Daniel Crosby on the Three E’s of Behavioral Change

Journal of Financial Planning: August 2021


WHO: Daniel Crosby

WHAT: Chief Behavioral Officer of Orion Advisor Tech

WHAT'S ON HIS MIND: “The power of environment is on my mind. The more I’ve studied behavioral science, the less I believe in willpower.”

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What are some of the areas where you are seeing advisers currently using behavioral finance principles and concepts successfully?

There are really three legs to the behavior change stool. It’s such a hard thing to do, so I have my three E’s. The first is education. It’s not sufficient to educate our clients just about the basics of how markets work and what they ought to expect. I don’t think that the average client understands we’re going to have a correction every single year, and over the next five years, [their] returns are probably going to be fairly paltry. This mismatch between what they’re expecting, and how they’ve been educated and what life’s actually going to look like, can lead to some bad behavior. We need to educate our clients, first and foremost, about how markets work, the drivers of returns, the drivers of behavior, and [clients’] centrality in this whole thing. All the research shows that most clients hand off their financial lives to an adviser, and then they don’t have much to do with their success or failure; they don’t understand the primacy of their own behavior.

The second E is environment. One of the things that we’re trying to do at Orion is talk about anxiety-adjusted returns because I think a lot of times, we maximize spreadsheet optimal returns and not real-world optimal returns. The best return a client can get, the best portfolio that they can have, is not the spreadsheet optimal portfolio; it’s the portfolio that they can live with. [Clients who pulled out of their portfolios in March 2020] were optimized for mathematics and not behavior. We’re up, like, 96 percent over the intervening 15 months, and they’ve missed that. The people you surround yourself with are part of your environment, the news you listen to, the things you read—all of these things have a material impact on how you make decisions and how you think about markets.

Then the last piece is encouragement. Even if clients know the right thing to do, even if they’re well allocated, there are going to be points in time where the emotion of a moment overwhelms that education and that environment. At those times, it’s critical for advisers to step in and help talk people off the ledge as it were. We know now that about 40 percent of Americans get some form of financial advice, but that only roughly half of them follow that advice. That’s consistent with medical research that shows that one of the leading causes of death in America is medical noncompliance: people with treatable medical diseases who’ve been to a doctor die or become ill because they don’t take their medicine as prescribed. That’s sort of what’s happening in the advisory space, too: people are getting good advice, but they’re not following it, so the encouragement piece is around advisers getting educated around how to give advice that sticks.

And what are some strategies around that to make that sticky behavior?

Robert Cialdini is a psychologist who has come up with six principles of influence, and it’s the best research I know about how to give advice that sticks.

The first [principle] is reciprocity. We have mental debits and credits, so if we are doing good for our clients, if we’re adding value, if we’re being kind, they’re going to be more likely to follow our advice.

The second one is scarcity. This is just the idea that we’re motivated to act for something if it’s hard to get. It’s why diamonds are worth more than cubic zirconia.

The third one is authority; they need to have trust in the blocking and tackling of knowing what you’re doing.

The fourth is commitment, which is all about making small requests that build upon each other. A lot of times we shoot for the moon with our clients when the more powerful thing to do is to help them make incremental behavior change that builds on itself.

The next one is liking, which is when we take the advice of people we like, and we tend to like people who are like us. This is building on common areas of emphasis with our clients.

The last one is social proof, which is peer pressure, effectively. The way that I talk about it in an advisory context is, we need to show our work. If we’re telling our clients, “Hey, in March of 2020, don’t sell out,” we need to give them a quote by Warren Buffett. We need to give them the research by Meir Statman that says, “In 19 different countries, the more active you are in your portfolio, the worse you do.” We need to show them that this isn’t just our idea; that other smart people are with us, so it’s really just peer pressure meets evidence-based investing.

What are some ways that technology can support planners in developing these kinds of behaviors and making them stick?

The most powerful form of education is what’s called “just-in-time education.” This is why I have the unpopular opinion that high school financial literacy courses are not that useful. I mean, what do you remember about what you learned in high school? Just-in-time education is, say, a technological pop-up right when you’re about to make a trade in your portfolio, and it says, “Hey there, Daniel, if you do this, you’re going to generate a tax event.” That’s a much more powerful form of education than me learning about capital gains tax in abstraction five years ago, and then hoping I extrapolate that to the moment.

[Also], the way in which things are presented matters. Research shows that the order in which food is presented in a buffet matters; if you put dessert last, people eat less dessert. Similarly, when we’re designing our technology, everything from the language we use to the colors we use, to the sequencing and the structuring of the build out, has a material impact on behavior. We need to be thoughtful about how we architect that technological experience and that choice architecture. That’s a big, big opportunity.

Clients have so much access to tech-based financial decision-making tools. They can control more of their money, they can invest on their own, they can buy literally anything they want online. What does that mean for an adviser who might not be there to talk through a client’s decision before they do something they regret with their money?

The tough thing with this is that a lot of what appears good or wholesome in a financial context—things like access, transparency, liquidity—all of these things are ostensible goods that actually are behavioral bads. The ideal portfolio for most people would have a 10-year lockup, a 20-year lockup. There would be no transparency, there would be no liquidity.

That’s an uphill battle for advisers who have to combat these things. Saying you shouldn’t be able to access your money, you shouldn’t be able to see your account every day, none of those things are very popular sentiments, even though they’re true. We have to go back to the three E’s because all of these things aren’t going anywhere. We have to educate our clients about the danger of checking their portfolio every day, the danger of overtrading, the danger of speculating, and try to build a relationship that’s deep enough and meaningful enough that we can overcome those other voices. 

General Financial Planning Principles