The Psychology of Investing (Archive Episode)

0:00Hello. Thank you for downloading Everything Psychology. This is an archive recording from last year of some of the most popular episodes that maybe you haven't heard. I'm now busy recording brand new episodes which I'll release in the spring. And if there's any topic you'd like me to cover, then please email me directly on paul at everythingspsychology.com. I hope you enjoy the show.

0:30Success in investing doesn't correlate with IQ once you're above the level of 100. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble when investing. That was a quote from one of the world's greatest living investors, Warren Buffett. But here's the thing. If intelligence isn't the secret behind investing success, what is? And how do we master that elusive temperament that Buffett talks about?

1:06Welcome to Everything's Psychology. I'm Paul Davis. And today we're unpacking the psychology behind investing. Have you ever considered investing, but maybe kept putting it off because it feels too complicated, too risky? Or maybe you thought it's only for rich city types. Or maybe you do invest already, but have found yourself making investment decisions based on maybe gut feeling, what you see others doing, or maybe in response to a wave of market panic.

1:36To chat with me about what psychology has to do with investing, if financial advice is worth your time and your money, and most crucially, to share some tips on how thinking like a psychologist can transform your approach to building wealth, I am delighted to be joined by Dr. Daniel Crosby. Daniel is absolutely ideal to discuss this topic because he's a psychologist and a behavioural finance expert, and he's the author of smash hit books such as The Laws of Wealth, The Soul of Wealth,

2:09and The Behavioural Investor. Hello, Daniel. Paul, good to be with you. Super, thanks for coming on. So I think this is going to be a really short episode because surely investing is all about maths, it's about economics, it's about statistical modelling. It's got nothing to do with psychology, has it?

2:30Well, it actually has everything to do with psychology, but a lot of people find themselves in the camp you were just describing, assuming it's all about technical acumen, math proficiency, or having some sort of inside track. One of the favourite examples, I gave this example in The Laws of Wealth. If we take this assumption, and we look at the best performing mutual fund of the 2000s. Now, here in the US, from 2000 to 2010, this is one of the only decades in US history where

3:07if you had bought and held the S&P 500, you would have lost money. We had multiple bubbles during that time, and if you had bought and held for a decade, you would have lost money. But during this 10-year lost decade in US stocks, there was actually one mutual fund manager who averaged 18.5% returns per year, which is absolutely, I mean, that's incredible over any time period, but especially over a time period when buy and hold investors lost money. But Paul,

3:41the average investor in this fund did not get that 18.5% per year that the fund did. They actually lost an average of 4% per year, because what they did was, even though the math was right, even though the fund was good, what people did is the fund would run up, people would hear about it, they would pile into the fund, then it was a volatile fund, like most funds that would

4:12return at that level are, so then it would draw down for a moment, people would question their decision, they would jump out, then it would run back up again, they would pile back in, and so on and so forth. So even though the math was good, even though the fund was a good fund, you had to be able to take the ride, and very few people had the temperament or the psychology to do so. So a lot of people think it's all about the math, you know, picking good stocks, picking the next

4:44Amazon. But you have to remember that Amazon had a 99% drawdown. And so you have to be able to not only have the have the acumen, have the intellect to to make good investments. But more critically, you have to have the stomach and the courage to stick with them. Yeah, that sounds scary, though, doesn't it? And the example you gave there is a really nice one, because I think a lot of people, even if they're not very ofay with investing, know the idea of,

5:19you know, buy low and sell high is something people hear, whether it be on films or anything, buy something low and and sell. What you said goes completely against that, that people did the opposite. They bought when it was high, and they sold when it was low. Is that a natural thing for us to do? It is, you know, the name of your podcast is really very apt, because everything in investing is psychology. A couple of things are at play here. The first is something that

5:55famed investor Howard Marks calls the perversity of risk. So if we take this first rule of investing to buy low and sell high, it must be said that our perception of what low and high are, are 180 degrees inverted, based on our psychology, what when when markets feel very scary to us, we know these tend to be the times of peak opportunity. And when markets feel very safe to us, these tend to be the moments

6:29when we should be maybe second guessing or running for safety a little bit. So there is this perverse miswiring of our intuition. And I'm a fan of intuition in many contexts, you know, I mean, even the psychological research shows that in places where we have experience, intuition can be in fact, quite a good guide. When it comes to judging your comfort with another person, it's a good guide in

7:01general. If you go on a date with someone, and they creep you out, and you feel like maybe you don't want to see them again, there's probably something to that. And there's probably something in your intuition or your subconscious that that has alerted you to something that's amiss. But investing is different. I call it Wall Street bizarro world, where every way that we are wired, you know, we are wired for immediacy. And good investing requires long termism. We are wired for

7:36certainty. And good investing requires the assumption of uncertainty and of risk. We're wired where in most places, doing more gets you more. You know, if you want to become smarter, you read more books, if you want to become stronger, you lift more weights. And yet we know that in markets, this has been studied in 19 different developed countries markets, the more people trade, the more news they watch, the more

8:08trades they make in their accounts, the worse they tend to do. And it's stepwise. If you look at deciles of activity in an account, it just goes down, down, down, the more active people are, the more financial news they watch, the worse they tend to do. So good investing requires almost a complete overhaul of the way that we move through the world, where less is more. And really, the future

8:38is far more certain than the present. You know, if I ask you what you're going to be doing in five minutes, you could tell me with a high degree of certainty, if I ask you what you're going to be doing in five years, you have no clue. Markets are the exact opposite of that. We could make effectively zero assumption about what will be happening five minutes or five days from now, but could say with a great deal of authority, what five years and even 50 years from now will look like.

9:08So it is so hard and good investors are so scarce, precisely because it causes it requires us to act in ways that are night and day different than almost every other endeavor in life. I mean, you said so many things there, which I think people will find very counterintuitive, especially in the world of investing, or just in the world of looking after their money, you know, a topic where people work hard to earn their money. And the last thing they want to see

9:40is it losing it, or is it going down in investing terms? So let's get into sort of, I guess, that decision making engine, the brain. How equipped is our brain for making decisions in sort of abstract concepts like investing? So we're very ill-equipped. If you look at the last time our brain had an upgrade, depending on who you talk to, it's something like 100 to 200,000 years ago. If you look at how old

10:13developed financial stock markets, like the ones we now trade in are, they are 400 or 500 years old. And so our brains were developed for a time and place very different than the one that we find ourselves in today. And, you know, again, people argue about what comprises human history. But if you were to compress human history down to about a year, all of human history compressed down,

10:43you know, to a one-year calendar timeline, you know, my country would have been founded on late in the day on December 29th. You know, the pyramids would have been built on Christmas Day, you know, things like this. So all of these, all of what we're wired for is survival. For most of human history, nature has been very red of tooth and claw, and we have just needed to live to fight

11:20another day. And one of the primary means by which we have lived to fight another day is a fear of loss. This is sort of behavioral finance 101, that we are dramatically more fearful of loss than we are excited about gain. And this causes us to have asymmetrical preferences. We're very scared to lose, but don't care as much about winning. Because historically, if you look at human history, you got one bad day, you know, one really bad day and you were done for. And so we're wired to do

11:59everything we can to avoid that one bad day. You look at our modern milieu, though, where the place where we find ourselves now where we have to invest, I mean, unless you are just enormously wealthy all on your own, you have to take some risk with your money. If you're going to keep pace with inflation, we get in in developed markets, we get a correction. So that's a 10% or better dip on average once a year. And we get a full-blown bear market every three to five years. So we are

12:36wired... I'm sorry, when you say bear market, would you mind just explaining what that is? Sure, 20% or greater, 20% or greater decline in a market index. And so we are wired to avoid even one bad day. And in capital markets, despite their long-term ability to grow wealth in really incredible ways, there are many bad days. You know, the market goes down, you know, three days and 10. The market dips out rather substantially about once a year. And so learning to tame this sort

13:13of primal impulse to avoid any sort of risk or fear or that avoid that one bad day becomes critical for us and something we're not naturally well-equipped to do. And it can sound, when you talk along those lines, that our brain is at fault, that our brain is a faulty thing. And I know British philosopher Alan de Botton calls the brain the faulty walnut, because it looks a little bit like a walnut with its two halves. And he calls it faulty because it

13:43leads us in wrong directions. But it's more like you're saying it's yesterday's technology in tomorrow's world in the fact that the world has changed so dramatically and so quickly that our brain has not yet got to that software version 2 to be able to deal with it. So we're still running software version 1 in a new environment. And that can sound, it's still quite scary for people, but you talk there about our brain, it's only real purpose, isn't it, is to help us survive and

14:13to reproduce. That's it. So back in the day when ancient man was in the Savannah plains and there was a snake, or what looked like a snake on the floor, it was best to move away from it as quickly as possible. If it happened to turn out to be a stick, well, that's no problem, you live another day. But if you didn't move away, thinking it was a stick and got bitten, then you wouldn't move your genes on to tomorrow and therefore you literally wouldn't survive. And that feeling in us of moving away from something, even if it is false, is still there and can lead us to make rash emotional

14:50and very quick decisions in an area where maybe we should be a little bit more deliberative. It's very well put, yes. So I'm interested then, I guess, in that loss aversion. As you said, I think a lot of people, if they've looked into behavioral economics, if they've looked into anything to do with psychology and stock markets, loss aversion is that big one that's there. Is it a sort of evolutionary hang-up? Is that where it comes from? Yeah, I think it is. I think it is. And, you know, I would never disagree in total with the

15:27founder of the School of Life. I really love his work and his channel is excellent. But I think it's not wrong in entirety so much as it is misapplied. You know, I think if you, you know, this impulse towards self-preservation, this impulse for certainty, this impulse to lead with our heart, there are places in life where that serves us well. Markets happen to be a very special case.

15:58There's, you know, the so-called biases, the so-called behavioral biases that spring up in that, you know, people like you and I talk about in investing, they really serve us quite well. It's not that we're irrational in total. It's just that it's misapplied. And what may serve us very well, you know, in our love lives or when trying to navigate the world in other ways serves us quite poorly here. So, it's not about, you know, shaming the brain or being, you know, lamenting our

16:33irrationality. I think it's more about fitting the behavior to what the demands of the situation. That's a brilliant, yeah. I love that. You're not shaming the brain because the brain at the end of the day is magnificent and it's stood us in great stead for millions of years. So, I think when I do get a little sort of tetchy when people sort of say it's at fault and, you know, we're doing this. In your book, The Behavioral Investor, you say that you went through a lot of the behavioral biases

17:03of what can affect people's decisions when they're making investment decisions. And then you sort of narrow it down to four psychological factors where you group them together, I suppose, into sort of handy pockets of these biases. Could you guess, unpack each one of those is and what they are and explain why they're so impactful for people? Sure. Yeah. So, what I did, as you said, there are something like 200-ish different cognitive biases that impact our financial decision-making. But candidly, Paul, you know how it goes. Some of

17:39these are fairly small and inconsequential. They're permutations of another one. Somebody needed tenure at a university, so they had to come up with some new big thing. And really, I said, I looked at these things. I said, look, there's really, I began without any preconception about how many there would be. But I said, there is such a thing as a meta bias, sort of a fundamental tendency that accounts for a host of smaller biases. So, the four of these meta biases, the first is ego. This is our tendency

18:13to think that we are smarter, luckier, and more knowledgeable than average. And, you know, going back to our previous conversation, this serves us well in many contexts. You know, people who are overconfident are happier. You know, it keeps us waking up in the morning. It keeps us getting out of bed. Yeah. Like, it's the thing that leads you to talk to the pretty girl at the bar. It's the thing that leads you, you know, to start a business, even though statistically, starting a business,

18:49or God forbid, a restaurant, is like, you know, has a vanishingly small percentage success rate. Absolutely. If you look at the statistics of marriage, for instance, you probably would never get married, knowing that the divorce rates are so high. So, our optimism is needed. Sure, yeah. If marriage is effectively a roll of the dice, then, you know, marriage is really the triumph of hope over numbers, right? But we're glad people get married. We're glad people start businesses, and we're certainly glad that people start restaurants. So, overconfidence serves

19:25us well, and it makes us feel good, and that's lovely. But it also leads us to think that we're luckier than we are, that we're smarter than we are, and that we can be more prescient about the future than we are. Those are sort of the three dimensions of over-optimism. So, I lump those all under this ego, ego killer. That reminds me of a phrase. It's strange how things just pop into my head when we're talking. I think it was a First World War poet wrote that every man walks out to war thinking the person

19:57next to him is going to die. Because, well, one, you wouldn't go to war if you thought you were going to die, but everyone that accepts that the person next to him is probably going to be the one that suffers. And I guess in investing, you're going to be the one that's successful, and they're going to be the one that might lose their money. That's right. And this overconfidence makes us strangers to rules and strangers to probability, right? Every person you know, it's actually somewhat lower than this now, at least in the US.

20:27Thankfully, the divorce rate is somewhat lower than 50%. It peaked, I think, when I was a kid. I think it peaked in the 80s or 90s. But, you know, well, just round numbers. Say the divorce rate's 50%. Well, if you ask people on their wedding day, you know, what's the likelihood that you two will get divorced? You know, the estimated probability wouldn't differ greatly from zero, right? Everyone knows that people writ large have a 50% chance of getting divorced, and yet

20:58no one thinks that their marriage will end in divorce. So it is with war. So it is with, you know, investing. Yeah. So what is the risk then of thinking that you can beat the market? Surely that's a good thing. Well, the risk of thinking that you can beat the market is that you fail to do a couple of things. People who are overconfident, they tend to trade more than they should, you know, go back to that research across the 19 countries. Like, if your decisions tend to be better than average, then why not take a lot of shots on goal? Well, being active in the market on average tends to lose

21:34you money. It also leads people to fail to seek advice. That's a big one. I think that we'll probably talk about that later, it sounds like. But, you know, people fail to do the research they need to, they fail to do, get the help they need, because they think, you know, hey, I've got this. And what's, what's interesting is one of the ways that we can diminish overconfidence is with specificity. So, you know, if, if you stop a person on the street and say, how good a driver are you?

22:13Are you, you are above or below average driver? Are you above or below average intelligence? Are you above or below average looks, humor, what, you know, friendliness, whatever positive quality, you know, almost everyone is going to say they're smarter, better looking, friendly, or whatever, you know, better driver, when we know that that's not how averages work. But, but, you know, if you, if you ask me, you know, hey, Daniel, how good are you at trigonometry? Or, you know, how good are you

22:45at watercolor painting in a, in an impressionist style? I would go, well, I mean, I don't know much about that. But if you, you know, if you ask me how, you know, how creative are you? I'd be like, well, you know, I do all right. And so, we find that specificity can, can be sort of one, one thing that's good at combating overconfidence. Okay. I'm going to get on to, you know, a whole set of questions on how we get over these. But let's, let's get to some of the other factors that you identified. So, we've got ego to start with,

23:20that overconfidence in manifesting in investors. The next one is conservatism, isn't it? Yes. So, conservatism has a great deal to do with that loss aversion. It's that we prefer things that are, are known to us and things that are safe. And in fact, we tend to prefer things that are known to us and think that they're safe. So, we prefer the status quo, we prefer safety, we, we're sort of provincially minded. If you look at, there's, there's a lot of different manifestations of how this shows up.

23:55There's something called home country bias or familiarity bias. So, a place like Canada, where, well, I mean, I'm going to pick on Canada, because Americans love to, but, you know, this is true of any country. But Canada is about 4% of the, of the world economy. The average Canadian investor has about an 80% allocation to Canadian stocks. It's a good rule of thumb that your investments should roughly reflect the,

24:30the weighted holdings, be, should roughly be a reflection of what the world capital markets look like. The same thing happens in the US, but the US is, you know, 50% of the world market. So, it's not quite as dramatic. It's almost accidentally not as dramatic in that case. Yeah, yeah, correct. It's sort of accidentally not as bad, bad a deal. So, when I lived in Canada, though, you would try and tell people this, and it was difficult. And it's dangerous, because Canada has, you know, like most countries, you know, they're very heavy on

25:03commodities and energy. And, you know, they do some things very well, but they don't represent a broad swath of the world economy. But people like that, you know, I like owning this company, because I see their gas stations on the way to the work and my, my buddy works there and he tells me they're doing well. So, it gives people a sense of this, this provincially, this provincial mentality that we all have, gives us a sense of safety and security, which is in fact, quite risky.

25:34Because, you know, I live in Atlanta. And so, if all my investments, you know, if my home is in Atlanta, my job is in Atlanta, and then I'm all, you know, wholly invested in Coca Cola stock, you know, I've effectively, in an effort to be safe, in an effort to, you know, play it close to home, I've sort of unintentionally bet it all on black or bet it all on red, or I've sort of stacked my chips on one single bet. And so, it's actually quite dangerous. So, again, going back to this,

26:08this man or woman on the savannah, we are wired for tribalism, we are wired for, you know, the known, but investing strictly in the known, this conservatism that we're prone to can actually be quite dangerous. Yes, okay. And then the third one you've got is actually attention, which sounds a strange one, because you would think attention was a good thing to have. Yeah, so attention is the process by which we confuse things that are loud with things that are likely. So, the psychological

26:44term in question here is salience. Salience, as you know, is just the vividness with which you can conceptualize or bring something to mind. So, if you think about, you know, something like, I'll give a silly example on tell on myself here, I lived in Hawaii for a summer with my wife when we were newlyweds. So, we lived in Hawaii for like four months. The first day we arrive in Hawaii, it's quite a

27:15long flight, I'm tired, you know, I plop down on the couch, we have a TV, a tiny, terrible apartment, we were very young and poor. We have a TV with three channels, one of them is Discovery Channel, which does Shark Week every year. So, I get to Hawaii immediately, it's Shark Week.

27:36I watch all this programming about shark attacks in Hawaii, and then for the rest of the four months, I don't get in the water past my knees. I mean, I'm like, terrified, you know, of shark attacks. I get home from Hawaii, and read up on this a little bit, trying to understand my behavior better. You know, I had a better chance of, you know, spontaneously combusting. I had a better chance, you know, I had a better chance of, you know, killing myself shaving, you know.

28:07Yeah. I heard one that says you have more chance of being killed by a vending machine than you do for a shark. Totally, right? You know, your pajamas catching on fire, you know, being made a Catholic saint, like, the likelihood of all of these things was dramatically higher than me being attacked by a shark. And yet, the idea of being attacked by a shark was very salient. It was very vivid, it was very easy to imagine. The beach was right there. You've got Jaws, you've got the Discovery Channel, you've got all these messages. And so, we tend to overweight sort of dramatic risks and

28:45underweight more quotidian, more everyday risks. You know, for most of us, the biggest risk in our lives is the hamburger we have for lunch and not, you know, the terrorism or something like that. And yet, we continue to eat hamburgers and, you know, we continue to spend trillions on avoiding terror because that's sort of how we're wired. So, how does that relate to investing? Yeah. So, in investing, when people are watching news, this has a lot to do with their media diet,

29:17right? People are always primed for the big one. When I talk to clients, they're always trying to avoid the next, you know, COVID crisis or the next great financial crisis. And all this time, they're overlooking more serious, more mundane risks to their wealth. You know, they're not investing, which is an assurance of losing money. You know, they're playing, you know, quote unquote,

29:51playing it safe on the off chance of the big one. All that time, though, 4% a year, their purchasing power is being eroded by inflation. You know, they are worried about trying to pick, you know, they're paying attention to trying to pick the next stock and all the while avoiding going back to school and getting that master's degree or that trade certification, which would bump their income by 20%. And, you know, that income is the engine of their wealth. So, we're always, we're led astray

30:28by trying to avoid big sort of sexy headline risk and ignoring simpler, surer paths to wealth creation. Yeah. Does that then go on to explain, over the last four or five years, people's tendency to want to go into cryptocurrency. That's always seems to be the topic of young people, especially of I can put all of my money into whatever coin it might be. And I'm going to get rich with this. I've heard it in all of the papers. I've heard all my friends talking about it. It's the thing everyone's talking

31:01about. Therefore, it's got that salience that you're mentioning. Yeah. So, I mean, cryptocurrency, less so now, even though it is back in the news somewhat, but, you know, a few years ago in particular, I mean, the salience of crypto was through the roof, right? There were all these stories about people getting rich. And crypto has a powerful one, two, maybe even one, two, three, which is, you know, first of all, there's the chance of becoming enormously rich, which is

31:33appealing enough all on its own. Secondarily, there's also this sort of gnostic, like there's this language, there's this in-group status, right? There's this knowledge that you have that others don't, like you see something that other people don't. I think especially in the early days of crypto, my personal take on crypto is that it has, or blockchain technology,

32:03more broadly, is that it has incredible potential to revolutionize many broken systems, and that it has largely failed to do so because people have been so focused on getting rich quick that sort of the actual, you know, the actual use cases of blockchain have remained somewhat fallow because people have been so focused on the moneymaking part of it. I hope that changes. So you've got, you know, the possibility of getting rich secret knowledge and a tight-knit group, a tight-knit

32:36community. I mean, I'm envious of how tight-knit some of these crypto groups are and sort of the in-group dynamics of them. So anytime you can get rich, know something about, feel like you know something about the world that other, you know, Luddites are missing, and you've got a great group of of buds. That's a powerful one, two, three. Yeah. And then let's talk four. That's emotion. Mm-hmm. Yeah. Emotion is just the tendency for our heart to lead our head. You know, we know that,

33:11you know, going back to the brain, I think most people conceptualize of the brain as sort of running the show. And I mean, I guess in many important ways it does. But our emotional, our emotions tend to inform our cognition more than our cognition informs our emotions. I think that a lot of people think that, you know, sort of deliberative thinking processes are what give rise to emotions, and there's some truth to that. But a lot of times, our cognition just serves as a PR department for what,

33:45you know, for what we feel very strongly. Yeah. And so, I think a lot of times people let the emotional, the emotion lead the whole thing and ignore and ignore the more fundamental, longer, slow thinking type of deliberation that's required. Yeah. And that's where if people have read Daniel Kahneman, you've got system one, system two thinking, or sometimes called the elephant and the rider. And that idea of us being almost that dual

34:16personality of having this rational side, but also having this very emotionally driven, powerful, emotionally driven side. It's been around for years, hasn't it? I mean, I know I read Plato talked about it. Adam Smith wrote about the impartial spectator and the powerful emotions. So, we've known for a long time that emotion is a huge part of a decision making. Yet, I think when it comes to us individually, again, we go, yeah, we get that theoretically, but I like to make my decisions

34:48deliberatively. And they don't acknowledge or, I guess, have that humbleness of going, well, actually, I probably don't. I probably react as emotionally as the next person as well. Yeah, I think that's exactly right. I've lost a lot of weight in the last year and a half. And one of the ways that I've done that is by better understanding sort of the emotional valence that food has. I travel a lot. And when I'm walking through an airport and I choose to eat a donut

35:24rather than an apple, that is never and has never been because I thought the donut was healthier, right? Like I had perfect knowledge about which one of those food items was more advantageous for my health and, you know, my goals. But when you've been away from your family for a week and you're tired and the presentation didn't go the way you want, like just the donut sounds better. And that is true

35:55of our financial lives as well. And we see this all over the place. You know, nurses, one of my favorite examples, nurses in the US smoke cigarettes at nearly double the clip of the general population. And there's not a nurse on earth who would tell you that that's a good choice, but they have hard jobs and they work, they work long hours and they're underpaid and they're underappreciated. And so, yeah, they're, they're stressed out. And so the emotion, uh, overcomes

36:28the, the cognition. And so understanding that and sort of protecting against it becomes, becomes important. Yeah. So those are the four things you identified in the book, ego, conservatism, attention and emotion, you know, and within those, you can put all of the behavioral biases or the 200 you mentioned in there, but it's a really nice way of remembering that. But as I go through it, I think what's interesting is you also point out that there could be a difference between genders when it comes considering investing as well. Um, and you point out some studies which will show that

37:03would you mind talking through that? Cause I think that's a really interesting aspect because in the UK, especially we have statistics that show, uh, females are much less likely to actually enter into investing than males. So in my new book, the soul of wealth, there is a chapter called listen to women and it shares all of the research around this very thing. Uh, women. So like just the headline first, women are, are better investors than men, uh, at every juncture. Um, when we look at retail

37:42investors, so like mom and pop everyday investors, women outperform men handily, uh, in professional contexts as mutual fund managers, as, as hedge fund managers, even little investing clubs, you think about like retirees of groups of men or women who get together to, to share ideas and do a little investment club, women outperform men everywhere. And yet when you ask mixed groups, so groups of 50% men, 50% women, who do you think is better, you know, better at investing? Is it men

38:18or women? 92% of people. So, you know, men and women, 92% of people say men are better investors. So I'm passionate. I'm, I'm glad you asked. And I'm, and I'm passionate about sharing this message because the industry is really underserved by the, the, the dearth of women in, in places of leadership. Yeah. I'm interested in that. Why, why do women perform better than men when it comes to

38:50making investment decisions? Yeah. So Paul, you know, uh, that the answer to any question, uh, to a psychologist is, is always biopsychosocial, right? So there's, there's, there's biological reasons, there's psychological reasons, and there's reasons of, of socialization. So from sort of an organic, from a biological perspective, women have on average about one 10th the level of testosterone as men. And so if you just look at different chemical markers, uh, in, in women's biology

39:23versus men's biology, uh, testosterone leads you to do things like take bigger risks, take bigger gambles. And what you even see in the animal kingdom is that, you know, uh, these sorts of, uh, of hormones will lead, lead animals to take more and more and more and more risks until they kind of mess with the wrong bear, or we like, you know, they keep on taking on a bigger and bigger battle until they, they take on too much. And indeed men do the same thing. So men on average take more risk

39:54than women, which in and of itself is not a bad thing and could even lead men to outperform, but they do it stupidly. Sometimes they, they, they pick that bigger and bigger and bigger fight. They take that bigger and bigger, bigger risk. So part of it is just simply a, a, a simple matter of wiring. Uh, if you think about how women are socialized though, and again, I don't want to, I want to speak, uh, I'm not saying these things are right. I'm speaking in gender stereotypes and socialization, not the way that things should be. But if you think about what society has historically

40:30valued in men, it's confidence, assertiveness, certainty, action, pounding the table, as we've discussed, none of those things serve you well in investing. If you, if you think about what, you know, how women are socialized and, and the things that the characteristics that society has historically valued in women, it's, you know, more relationally oriented, more thoughtful, more demure, more deliberative, quieter, uh, these things that turns out serve you very well as an

41:05investor. What's, what's interesting. There is, that is of course changing as, you know, society changes and, and gender roles become more egalitarian. If you look at the confidence gap, there is a massive confidence gap among older generations with, with women saying, uh, they are much less confident about their finances than men, young women. There is a, a really small confidence gap in terms of, of, you know, money behaviors between men and women. So what will be

41:39interesting to see, Paul, of course, we want women to feel confident. We want that confidence gap to, to shrink, but will there become a point where society becomes so equal that women are just as stupid as men one day. We can, we can, we can, we can, we can only hope for, for a day, but in the meantime, women are, women are much better than men at investing. Brilliant. Yeah. Um, I'm going to move on to, I guess, financial advice, because we've talked about

42:09how psychological the whole decision-making process is when investing. And I've done a lot of research with individuals where I interview people who are scared of investing. They say, you know, I'm not confident enough. Um, I don't know enough. It's a complicated business. And I simply don't have the time or the energy to deal with trying to find things out because I'm a very busy person. Often they have families and they've got lots of other priorities, even though money, they do certainly don't deny that it's very important to them. And then you've got financial

42:41advisors. So if someone feels underconfident, you would think a financial advisor would be the best solution because they are an independent third party that is unemotionally connected to the money and therefore they would make the best decisions for you. Is that true? It is true. It is true on average. So let me, uh, let's, let's talk about, um, meta knowledge, right? So meta knowledge is in part knowing what you don't know. Um, I, I'm very bad at

43:15car stuff. Like I don't, I don't, I can not do much with my car except put gas in it. And so that's okay because I know I suck at car stuff. And so when it's time for me to get my car worked on, I don't try and do it myself. I, I go get help. So I think, uh, but I still need to know how to pick a good mechanic there. I need to know enough about what a good mechanic looks like that I can, that I can pick a good mechanic. And I think that's, uh, analogize as well for, for financial advice. The first step

43:50is kind of knowing what you don't know. And for the average person, what has made you successful in life and at work is, is unlikely to make you successful in markets. I mean, it's just not like what, what got you here won't get you there. And so one of the first things that we need to know is just that proper level of humility about what we do and don't know about our finances. Secondarily though, we need to be able to pick a good advisor. And I will say that I think most are really good.

44:23And the research says the research says people who work with financial advisors are more ready for an emergency. They're happier. They have better marriages on average. They have lower levels of divorce. They make more money. I mean, it's just, there's a, a lot of really good, uh, outcomes literature from working with an advisor, both in terms of dollars and cents, just how, how your money grows. But also because money touches every part of our lives, um, you really, you really get all

44:58boats being lifted. When you can sort your financial life out, it really tends to, to lead to improvements and other ostensibly non-financial parts of your life as well. A few tips for picking an advisor, and I'd actually love yours as well. Cause mine may be a little bit country specific. You know, you want someone who, uh, you feel understood by you want someone you click with the best predictor of whether or not someone follows their financial advisors advice is whether or not they like them.

45:34So, you know, you should ask for a 10 to 15 minutes sort of trial balloon, just like, Hey, can we meet for 10 minutes and just feel each other out a little bit so that we can see if we think we would work well together. And I think that's a, that's a legitimate request. Absolutely. And here as well, I mean, obviously that's nationwide or worldwide, isn't it? That rapport. And I would almost go that you need to be able to feel that you can absolutely be honest with them

46:05yourself, that you're not putting up a front. You're not trying to say you've done better than you have done or trying to impress them. You need to be able to completely honest as well as saying, I don't understand what you're saying because a lot of the time financial advisors or any experts in an area where you don't specialize. So car mechanic would be one. Sometimes they can't help, but go into their language and vernacular. That is what they use between themselves, but it leaks into conversation. And to be able to say, look, I'm really sorry. I don't understand

46:38what you're saying. Could you explain that again, please? It's really important. And I, again, I know through interviews, people say they felt intimidated by their advisor and therefore that's not a good rapport and not a good relationship. And so they're not going to get the best out of them in that way. What you just said was brilliant because when we look at the two things that prevent people from seeking advice, I call it the two J's. It's judgment and jargon. It's the fear that the financial advisor will look down their nose at the decisions you've made historically and be

47:12judgmental of your past choices or the jargon, using the big words and being confusing. So you want an advisor who doesn't judge and doesn't use jargon. And that can actually put people off even before they get into the meeting room. I've talked to people about why they have not invested or why they have not gone into financial advice at all. And one chap said to me, and I've always remembered it because he just, I guess, summarized it so well. He said, why would I want to walk across a car park full of Porsches and Jaguars to sit in front of someone who's going to judge me for all of the bad

47:47mistakes I've made with my money over the years? And that fear just meant that he didn't ever go towards financial advice. Now, I think the idea that you're saying, have that 15 minutes of which many financial advisors offer online these days as well. So it's very easy for you to do and talk to them and see if you can get that rapport and understand, well, try and pick out if they're trying to sell you their service or be a partner in your life, because that's kind of what you're after, that partner who can help you through your finances works for it without judgment, isn't it?

48:19Yeah, no judgment, no jargon, rapport. And then the final one I'd say that is not, you know, sort of country specific is you want to understand how they get paid. Of course, financial advisors get paid. Like that's, you know, I'll meet people and they'll go, oh, well, I have someone helping me, but I'm not paying them anything. And like, you definitely are. You know, they are definitely getting paid. They're not doing the Porsches and the Jaguars did not come from the goodness of their hearts. You know, they are definitely getting paid. That's fair, you get paid. So, but understanding

48:55how they get paid. And I think you want someone who's not cagey about that, and who's happy to have that conversation with you. Yeah. In the UK, it's slightly different because in 2012, we had the UK retail distribution review, which was when the financial conduct authority basically looked at the financial advice market and tried to make it more transparent, more trustworthy, I suppose. And one of the big things they did was basically to stop financial advisors being able to get

49:29commission from where they placed their client's money. Instead now, clients themselves need to pay their advisors out of their own wallet. The problem with that, and I'm going to be quite bold with it, I think it was the single biggest psychological misunderstanding of human behavior in finances that I've ever seen, really. Because they did it because it's natural human behavior for an advisor or any human when they have a choice of where to put their client's money. And they can get more

50:01money themselves from one over the other. It's just naturally you're going to put more money into that one because you benefit from it. Of course you are. And that was the problem. And I think if the financial conduct authority approached it behaviorally, they should have asked, how do we motivate advisors to place their client's money in the best place for them, as in for their client, not necessarily for themselves. But instead what they did was just ban all commission and made the end

50:32consumer pay. Now the problem with that is now people have to pay hundreds and sometimes thousands of pounds for financial advice. People just don't do it, especially if you don't have a lot of money yourselves. And this is where we call it the advice gap in the UK, that we've now got people who are sort of on a normal wage, completely avoiding financial advice because they think it's too expensive and it's just going to come off of their profit at the end of the day. And so therefore they think it's only for the rich people because they can afford that sort of thing. And

51:04that's a shame. And I've worked very hard with lots of organizations in the UK who are trying their best to show people who have, you know, maybe psychologically think that they're not the type of person who can invest and not have the money to pay for advice, that they would benefit from all other things that it can offer. So yeah, slightly different to you in the US, I imagine. No, that is slightly different, but there's always the behavioral complexities and a lot of times you solve one problem and create another when it comes to that pain of paying.

51:38Yeah, yeah. Now, interesting, I think one thing you didn't mention there is when talking to an advisor is, I guess, to ask them if they understand the behavioral biases or understand the heuristics which could not only affect the client, but affect them themselves. Because advisors are human as well, aren't they? And they're open to succumbing to behavioral bias as much as anyone else. Is that something you've ever been asked yourself? Yeah, so your listeners will be more psychologically

52:12astute, of course, than the average person walking around. But if you really, when you look at the data, something like behavioral coaching, so the advisor's tendency to help you stay out of your own way and make, you know, prevent you from making bad decisions, that is eight times as additive to your bottom line as something like asset allocation, actually picking, you know, the percentages of

52:43allocations to stocks and bonds and commodities and whatever else. The average person has that flipped in their mind. They think that the biggest deliverable they are getting from their advisor is the math, you know, is the is going back in like the asset allocation, the stocks they choose, the bonds they choose. This is the biggest value at that is deeply commoditized. It's easy to look up yourself. And it is just not hard. There's value to it,

53:14but it's not enormous value. The behavioral coaching piece is eight times more additive. And yet, when we look at interview, excuse me, survey data of what clients say they value from their advisor, behavioral coaching tends to be at the bottom and things like asset allocation tend to be at the top. So there's this weird, there's this weird inversion of where clients think the value is coming from and where the value is actually coming from. Yeah. So if you're listening to this, and you're trying to select an advisor, by all means, say,

53:50Hey, look, I understand that you being a behavioral coach that you keeping me out of my own way and keeping me from making poor decisions is job one. What practically will you do to ensure that job gets done? You could scarcely ask a better question than that. And most people don't do it. Fantastic. I think it's a great tip for people to go and ask. And if you're a financial advisor listening, then be ready for those questions to customers. An interesting study came out by Oxford Risk in the UK with the wonderful

54:23Greg Davis, not that one off the telly, which looked at decision noise in financial advice. And what it sort of found was, going back to the point that financial advisors are human, and therefore they succumb to behavioral bias as well. They found that sometimes when there's noise in their decision making process, and it can be such little things as what the weather was like today, can change the way they give advice on that day, or how if they didn't sleep well the night

54:54before, or if their car broke down on the way in, or if their baby was crying all night, there's lots of things that can actually affect the advisor giving the advice, as well as the customer on the other end. And with that in mind, what do you think the future of artificial intelligence is in giving financial advice to people? Sure. Yeah, that, you know, a lot of what I wrote about in the behavioral investor is sort of the environmental predictors of financial decision making. And you definitely see

55:27things like hunger and sleep and weather are impactful on people's financial decisions. Again, we think we're in control and tend to underplay environmental factors. When I look at the future of financial advice, if you look at what AI does well, AI does well things that are technical, analytical, mathematical and rote. So those pieces of the financial planning process are largely today and

56:00will only be more so automated in the future. And I welcome our robot overlords in that, you know, I welcome, I think there's a welcome development. What it will leave room for though, what it will free up is more, more bandwidth for advisors and clients on the behavioral side of the ledger. Once, you know, rebalancing and trading and asset allocation are all owned by AI, and they will be shortly if they're

56:31not already. That's fine. They're great at that. That leaves more time for conversations around behavior and around money and meaning. You know, my new book, The Soul of Wealth is all about money and meaning because as Viktor Frankl said, I'm going to mess it up. But you know, ever more people today have the means to live, but no meaning to live for. When the US, you know, 250 years ago, when we parted with with your great nation, we were 85% of the world was living in poverty, everyone effectively,

57:09everyone everywhere was poor. Today, that number is under 9%. And yet over that 250 years, we've become more sad, more disengaged, more depressed, more suicidal, more lonely. And so over the past 200 or so years, we've had this explosion of material wealth. But we haven't always been good at connecting that back to positive life outcomes. And so what I hope is, look, give all the math to the robots. And then

57:43like leave, it will change the role of a financial advisor. And it will make him or her more sort of a life, a life coach, I kind of hate that word, but sort of a life quarterback life coach that is more deeply involved in connecting financial wealth to holistic wealth. That's my hope. And that's what I see. It sounds like you're saying that almost in the future, financial advisors will be more psychologists. I think so. I think it's going to become increasingly important. So listen to Paul's

58:19podcast. Yeah, absolutely. Just to finish off, I think a criticism of, I guess, psychological research in general, but behavioural economics in particular, is that it does and has listed many biases, which mean people could make bad investment decisions. But it's offered very few actual solutions to do something differently. And people can go, ah, brilliant. Let's overcome those so I can be better off in this case. So I'm very keen on to draw on your expertise and your experience as a psychologist

58:51who works in the financial world about how a psychologist would actually go about investing money. So what is the very first thing a psychologist would do with their money? Yeah. So I'm going to, I'm going to take the, I will answer your question, but I, the first part is interesting to me because I think the, the growth of behavioral economics, behavioral finance has largely mirrored the trajectory of psychology, you know, psychology as a formal disciplines, not that

59:22old. And when we look at how it started, it was largely with the, you know, call it the bad stuff, the negative stuff. We studied what makes you broken, what makes you sad, what makes you depressed and anxious and schizophrenic. And it's only in the nineties and it's only in the 1990s that we see the rise of positive psychology, which is okay. And in addition to saying what makes people depressed, we should also study proactively what makes someone a good parent or a good spouse or a

59:54good leader. And I think you're starting to see that. I mean, even if you look at the trajectory of my own books, I think it roughly maps on, onto that. Um, what I do, there's, there's three things that I try and get right. So I'll try and be as practical as I can. Uh, first is, and I call it the three E's, right? If you're looking to invest your money, you need three things. You need education first, right? So you need to read a couple of books, like read a couple of books on investing,

1:00:25read a couple of books on personal finance, really seek to understand at a basic level, the fundaments of what you're trying to do, if only so you can hire that good mechanic, right? So the first sort of layer is, is education. The next is, uh, is the environment. You brought this up earlier with the weather and the food and the sleep and all that. The places we put ourselves in are a better predictor of how we're going to act than our actual goals and desires.

1:01:00If you want to be a thoughtful long-term investor, you need to surround yourself with hardworking, optimistic people. And more than anything, you need to turn off the news. You need to stop, you know, you need to stop watching 24 seven cable financial news. All of this is just designed to incite. You need to be cognizant of your media diet and your relational diet, the kind of influences you're putting in your sphere. Yeah. And then the last one I would say is encouragement. You need that

1:01:33coach. You need that person in your corner, whether it's your, you know, whether you're going to do it yourself and it's your spouse, who's a little more, uh, you know, measured than you are in these things or whether it's, you know, a formal financial advisor. So those are sort of the three ingredients to me. You need the right education, the right environment, and the right encouragement. The particulars of what stock or bond to buy are going to, you know, your mileage will vary greatly by your risk profile and your place in life. But if you get those three things

1:02:05right, I think you'll have the answer to those questions. Excellent. I'm going to challenge one of those if that's all right. Only because in a lot of the research I do, again, one-on-one interviews of people, environment, absolutely, 100%. If you can change your environment yourself to make it easier to do what you want to do and harder to do what you don't want to do, then that's a fantastic way of trying to, again, be humble enough to get over that, that fallacy that willpower is going to get

1:02:35you through and instead go, actually, I probably am quite mediocre at controlling my own life. Let's change the environment to make it easier to do what I want. Encouragement, absolutely as well, whether it's from the people around you, family, friends, talking about that and encouraging you to do something more with your money and be more open, I think, with money as well. In the UK, especially, we're very private about our money. But education, I have found, can put people off and actually lead to status quo and stagnation? Because people go, well, it's complicated.

1:03:08I don't have the time to educate myself. I don't know where to look to educate myself. So it all becomes something bigger in their mind. And they go, well, I have to get over that first. I won't act until I do that, because it's a very rational thing to think that don't put my money into something that I don't know about. But actually, I think when you break it down, there are so many things in the world that we do and we use that we are not educated about. You yourself use your car. You use your car because you understand the usefulness for you using your car. You don't know what a carburetor is.

1:03:41You don't know how the air and the gas mixes together to form the wheels going around. It doesn't bother you. You just put the magic juice in the back, off it goes, and you get a purpose out of that. I don't know how computers work. I don't know how microchips work. I don't know how many, many things in the world work. And I don't want to educate myself on them. Although they were bound to be YouTube videos, I can quite easily find out if I wanted to. I don't want to. I just want to use them to be better off. Now, I've got the feeling that actually people would be better with that

1:04:12attitude to go, actually, if I used investing, I would be literally better off. Let's get going. Let's just start small. I don't have to go all in on something. I don't have to suddenly just move all of my savings out of the safe place into the risky place. I can just use a little bit and maybe trickle a bit in each month from my paycheck as well. See how it goes. Because then what happens often is that people's rationalization kicks in of going, well, why am I doing this? I do want to be

1:04:44better off and I do want to do the best financially by my family. And maybe I should read a couple of articles as well because I'm already doing it. And I will now want to read something so that I'm better doing it. Whereas I found that if people say I will read first and then do second, they are less likely to actually do at all. And that's what in this country, especially leads to people stagnating and not investing, sticking their money in savings. And as you said earlier, just getting absolutely crucified by inflation and losing money, guaranteed losing money. So I always sort of say

1:05:18there's nothing wrong with education. It's fantastic. But don't see it as a necessary precursor to changing your behavior to be better off. So I think we're probably in violent agreement on this one because I think you need enough education because many of those things you just mentioned, like even the realization, I mean, inflation is the silent killer. Like even the realization that, hey, sticking my money in cash isn't as safe as I

1:05:54thought it was because it's being, uh, it's being eroded by inflation. It takes a level of know-how to understand that, you know, the things that it takes to pick advisor A over advisor B to pick the right mechanic, you know, to, to advocate for yourself on a, on a low fee fund versus a high fee fund. I think the, the bar for education is quite low. I think you just need enough, uh, that you can, it's, it's again, back to that meta knowledge point. You need enough to choose the good mechanic,

1:06:25but I have certainly seen what you have said there where the desire for education becomes such that, you know, I think there is a, there is a curve such that at some point people know just enough to be dangerous or just enough to think that they can do it themselves or just enough that they're immobilized by the whole process. So I guess I'm going to put an asterisk by education and say, you know, educate yourself, uh, enough to take action and enough, you know, with enough meta

1:06:57knowledge to make good, basic fundamental, uh, choices about who can help you. Yeah. Yeah. And I'll put an addendum to my comment as well. And I think educate yourself enough to know why doing it is useful for you. That that's the thing you really want to educate yourself. Don't try and understand what yields are or what stochastic modeling is. You know, that's going too far. That isn't what I think we both mean by education. And for me, it's getting that motivation to do something and have that confidence, not overconfidence, but confidence

1:07:30enough to take that first step in because you can always learn as you go. Whereas I, I get the, I get the feedback a lot of the time that people think they need to know all about it before they can start. And that is a killer. That's great. Now I, I can see where that would immobilize people. And back to the judgment and jargon, you, you feel like you have to steal yourself against the, the big words and the, and the, the judgy glances of your advisor. No, you just need enough. You need enough knowledge to know that you need to get started.

1:08:01Yeah. Um, we're going to summarize up because, um, this isn't the Huberman podcast. We're not going to go on for four and a half hours, although I very much could, Daniel, talk to you about this for a long time. Um, so just to summarize, we've got, you know, the, the, the four areas that we've talked about here, which influence people's investing decisions, ego, that, you know, that idea that people can be overconfident, especially men and males, as we talked about, and that conservatism as well, that, you know, and, and the attention and then emotion. If you just had to give one piece

1:08:34of advice for the person listening, that one thing, maybe they're sat at home, they're thinking, well, I've got a certain amount of money. I don't know what to do with it. I've heard this podcast and it sounds like from the, as you were talking, go through that you should be investing. What is their next step? What should they be doing? I'm going to give you two with apologies. Oh, it's a bonus. Great. Yeah. Automate and get help. I think those are the two most powerful things that anyone can do. Uh, the beautiful thing about automation. So just the, the simple act of every month or every two

1:09:08weeks, when you get paid, automating a portion of that going to savings and automating the means by which that gets invested in a, in a broadly diversified fund, it, it takes all these human tendencies we have towards laziness and status quo proneness, and it makes them work for our benefit. You know, the, the same way that I have, you know, movie HBO subscriptions or something that I have forgotten about that I continue to pay month after month. You can be doing something automatically that,

1:09:43that benefits, that benefits you. So automating so that you make, you make one good decision that serves you well for a lifetime and then go get help. If, if you only do those two things, you'll be ahead of 99% of people. If you can just automate, you know, automate one or two good behaviors and go get someone to help you out. I think you're on the way. Fantastic. That's, that's absolutely super. Um, Daniel, if people are interested, where can they find out more about you, your work and your

1:10:14books? Yeah. So, uh, my books are on Amazon. My, my newest book is called the soul of wealth. I'd love for everyone to go check it out. Uh, I have a podcast as well called standard deviations. And this year we're doing a deep dive on money and meaning and all about the purpose of life. So come and get it. Um, I'll put a link in the show notes that people can link directly to that. I would heartily recommend people listen to your podcast. I think it's, um, so eloquently and simply put some of the very difficult things that are surrounding the world of investing. It just makes it so much more

1:10:47accessible. Um, and I can't recommend your book behavioral investor enough. It is a fantastic book soul of wealth. I love it as well, by the way, but behavioral investor to me was the first book I read of yours. Um, and you've done it in such a way that is so enjoyable to read about investing. And that's not something I can say about a lot of investing books with the peppered all the way through a psychological experiments, which you would just want to nudge your partner and go, Hey, did you know this happened? And do you know that? And you recognize it in yourself and you start

1:11:20to sort of reflect and think, how can I change my own behavior? So I think it's one of the absolute best books on, uh, investing in general and obviously behavioral investing in particular. So yeah, I thoroughly recommend that I'll put the links to the books in the show notes as well. So if you're listening, please do go and grab that one and then look at Daniel's other books as well. And obviously the podcast, Daniel, thank you so much. I really enjoyed that. I, my pleasure, Paul. Thank you. It was an honor to join you. Thank you so much. Thank you.