July 2015 10 Questions

​Daniel Crosby on Investor Behavior, Why Planners Need Planners, and the Upside of Crazy

Journal of Financial Planning: July 2015


Who: Daniel Crosby, Ph.D.
What: Behavioral finance expert,
author, speaker, psychologist
What’s on his mind: We have to shift the way we think about the value we bring and think of it as more of a behavioral coach than a money manager or even a planner, in some respects. That takes a pretty monumental change of thought and a change in the way we position our business.

Human behavior is a better predictor of whether clients will reach their financial goals than anything else, Daniel Crosby, Ph.D., is fond of saying.

Crosby, a psychologist, author, speaker, and behavioral finance expert, trains financial professionals on how biases influence investor behavior. He says too many planners focus on things that are out of their control instead of on the things they can control, like learning how to manage client behavior through a number of tactics.

And when it comes to behavioral finance, many planners don’t know the basics or have a negative connotation of it, but it shouldn’t be that way, according to Crosby. Planners should understand what clients are emotionally invested in; finding out what clients are passionate about is the key to helping them reach their goals.

Crosby spoke in April to a packed house at FPA Retreat 2015 about how to create influence; in other words, how to get clients to do what you want. Following that presentation, Crosby sat down with the Journal to talk more about affecting client behavior, how the notion of scarcity can help planners market their business, and why you need to “own your crazy.”

What’s next for Crosby? Look for him to launch a new venture called Nocturne Capital, where he’ll be managing money in a way that he says is respectful of behavioral best practices and consistent with client’s social values.

1. You’ve done a lot of research on the psychology of investing. If you had to sum it all up into one or two things that are most important for planners to know, what would those be?

My one big lesson is, that in every market, you control what matters most. 

Most people assume that economic conditions, timing, investment acumen, etc., are the biggest drivers of returns, but study after study shows that we are our own best friends and worst enemies in the market. That message is simultaneously empowering and burdensome, because it means we are in control to a larger degree than we’d previously expected, but that we’ve got work to do in terms of educating ourselves and managing our emotions. Most people aren’t too keen on accepting responsibility for anything really, so what ought to be an empowering message is one that is too often ignored.

2. Do you feel most planners are well educated on behavioral finance?

I’m surprised at how uneducated we are as a profession, frankly. I will frequently go to conferences—I speak at about a conference a week—where people have never even heard the term behavioral finance. 

When I speak, a lot of advisers and planners grasp these things intuitively. They’ve lived through loss aversion and things like that, but don’t have any kind of real framework. So I really feel like we have a long way to go. 

Most often, when people have heard of behavioral finance, it’s been in the strictly negative sense, where their familiarity is with bias, weakness, and deficit. So they know people are flawed; they know that we have cognitive bias and errors in our thinking, but that’s where it stops. I find there’s a complete lack of knowledge in many cases and a very limited knowledge in others. 

Planners and advisers have to realize that the greatest value that they add is behavioral. And this has been documented by everyone from Aon Hewitt to Morningstar to Vanguard. 

Vanguard even released a paper a while back, talking about the value added by the various activities an adviser goes through with a client. They had asset allocation at 35 basis points in added value, and hand-holding and behavioral management at 150 basis points in added value.
We have to shift the way we think about the value we bring and think of it as more of a behavioral coach than a money manager or even a planner, in some respects. That takes a pretty monumental change of thought and a change in the way we position our business.
Once you realize that the primary value you have is behavioral, the mandate then becomes to educate yourself on how better to influence people’s behavior.

3. Let’s talk about that. At FPA Retreat 2015, you said the biggest problem clients have is managing their own bad decisions around money. How can planners better influence people’s behavior? How can they get clients to follow their sound advice?

At Retreat, we talked about six ways to influence, and those six were listed in order of their power, and they’re listed in order of their efficacy. And the first one is reciprocity. So, really, the most important thing you could be doing is to always be building up that money in the bank with your clients, so when it comes time for you to ask them to do something uncomfortable, they feel like they owe you one. 

This can take the shape of everything from just being pleasant and conversational when you meet with them, remembering big events in their lives, helping them with their kid’s financial future, doing them a favor, taking them to a ball game, or buying them lunch. It can take a million different forms. But we really need to be thinking about, “How are my relationships?” because the depth of that relationship has everything to do with whether or not [your recommendations] get implemented.

4. Another one of the six weapons of influence you shared at Retreat was scarcity. What more can you tell us about scarcity as it relates to how a financial planner should be marketing his or her business?

There are two ways we run afoul of this tendency to leverage scarcity. One is that planners tend to be really nice people, and so they just want to help everyone; they just often have a “come one, come all” attitude about planning and advice-giving. 

Ultimately, while that’s a very humane and egalitarian bent, I don’t think it’s great for business development, because it has been my observation—and the research would back this up—that if you try and be everything to everyone, you end up sort of being nothing, and no one thinks of you for anything. 

One of the reasons we get it wrong is because we’re trying to be nice and we then end up taking on someone who’s a bad fit, and then you’re not doing anyone a favor. You’re not really being nice when you do that—to yourself or to [the client]. 

The second thing is people, especially people who are new in the business, say, in order for me to succeed, I need to offer every service under the sun. I need to do everything, regardless of my particular skillset or interest. I need to provide every service in the world and just have my website be the largest it can be to catch as much business as possible. 

And once again, you end up doing subpar work because you’re doing stuff you don’t like or you’re not good at. And no one thinks of you for any sort of piece of work in particular.

5. I read recently that you’d like to be at the forefront of combining socially responsible investing with behavioral finance; tell us more about how you are going to do that.

I have this really varied and—at least to me—interesting background. By education, I’m a clinical psychologist and I went into that because I wanted to help people, and I wanted people to live meaningful lives and find what mattered to them and live that more fully. 

But when I got in the trenches, I found out that the stress and messiness of that job were more than I’d bargained for. I’ve really enjoyed working in behavioral finance where I still get to think deeply about why people do the things they do without going home stressed out and worrying whether my clients are going to live through the weekend. 

I’ve got this heart, on the one hand, that led me to my profession in the first place. I was a missionary for a couple years in the Philippines, and that’s just a big part of who I am. So I’m trying to bring together the heart and the discipline to create a quantitative value investing approach that is consistent with people’s individual values. 

Much of my desire to do that is heart-driven, like I talked about a minute ago, but another part of it is behavioral. My research has found that people are more likely to stay the course when they’re invested in something that’s personally meaningful to them.

When I can look at this and say, yeah, things are scary, but when things are scary, and I’m someone who cares about quality or women’s rights, I’m far less likely to jump out of the women’s leadership fund than I am perhaps my QQQ or my SPY or whatever. When people make it more personal, they’re going to make better decisions. So that’s another big part of my interest there.

6. Do you think financial planners need their own financial planners?

Yes, and I will liken it to myself. I have a financial adviser, and I’m security-licensed, and I talk about good financial behavior every day, all day. I research it. I know all the right things. And yet, I still pay for an adviser. And some people are kind of like, “Why couldn’t you do it yourself? Couldn’t you save yourself some money?”

And, for me, that knowledge is insufficient. One of the stats I like to talk about a lot is that there’s a good body of research that shows that, under duress, we tend to lose 13 percent of our IQ. So, even if we know all of the right lessons, even if we know all the right things to do, those things are out the door when you need them the very most. 

I liken it to America’s national obesity crisis where we’re not a fat country because we don’t know that sugar makes you fat. We’re a fat country because the nutritional knowledge you possess is hard to implement in an emotional moment. And so that’s why I keep my adviser around to keep me applying that knowledge, even when I don’t want to.

7. I’ve heard you say that just like investment policy statements, we need to have behavior policy statements. What could this look like?

I have 10 commandments, if you will. InvestmentNews published these; they sort of cover the waterfront for me, if people would do these things: 

First, in all markets, up down and sideways, you control what matters most. Second, thou shall understand risk. Third, start now, start again tomorrow, and start again the next day. Fourth, trouble is opportunity. Fifth, do less than you think you should. Sixth, forecasting is for weathermen. Seventh, if you’re excited about an investment, it’s probably a bad idea. Eighth, this time isn’t different, and neither are you. Ninth, you should be the benchmark. Tenth, excess is never permanent.

There’s robust literature about people doing things in the heat of the moment that they would never do in their right mind. So when people are cool and calm and collected, I think it is best to commit them to a pattern of behavior. Then, when they are freaking out, you can bring out that document and say, “Look, at a cooler, calmer time, this is what made sense to us, and I think it still makes sense today.”

Little things make a big difference. Having that one-page document, having that signature, it seems like a small thing, but it’s not.

8. In your book, You’re Not That Great, you say we’re all kind of crazy, and that’s not a bad thing. So what’s the upside to crazy?

There’s a lot of upside to crazy and I’m living proof of that. What I have tried to do in my own work is get away from pathologizing the idiosyncrasies of humanity, because when behavioral finance first came on the scene, it was all about, look how screwed up people are; look how flawed people are; look at all these ways they make silly decisions. 

It has always been my thought that that’s not the case. I think our little quirks make us charming. There are even ways that we can take those things and turn them on their heads for our own benefit. 

So one of the things that I love to talk about is—back to the sort of meaning-based investing—they did a study where they were having a terrible time getting low-income savers to set aside money. They tried everything and they couldn’t get them to set aside money. I mean, it’s hard; they didn’t have much. 

So what they did is they replaced the routing number on their bank accounts with a picture of their children, and when they did this, savings behavior increased 250 percent. So, in some sense, that is crazy. I mean, that’s not rational, in the strictest sense. You should save the amount of money that’s optimal for you, if we were rational decision-making engines. But, since we’re not, use that emotionality to your own good. Just own your crazy, and use it in a way that’s going to be helpful to you. 

9. You also say that a lot of what we believe is wrong; it’s a confirmation bias. What can you share about confirmation bias to help planners better understand how to deal with it?

One of the best ways to elicit any behavior is to model it. People who model humility, open-mindedness, and a willingness to admit their mistakes and talk about the times that they were wrong, they get that from the people they serve. Foundationally, you need to be willing to be all of those things yourself and be just as humble about your own confirmation bias—just as humble and aware of your own tendencies to be dogmatic—as you are in your tendency to see it in other people. 

The other way I think you can elicit that is to get people to talk. If someone’s so certain about something, move the conversation in a humorous and low-impact direction to remind them of times that they were sure about something and that ended up not being so. And then I think you could open up a dialogue, a non-defensive, sort of easy, jokey conversation about, hey, life doesn’t always come out the way we think it will, despite our best hopes and plans, and so because of that, we want to protect you in any eventuality, any contingency, so let’s do X, Y, and Z.

10. You seem to like to crunch numbers and try to make some sense out of market valuations. Where are we today (May 15), and do you have any short- and long-term predictions for equity returns?

I’ll say a couple of things about that, that are seemingly incompatible with each other, but they’re not. 

Some people question the fact that I even do this because they’re like, how dare you have a thought on equity valuations when you’re more of a behavioral guy?

But anyway, one of my 10 commandments is that excess is never permanent. Right now, we are at a point of pretty significant excess in return to the averages of the last—any old time frame really—but especially the last 50 years. It’s high. It’s really high. And so, in the long run, excess is never permanent. 

I also have a lot of humility about making short-term predictions because I’m aware of, and I broadcast the research on, how impossible it is to time the market. But I think you can say, medium-term—four to seven years—the average annualized returns are going to be flat to negative.

History would bear out that we are in for a time of really tough returns because excess is never permanent, and we pay for today’s positivity with tomorrow’s pessimism. I don’t know when that’s going to happen, and no one else does either. But I think I could say pretty conservatively that we’re going to have a tough time in the medium-term because of how high equity values are now, relative to history.

Carly Schulaka is editor of the Journal. Contact her HERE.


Learn More

6 Weapons of Influence

During his talk at FPA Retreat 2015, Daniel Crosby shared six weapons of influence, taken from two books—Influence: The Psychology of Persuasion by Robert B. Cialdini, and Influencer: The New Science of Leading Change by Joseph Grenny and co-authors.

The six weapons are: reciprocity, scarcity, authority, commitment, social proof, and likability. Read more about these in the Journal’s blog posts from Retreat at PracticeManagementBlog.OneFPA.org/tag/FPA-Retreat-2015.



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