is the chief behavioral officer at Orion Advisor Solutions. Daniel has written numerous books on behavioral finance, including The Behavioral Investor, The Laws of Wealth: Psychology and The Secret to Investor Success, and You're Not That Great. Daniel also hosts his own podcast called Standard Deviations. He received his Bachelor of Science and doctorate at Brigham Young University.

Background

Bio

The Behavioral Investor, by Daniel Crosby

The Laws of Wealth: Psychology and the Secret to Investor Success, by Dr. Daniel Crosby

You’re Not That Great, by Daniel Crosby, Ph.D.

Standard Deviations podcast

Orion Advisor Solutions

Current Environment

3 Tips to Handle Financial Peer Pressure With Ease,” ally.com, Aug. 18, 2021.

Loneliness and Social Isolation as Risk Factors for Mortality: A Meta-Analytic Review,” by Julianne Holt-Lunstad and Timothy Smith, scholarsarchive.byu.edu, 2015.

Episode #337: Professor Richard Thaler, University of Chicago, ‘When Somebody Would Fire Us, It Was Almost Always at Exactly the Wrong Time,’” The Meb Faber Show podcast, mebfaber.com, Aug. 4, 2021.

Help Wanted: How Investor Behavior Is Rewriting the Job Description of Financial Professionals,” Natixis Global Survey of Individual Investors, fa-mag.com, 2016.

Orion Advisor Technology

Betterment

Jason Zweig: Temperament Is Everything for Most Investors,” The Long View podcast, Morningstar.com, June 29, 2021.

Pandemic

The Strange Psychology of COVID-19 and Investor Behavior,” by Daniel Crosby, Kiplinger.com, Aug. 11, 2020.

Daniel Crosby: Investing Rules for Uncertain Times,” by Daniel Crosby, investec.com, June 4, 2020.

When It Rains,” by Daniel Crosby, blog.brinkercapital.com, 2020.

How COVID-19 Will Impact the Future of Investor Behavior,” by Daniel Crosby, blog.brinkercapital.com, 2020.

Behavioral Finance and Investing

Daniel Crosby on the Three E’s of Behavioral Investing,” financialplanningassociation.org, August 2021.

The BIG List of Behavioral Nudges,” by Daniel Crosby, blog.brinkercapital.com, 2019.

Robert Shiller: 'Wild West' Mentality Is Gripping Housing, Stocks and Crypto,” by Stephanie Landsman, cnbc.com, May 24, 2021.

Dr. Daniel Crosby’s Three Drivers of Human Behavior,” E-book by Daniel Crosby, orionadvisortech.com.

The Formula for Happiness: Wanting What You Have,” by Daniel Crosby, blog.brinkercapital.com, 2019.

Can Money Buy Happiness? Sort Of,” by Daniel Crosby, linkedin.com, July 19, 2016.

What Is the PERMA Model?” corporatefinanceinstitute.com.

Denise Shull

Daniel Kahneman

Standard Deviations Podcast

Christine Benz--Goals Based Approaches to Retirement,” Standard Deviations podcast with Daniel Crosby, standarddeviationspod.com, April 11, 2019.

Morgan Housel--The Psychology of Money,” Standard Deviations podcast with Daniel Crosby, standarddeviationspod.com, Sept. 4, 2019.

Jim O’Shaughnessy--What Works on Wall Street,” Standard Deviations podcast with Daniel Crosby, podcasts.apple.com, Aug. 14, 2019.

Transcript

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance and retirement planning for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.

Benz: Our guest on the podcast today is psychologist and author Dr. Daniel Crosby. Daniel is the chief behavioral officer at Orion Advisor Solutions. Daniel has written numerous books on behavioral finance, including The Behavioral Investor, The Laws of Wealth: Psychology and The Secret to Investor Success, and You're Not That Great. Daniel also hosts his own podcast called Standard Deviations. He received his Bachelor of Science degree and Ph.D. at Brigham Young University.

Daniel, welcome to The Long View.

Daniel Crosby: Thank you. It's wonderful to be here.

Benz: Well, it's great to have you here. We've been asking a lot of our guests to comment on this meme stock mania that has been going on over the past year and a half. You think that there's a connection to loneliness. Can you explain that thesis?

Crosby: I do think there's a connection to loneliness. So, loneliness was an epidemic across the world, even before the pandemic and the accompanying lockdowns kicked off. Interestingly, years ago, Great Britain actually appointed a minister of loneliness. Japan has done the same, because these two countries have seen that the social impact of social isolation has been profound. In fact, 50% of Americans who were surveyed before COVID kicked off, said that they were very lonely themselves. A lot of times we don't think of loneliness as a huge problem; it seems kind of like a high-class problem. But research done at my alma mater, BYU, found that there are actually huge health consequences that come along with social isolation--found that it's twice as damaging to your health as obesity, that it's the equivalent of smoking 15 cigarettes a day.

So, the world was in this lonely, isolated place to begin with, then comes COVID and all the associated lockdowns and the need to socially isolate from one another. And across this backdrop comes the Reddit crowd, the meme stock crowd, who says to you in a very real respect, we're a group of like-minded people, and we're going to do something incredible. We're a group of like-minded people, and we're going to A) get rich by, B) sticking it to people who have taken advantage of the little guy right across the last eons of Wall Street history. And this narrative, I think, was very compelling. And this match was lit, across the backdrop of real loneliness--we were lonely to start with, we were further socially isolated, because of the pandemic. And here comes this narrative that says, “Look, let's get rich together and do it in a righteous way.” It was a very compelling narrative for that specific moment in time.

Ptak: Want to talk about one dimension of that, which is people have their devices on them, more and more people are using their phones to invest--Robinhood, what have you. What do you think about that from a behavioral-finance standpoint? Do you think it's likely to lead to worse outcomes? Or do you think it depends on the type of activity?

Crosby: It's interesting. I really think it's a two-edged sword. Because in many respects, there's never been a better time to be an investor. Funds have been falling about 10% year over year, fund fees have been falling about 10% year over year for the last decade. And now we have technology that enables access. And what we've seen over the last 18 months, is that groups like women, people of color, and young people are joining the investing game in ways that they haven't historically. So, we're seeing groups that have been underserved and have had limited access historically, are actually joining the world of investing in big ways. And that's nothing but a good thing.

But then on the other hand, you see yourself making life-altering financial decisions on the same device that you use to check Twitter and send a goofy meme to your parents or your friends. And so, I think that the stakes can seem low when they are in fact quite high. And we also know that things like frequently checking your account, having a great deal of access and insight into your account can also facilitate a form of action bias that is bad. Across 19 different countries where it's been studied, we know that the more people check their accounts, the more they trade, the worse they tend to do. So, I really do think it's a two-edged sword. Technology is bringing new people to the investment world, but it's also giving us the tools to blow ourselves up, as it were.

Benz: You've argued that ideal portfolios would have 10- or 20-year lockups where people couldn't make any trades. That's probably not practical. I can't see many people agreeing to that. Are there any less-drastic measures that the industry could take to improve investor outcomes and try to troubleshoot some of this excessive trading and excessive interaction with accounts?

Crosby: On Meb Faber's excellent podcast, he interviewed Richard Thaler a week or two ago, and he actually told the story of a few years back, there was a fund that tried to do these multiyear lockups and they got sued. So a lot of the things that are ostensibly good, that the average investor would see as good--like liquidity access, transparency--we know that these things are bad for investing behavior, but I don't know that there's a practical way to lock them up, as it were, against bad behavior, because A) no one would buy them, and B) as we've seen, lawsuits could ensue.

I think one of the things that we have to do is we have to do business with technology providers who have good investor behavior in mind. There are certain technologies that are designed from beginning to end to incentivize trading, to gamify bad behavior, and to make it seem less real that it is. But there are also folks in the wealth-tech space and the fintech space that are approaching it from the opposite angle and trying to do things like just-in-time education. We know from the research that financial education is not very powerful if it occurs in a traditional classroom setting. But just-in-time education is in fact, very, very powerful. So before you're about to hit the buy or sell button, a pop-up might occur that would talk you through the tax consequences of the decision that you're about to make. That's a powerful form of education that occurs just in time and can really move the needle on behavior in a way that reading a book in high school can't.

And then finally, I think that we as an industry, we need to tell a new story. Natixis did research a few years back that looked at what the average financial advisor said they did for their client versus what the clients thought they got from the advisors. And 84% of advisors said the most powerful thing they did was help investors manage their behavior and make good decisions. But when the investors were asked, the thing that they thought added the most value was stock-picking. And only 6% of them said that investor-behavior management really added much value. So, we need to as an industry sort of agree to use our powers for good, to use our powers of technology to provide good architecture, and good just-in-time education. And we need to start to tell the new story about what actually moves the needle for investors. And it's not outperforming funds.

Ptak: What are a couple examples of providers that you think are doing an especially good job of striking the balance in the ways you just described? As you put it: architecture, just-in-time education. Anything spring to mind?

Crosby: Certainly selfishly, I would point to my own firm, Orion Advisor Technology. My whole job is to think through the the behavioral implications of everything we do. Everything from the way that an advisor selects a fund, to the way that we measure risk, to the way that we bucket or segment client wealth to try and incentivize best behavior. I know Betterment, the robo-advisor, is also very thoughtful about these things. They have a talented behavioral-finance expert, Dan Egan, on staff, who has done some cool work around the tax implications example that I just gave. They've really been able to move the needle by having people think through the tax implications of a trade because everyone hates to pay taxes. And, so they can use this just-in-time education to keep people from from overtrading.

The other cool thing that Betterment did, they were actually proactively sending out alerts during choppy markets. It's a volatile day in the market, they would send out an alert and say, “Hey, stay the course; don't freak out. Here's a little research that says you should do nothing.” Well, they AB-tested that and found that they were actually, despite their good intentions, they were incentivizing people to trade more when they sent out these notifications, because the preponderance of their clients had never worried in the first place. And they were actually germinating a seed of worry where there was none before.

So behavior can be tricky. And behavior can be paradoxical. And the cool thing about technology and technologists that work with behavioral experts is that they can test their assumptions. It's a sensible enough thing to send out an alert to clients. But in this case, it backfired. And they wouldn't have known that unless they had tested it.

Benz: I wanted to follow up on the whole just-in-time thing. I think the thing that I really struggle with is just the incentives that you've got a lot of actors in the industry who don't have an incentive to try to improve investor outcomes; they want to improve their bottom lines. So how do we reckon with those two competing forces?

Crosby: There is no doubt that encouraging bad behavior is likely the more lucrative path than encouraging good behavior. There's example after example of that. I think there's some pretty high-profile offenders. I'm not going to name names, of course, but I think we could probably all agree on who a couple of those are. So, in some respects, it's up to the ethics of the individual company, which is always shaky ground. But I think it's also a call for Wall Street to start to tell that new story that I'm talking about, so that investors can get better educated about what to look for. I am sort of sceptical--and this is an unpopular opinion, I know--but I'm a little sceptical about high school financial education efforts, as I've talked about earlier. But one of the things that I do think is very powerful is meta knowledge, which is knowing what you don't know. I don't know how to work on my car, but I know enough to know that I don't know that, if that makes sense.

And I think one of the things that we can do is help individuals and help investors understand some fundamentals of how markets work and how the economy works, and then know when they need help. Because I think as their understanding that they're being taken advantage of by some of these perverse incentives and by some of these ill-motivated tech players, they're better able to steer their business to the people who have their best interests in mind. But I don't think there's an easy solution, because there's certainly a lot of money to be made in getting people to do the wrong thing.

Benz: Wanted to follow up on your earlier comment about loneliness. And my question is, what do we do about that as a society? I think we all understand on a micro level to try to reach out to people who we suspect or know to be lonely, but how do we tackle it in a broader way, if at all?

Crosby: I think there's a couple of things. The micro level is right on--we all need to do our part to check on the people in our world who may be lonely and understand that that may not be the person that you expect. It's easy to be lonely in a crowd, it's easy to be lonely when surrounded by other people. So, it may not always be the stereotypical person that you think. I think we can do something to promote this at the corporate level. For a lot of people work is one of their primary sources of connection. I think we can all make efforts, and individual companies can make efforts internally, to try and promote some healthy socializing and encourage people to get together.

I think we need to understand the physical impacts of this, too, and we need to be more honest about it. One of the reasons I quote this research about how it's so damaging, is because it seems like this high-class problem that doesn't have a material impact on us. It's like saying, “I'm lonely.” That doesn't seem like a tragic condition. But, in fact, the health impacts are real. So, I think we can do a better job at the individual organizational level. I think that we, as a society, can encourage greater candor and honesty and transparency about how disconnected we all are and the physical impacts of that and realize that it's a big deal. It's not this high-class problem; it's a pervasive problem with real physical impact.

Ptak: I think a related issue to loneliness is distrust of experts and institutions. We had Jason Zweig on the podcast. And he commented that many people seem to not trust experts. And he sees this running through a lot of different spheres, medicine, science, also investing. Do you agree with that? And, if so, what do you think could be driving that?

Crosby: I do agree with it. And I think it's a multifaceted problem. I think there's three or four specific prongs to this pronounced mistrust of authority that we're seeing. I think one of the things is that with the pandemic, we saw something that you and I and Christine see all the time working in markets, is that it's hard to forecast the future. And, society was exposed en masse to the difficulty of forecasting, because definitionally, this was a novel virus. This was something that we had not seen before. And so, we're seeing this thing that's changing in real time that we're learning about in real time. And it's just hard to forecast, even by the best and brightest in the world. And you pair that with the fact that we have a society that's scientifically illiterate, that we have a society that's innumerate and doesn't know how these things work. And it looks like folks don't know what they're doing, when in fact, they're just up against a big complicated problem.

I think a second difficulty is that the experts did indeed tell white lies. I mean, they told white lies in an effort to try and serve the greater good. I think you saw early in the pandemic, saying things like, don't wear a mask. And I think the the stated reason we now know for saying things like, “Don't wear a mask,” is because they wanted to have N95 masks available to the first responders who were out there every day risking their lives on all of our behalves. And so the end goal was, let's make sure there's enough PPE for the brave doctors and nurses who are out there helping on the front lines of this virus. But the way that kind of got positioned to the public was, “You don't need to worry about a mask,” because they didn't want there to be a run on the bank for masks. So, this was a white lie--we can talk about it now; we get why you might say something like that. But then when they later came out and said, “Yes, do wear a mask,” it became, which is it: Is it the first thing you told me or is it the second thing?

The third facet of this I think is that truth has become trivialized. We see something as vanilla as mask-wearing or vaccination having become politicized now, and we know there's great disparities in how the different political factions in our country think about something that should be a scientific conversation has become a political conversation. And then finally, this is something that is always there with any kind of mistrust of authority or a conspiracy theory. It feels like a form of gnosis; it feels like this form of elevated thinking and elevated knowing. If we disbelieve the popular narrative, it feels like we have some sort of esoteric knowledge, it feels like we know something that other people don't, and that makes us feel smart or elevated or other. So, it's a complicated mix. But everything from these white lies to the politicization of truth, to this long-standing reality that having a conspiracy theory makes you feel special, all of these things are at work in a big way with very high stakes. And I think this problem is going to continue to grow.

Benz: Do you have any thoughts on how we could reverse it or begin to reverse it?

Crosby: I think you have to take all of this individually. I'm from Atlanta, and I was always so proud of the CDC’s presence here. And one of the things that I'm walking away with, having lived through the pandemic, is it's just as important for the CDC to have messaging experts on board as it is to have medical experts on board. Because as is the case with investing and so much of life, we can get everything right, in sort of an analytical black-and-white perspective. But if the rollout is not human-centric, if it isn't sensitive to the ways in which people think and behave, then it's going to fall on deaf ears. I think we need to pair our medical experts with experts in behavior and messaging.

I think that we as a voting public need to start demanding the truth. And we need to start overcoming our tendency to think in tribal ways, and to really get to the bottom of what's being said, and avoid the knee-jerk, yay or nay, these are my friends, these are not my friends thinking. And then I think we need education. I think even more than we need financial education and high school, we need to get rid of trigonometry, and we need to put in statistics and probability and the scientific method. I think it is imperative for people to understand probabilistic thing and just the rudiments of science. In a way, that's a lot more powerful than some of the higher math that we learn. I think it's a much more applied math that would do the average citizen more good.

Ptak: For financial professionals, you think these are make-or-break times because of how their clients' memories work, how everyone's memories work? Can you explain?

Crosby: One of the things that we know about memory, the way that we think about memory and memory retrieval, we often analogize it to a computer. But that's a pretty flawed analogy, because we know that emotion has a great deal to do with how we form and how we retrieve memories. So, one of the things that we know from the science of memory is that the more emotional a moment, the more of a steel trap our memory becomes. So, this is just an evolutionary adaptation. If things are high stakes, we're going to remember it good, bad, or ugly. Because the next time we're in a similarly high-stakes situation, we want that recall.

Everybody over the last 18 months has had this heightened memory for things that are happening around them. Now, financial professionals are in a make-or-break time, because if you've been responsive to your clients’ needs, if you've been checking in, if you've been seeing to their needs holistically, you will have a client for life, because they will never forget that in a moment of need, in a moment of panic, you were there for them. But I think on the flip side, financial advisors who have hidden or laid low during this time, are also going to be confronted with a clientele that's going to have a very sharp memory of the time when they needed help, they needed guidance, they needed education, and they didn't get any.

If there's a lesson to be learned, it's still very much that the uncertainty is ongoing. We see with the advent of the delta variant and some of the new shakeups that we're seeing, there's still time to do the right thing. And there's still time to be responsive to client needs in a way that I think they'll never forget.

Benz: We've seen some indications that many people are using the pandemic as an impetus to shake things up in their lives--they're buying homes, they're quitting jobs, or they're retiring earlier than perhaps they expected to. Is it a good idea to make these kinds of big life changes in a really stressful environment like we've had over the past year and a half?

Crosby: In my book, The Laws of Wealth, I tried to put down my 10 commandments for investor behavior, if you will, and this brings to mind two of them. The first is that excess is never permanent. And the second is, if you're excited about it, it's probably a bad idea. Why do I say this? Well, the truest words in investing, I think, are: “This too shall pass.” This is a phrase that we should repeat to ourselves in good times and bad. Because in bad times, it has a heartening effect, and in good times, it has a chastening effect, because excess is never permanent in markets, and yet it's our very real human tendency to take the right now and project it into the future indefinitely.

So, a year ago, we were reading all these articles about the death of the handshake. And how we would never have a conference again and everything's going to go to Zoom. And, I have six conferences over the next six weeks, and I'm extremely confident that I will be shaking lots of hands, because that's been the tendency as we've gone back to these things. I think the times of emotional extremes are not the time to be making big financial decisions. And, indeed, you're already seeing the articles being published about people who bought the second home at the height of COVID thinking that it was the right idea. It was maybe the right idea in the moment, but maybe not an enduring right idea.

Ptak: You've talked about spreadsheet-optimized portfolios versus behavior or real-world optimized portfolios. Can you explain the difference?

Crosby: There's a big difference between what we'll call the mathematical optimal and the behavioral optimal. One of my favorite stories about this, I cite it in The Laws of Wealth, it looked at the best-performing equity fund of the 2000s. So from 2000 to 2010, the S&P is slightly down over that time, but this fund, this focused equity fund, got 18.5% per year, which is just an enormous, incredible run anytime, especially over the lost decade that time was. But if you drill down, and you look at the average investor performance in that fund over that time, the average investor in that fund lost money, because of when they time their buy and sell decisions.

So, you've got the hottest fund in the world, and the average investor in that fund is losing money. And that's the most obvious and visceral example I can give of this--that there's a difference between a vehicle or a product that's going to do well and your ability to take the ride. In a personal example, my wife and I paid off our house a couple of years ago, in a move that I think no one would have told you was smart. No financial professional would say, “Mortgage rates were 2%, 2.5%--it's not anybody's spreadsheet-optimal idea of a good decision to pay off a house when you could be investing that money elsewhere.”

And, indeed, it hasn't been a good decision from a strictly mathematical standpoint, but it's really good for our peace of mind. It was really good, in March of 2020, to have a paid-off house, and that peace of mind allowed me to stay the course and stick through with the rest of my investments and take risk with the remainder of my wealth. And so that's what I'm talking about there. A lot of times I think, as an industry, we try and solve for the spreadsheet optimal or the mathematical optimal. I think when we start to have deeper conversations with our clients, though, we might see that there's a behavioral optimal that may look a little different.

Benz: What's the best way then to ensure that the level of risk in a portfolio or in a total financial plan matches what the investor can live with and what gives him or her peace of mind?

Crosby: There's strong opinions about these risk questionnaires and risk-behavior questionnaires. And I know that my organization has rolled one out, Morningstar's rolled one out recently. We, of course, have all of the incumbents who have been doing a great job for a long time. And then there's people who think that the whole exercise is one of futility. And to them I would give the George Box quote that, “All models are wrong, but some are useful.” I think we could all concede that you're never going to nail someone's risk tolerance in a way that's forever unchanging and totally perfect. But we shouldn't throw the baby out with the bathwater. And we should understand that measuring risk-taking behavior is an important prerequisite to asset allocation.

So, the right way to do it, from a behavioral standpoint, incorporates three broad themes. Different people use different nomenclature, but I think there is a decent deal of consensus that there's these three broad themes. The first is risk capacity. Risk capacity is how much risk can I afford to take? This is a function of my goals, my timeline, my existing level of wealth, how much can I afford to take just given what I want to do and when I want to do it? The second thing we're going to measure then is risk tolerance. This is someone's long-term willingness to make risk/reward trade-offs in what we'll call a cool emotional state. On a normal day, what is their willingness to make risk/reward trade-offs? And what we see, I think, much too many people's surprise, is that risk tolerance is relatively static over a lifetime. Risk tolerance does not change that much over a lifetime.

What changes a great deal, though, is this third facet, some call it risk perception, I call it risk composure. This is how likely it is that a hot emotional state will change the perception of that cool emotional state? How much will a moment of fear or greed--how likely is it that it's going to alter that longer-term willingness to take risk/reward trade-offs? How likely is it that this emotion is going to alter their perception of how safe or how risky an asset or a market is at any given point of time? But the big takeaway, I think, is that we need to measure three things: We need to measure ability using capacity; we need to measure these longer-term attitudes, which is tolerance; and, we need to measure these behavioral predispositions, which is composure.

Ptak: To follow up on that, how do you measure and validate each of those three dimensions in practice? How do you approach it?

Crosby: Capacity is pretty cut and dried. Capacity is pretty easy that I don't think takes a great deal of explaining. I think tolerance, the best way you can measure it is using their actual account size. You want to look at the actual trade off in their dollars, you want to look at their investable assets, you want to look at actual numbers and see where they draw the line. I think one mistake of some historical approaches to measuring risk tolerance is that we've used numbers that mean very different things to very different investors. To one person losing $10,000 could be catastrophic, to a very wealthy person it could be no big deal. So, we need to make sure that it conforms to the specifics of their world.

And then the composure piece actually bears a lot in common with things like neuroticism from the personality literature. When we look at the personality literature, there's five pillars of personality. One of these is called neuroticism. It's not a great name, but it's effectively this person's anxiety proneness. it's been validated across four different streams of research. We know that this is something that varies greatly from person to person. And using this as a starting point, we can start to look at how anxiety-prone someone is and how prone they are to get into these hot emotional states that will change their perception of an asset or the market broadly.

Ptak: And how do you know that this approach to assessing capacity, tolerance, and composure has worked without the investor messing up, if you will. I think that you've already alluded to the fact that in many of these cases, you have an investor that maybe thought that they had a certain capacity, tolerance, or composure, when it was anything but and then they make a harmful decision to chase, to bail out at the exact wrong moment. So how have you approached that in practice so that you can help clients to succeed with these assessments without doing it through the rearview mirror?

Crosby: One of the things is each of these things is going to be dealt with through a different approach. Some will be through the actual construction of the portfolio--thinking of capacity and tolerance, you'll address through the actual portfolio allocation. But composure is primarily a behavioral-coaching consideration. One of the things that composure can do for financial professionals is serve as an early warning signal for who among your clientele is likely to have a problem. Now someone with a tendency to be anxious, you're not necessarily going to dramatically dial down their portfolio, because they may need some of that risk to achieve their goals. But what you are going to do is you're going to give them a little extra TLC and you're going to get an early warning sign that they may need some hand-holding when markets become volatile. Because, again, there's a portion of your clientele that's so composed, that reaching out to them would actually do harm in the same way that Betterment's reach-outs did harm.

So just like any model, you're going to want to see how well that predicts who actually does become anxious in volatile markets. And you're going to want to see how well it predicts the ability to allocate assets in a way that will allow people to stay the course. So, its predictive power and its practical power, I think, are the ultimate test. But I think these three pillars give you a robust starting point that accounts for not only their needs, but also the reality of their wants, wishes, and behaviors.

Benz: Speaking of behavioral finance, it seems like the whole area of home-buying, mortgage paydown, all of that stuff, is a hotbed of irrational behavior. And I'm wondering if you agree with that, and what you think consumers should be thinking about with respect to some of these decisions? How can they find touch points to calm themselves down and to make good decisions in this space?

Crosby: It's fascinating. About 10 years ago, I had a client who thought it would be fun for me in February to go stand out in the middle of Times Square for a piece we were doing, go interview passersby about the best and the worst investment decision they had ever made. And it was a miserable experience, because I'm from the deep south, and it was freezing, and I was dying. But, it was also a very instructive experience. Because, to a person, every single person said the best financial decision they had ever made was the purchase of a home. Now granted, this is overindexing on Manhattanites, who had probably done better than average on their homes. But, to a person, every single person said the worst investment they'd ever made was some stock or another.

So, it's incredible to consider that if you look at history, stocks do, over long periods of time, 9% or 10% a year, on average. And homes, Robert Shiller looked at home prices for the last 100 years and found that home and investing in residential real estate basically keeps up with inflation--it's like 2% to 3% a year. So how is it that an investment that is, in reality, so bad, is the one that everyone says as their top? It's because all these biases are wrapped up in our home. It's where we bring home our babies, it's where we raise our kids, it's where we carry our spouse across the threshold to start a life together. It's the backdrop for every one of our emotional experiences and our lived experience broadly.

I think the first thing that people need to do is to get realistic expectations about what it is and what it isn't. I think a home is a great way to force savings and a great way to create a forced nest egg. But what it is not, when you look at the alternatives, is it's not a great investment on average. Maybe your mileage may vary. But, on average, it's not a great investment. I think we need to get honest about what it is and what it isn't. It's a great way to save money. It's something that you need, but it is not, when compared with the alternatives, a fantastic investment.

And then I think we need to get outside of ourselves a little bit and get this outside perspective on what homes can and can't do. What do we want from our home? And that's going to look different from person to person, but I think we need to divorce ourselves of some of these more romantic notions of what home is and get a little bit more honest about what it can and can't do. The final thing that I'll say there is when we look at the psychology of spending, buying a home is one of the worst ways to buy happiness of anything.

When we look at the positive ways to buy happiness, it's things like spending times with loved ones, giving to charity, getting out of work that we don't like doing--whether it's cleaning the house or mowing the yard--those all contribute meaningfully to happiness. But purchasing a home is very low on the list. Because we so immediately become acclimated to our home. When you walk into a new home, it's splendid, it's wonderful, it's novel, it's new, it brings you a lot of happiness. But very quickly, that home just becomes the place where you put your dirty dishes and you throw your dirty socks, at the end of the day. It very quickly becomes the backdrop of your lived experience, and it doesn't provide much happiness. So, I think if we understand all these things about the home-buying process, we're on the road to being more rational.

Ptak: One interesting recent development is we've seen this trend toward customization, personalization, if you will, and your comments on the home-buying process and some of the biases that attend to that. It does make me reflect on this desire to personalize, tailor our portfolios. Do you think that's healthy? And what are the potential downsides from a behavioral and overall investment standpoint?

Crosby: This is, again, not a popular opinion. I'm an ESG sceptic, but a values-based investing believer for primarily behavioral reasons. When we look at the research done by people like Dan Ariely, he shows that the more real we can make money, the more it changes the way that we think about spending, saving, and investing it. He's done a lot of work on dishonesty and has shown that there are people who will steal $100,000 out of a bank account, who would never take $10 out of a tip jar. Because the tip jar is tangible, it's real, it seems like real money, where stealing credit card numbers, or taking money from one account to another, it's distanced from the realness. It's not as reified as that actual dollar bill is.

And one of the things that I think direct indexing and these customized portfolios can do is that it can make investing more real in the life of an investor. It's actual companies that you care about that are connected to the values that you espouse and disconnected from things that you don't like. And I think that investors are much more likely to hang on to the green energy fund, or the women's leadership fund, or the Daniel Crosby direct index than they are QQQ or SPY or something else, that feels a little bit more divorced from reality, that feels more like a copy of a copy of a copy. So, I'm actually very high on direct-indexing ESG-customized portfolios, but not because I think that they're changing the world; because I actually think they're changing investor behavior for the good.

Benz: You recently wrote that you'd love to see a book about how to achieve an enough attitude to help be satisfied with what they have. Why is defining what's enough, so important, and why are we so bad at it?

Crosby: I think it's important to start with why we're so bad at it. We're wired with brains that are nearly 200,000 years overdue for an upgrade. So, we're operating with these really primitive brains. And when life was much harder, when life was much more difficult, it was true that you had to be primed to keep going. Because you were as good as that moment's safety, or that moment's kill, or that moment's hunt, or that moment's gather. You couldn't really amass wealth, you couldn't really amass safety, just because of the demands of the world at that time. Now, we live in a world where if you're lucky enough, it's quite possible that you could have enough, and if depending on your circumstances, you might have enough at even a very young age.

So, we're not wired for enough for evolutionary reasons. We're wired for struggle. We're wired to keep pushing. We're frankly wired for inadequacy, because you need to wake up a little hungry, feeling like you're not quite there, and feeling like you've got to keep pushing. But, again, that's kind of an ancient idea that's not necessarily suited to the demands of any individual today. So, understanding that about ourselves, we have to work for ways to overcome this sort of hedonic treadmill and figure out what enough looks like.

And the tricky part about it is, and why I want to see a book written about it, is that goal post tends to move, because we know from this research into what's called the hedonic treadmill, that our spending and that our desires tend to rise in concert with our wealth. So, what may have been a perfectly acceptable dinner or car or vacation when you were 20 years old, and in college and struggling, would be profoundly disappointing when you're 40 or 50, and a little more flush. Because of that hedonic treadmill, because of that deep-seated tendency toward inadequacy and struggle, and not enough, I want someone to write the book and figure it out. Because this is help that I need.

Ptak: To follow up on that, does any of the research that's been done on happiness, has that yielded any insights into what are particularly good constructs that people have used to define enough in a way that's workable as they graduate from one phase of life to the next and get to the end and feel like they have enough and therefore they're happy? Is there a good model for enough that's emerged from happiness research?

Crosby: The best model I know of is Seligman's PERMA model. He talks about these five things that lead to enoughness or happiness. It's positive experiences, which are just fun. This is like, eating an ice cream cone, going to Disney World, going on a date with your spouse, something like this. The “E” in PERMA is for engagement. So, this is deep, meaningful work. The kind that causes you to lose track of time. “R” is for relationships. Going back to our loneliness conversation, being surrounded by people you love and care about and who you love and care about. “M” is for meaning, which is something bigger than ourselves, whether that's God, or philanthropy or charity, or spirituality, or whatever that looks like for you. And then “A” is advancement or achievement, moving forward, being better than you were yesterday.

And you listen to this, and you listen to these five things. And you realize that it's still about growth. It's about it's about getting outside of yourself. It's about surrounding yourself with other people, about working for things that are bigger for you and getting better every day and working hard. So, I think we have a very wrongheaded and illusory idea of what makes us happy. And I think money, we treat as a form of liquid happiness sometimes, when really, money can facilitate those five things I just mentioned; but money in and of itself is never going to lead to that deep fulfilling of enough.

Benz: Are there any other aspects of behavioral finance that you think are underexplored and you'd like to see more research on them in the years ahead?

Crosby: There's a surprising amount of disagreement in among behavioral finance researchers and practitioners about the role of something as basic as intuition and emotion. There's those in the behavioral space who think that intuition and emotion can be instructive when making investment decisions. Denise Shull notably believes this. And then there's people like myself and Kahneman and some of the others who would say that emotion does more harm than good. I'm interested in that dialogue. And I'm interested in those differences of opinion. So, I'd like to see more research done on the good, bad, and ugly of emotion and intuition.

I think there can be some cool research done using technology to talk about predictive behavior--how able are we to anticipate that client who's going to make a mistake before they make it? And this one's pretty foundational, but we're really bad at self-awareness. Ostensibly, we write books like the kind that I write, so people will become more aware of their self and more aware of their behavior, but there's a great deal of research to show that we see ourselves very imperfectly. And, so I'm interested in advancing and reading about advancements and just how we get to know ourselves as clearly as others seem to know us.

Ptak: What about the flip side--stuff that you think has just been done to death in the literature or otherwise, and you feel like folks in the behavioral finance field should move on and focus on some of these other topics you've mentioned?

Crosby: There's some hair-splitting around biases that gnaws at me. There's documenting biases that are at the periphery of, or some really specific manifestation of a larger bias. We've got like 200-plus different behavioral biases now. They're almost like a bias toward coming up with more biases. And these things are fun, they're quirky, they have anecdotal explanatory power, and they're fun to read about, but I don't know that they're moving us forward much. And I think we could never discover another bias again and be OK. So, I hope that we'll move more toward application and further away from documenting longer and longer lists of our irrationalities.

Benz: Wanted to close by asking you about your own podcast, Daniel, Standard Deviations, which has one of the best titles I think of any podcast out there. I just love it. You've been doing it since 2017. What are a few of the interviews that stand out in your mind and why?

Crosby: The Christine Benz interview was just such a gem.

Crosby: So, packed with wisdom. Yours was fantastic. And it's one that my boss refers to all the time and has made mandatory listening for everyone at Orion. You were incredible. Morgan Housel has a gift for explaining complicated things in simple ways. So, I really enjoyed my episode with him. Jim O'Shaughnessy is such a renaissance man and a quirky, unique thinker. I really, really enjoyed my time with him. And recently, I had Morningstar's own behavioral economists on to talk about--Sarah Newcomb, that is. We had her on to talk about her research. You ever meet someone at a party or something who's just so endlessly fascinating and broadly read that you just want to talk to them for hours? Dr. Newcomb was that person for me. So Dr. Sarah Newcomb's upcoming episode is one that I think everyone will really enjoy.

Benz: Well, Daniel, flattery will get you everywhere. And this has been such an interesting discussion. We're so grateful that you've taken time out of your schedule to join us today.

Crosby: An absolute pleasure. I'm a big fan of the show. So, it's great to have been asked to come on.

Ptak: It was our pleasure. Thanks again.

Benz: Thanks so much, Daniel.

Crosby: Thanks.

Benz: Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

You can follow us on Twitter @Christine_Benz.

Ptak: And @Syouth1, which is S-Y-O-U-T-H and the number 1.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis, or opinions, or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)