{"id":218,"date":"2024-08-07T19:10:04","date_gmt":"2024-08-07T19:10:04","guid":{"rendered":"https:\/\/europaskolos.lt\/index.php\/2024\/08\/07\/atm-humans-are-not-built-for-investing\/"},"modified":"2024-08-07T19:10:04","modified_gmt":"2024-08-07T19:10:04","slug":"atm-humans-are-not-built-for-investing","status":"publish","type":"post","link":"https:\/\/europaskolos.lt\/index.php\/2024\/08\/07\/atm-humans-are-not-built-for-investing\/","title":{"rendered":"ATM: Humans Are Not Built For Investing"},"content":{"rendered":"<p> <br \/>\n<\/p>\n<div>\n<p><iframe style=\"width: 100%; max-width: 660px; overflow: hidden; border-radius: 10px;\" data-lazy-type=\"iframe\" data-src=\"https:\/\/embed.podcasts.apple.com\/us\/podcast\/at-the-money-humans-are-not-built-for-investing\/id730188152?i=1000664601212\" height=\"175\" frameborder=\"0\" sandbox=\"allow-forms allow-popups allow-same-origin allow-scripts allow-storage-access-by-user-activation allow-top-navigation-by-user-activation\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"lazy lazy-hidden mce_SELRES_start\">\ufeff<\/span><\/iframe><\/p>\n<p><noscript><iframe style=\"width: 100%; max-width: 660px; overflow: hidden; border-radius: 10px;\" src=\"https:\/\/embed.podcasts.apple.com\/us\/podcast\/at-the-money-humans-are-not-built-for-investing\/id730188152?i=1000664601212\" height=\"175\" frameborder=\"0\" sandbox=\"allow-forms allow-popups allow-same-origin allow-scripts allow-storage-access-by-user-activation allow-top-navigation-by-user-activation\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><\/iframe><\/noscript><\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<p><strong><a href=\"https:\/\/podcasts.apple.com\/us\/podcast\/at-the-money-humans-are-not-built-for-investing\/id730188152?i=1000664601212\" target=\"_blank\" rel=\"noopener\">At The Money: Humans Are Not Built For Investing<\/a><\/strong> (August 7, 2024)<\/p>\n<p class=\"EpisodePage_showDescription__gGkPP\">Of all the many things Humans do brilliantly well, investing isn\u2019t one of them. As a group, we are easily excited, focused on the wrong things, and filled with unjustified overconfidence.<\/p>\n<p>Full transcript below.<\/p>\n<p style=\"text-align: center;\">~~~<\/p>\n<p>About this week\u2019s guest:<\/p>\n<p>Dr. Daniel Crosby sits is Chief Behavioral Officer at Orion Advisor Solutions, where he helps financial advisors apply behavioral science in their practice. He is the author of \u201c<a href=\"https:\/\/www.amazon.com\/exec\/obidos\/ASIN\/0857197835\/thebigpictu09-20\" target=\"_blank\" rel=\"noopener\"><em>The Laws of Wealth: Psychology and the Secret to Investing Success<\/em><\/a>.\u201d<\/p>\n<p>For more info, see:<\/p>\n<blockquote>\n<p><a href=\"https:\/\/orion.com\/thought-leader\/daniel-crosby\" target=\"_blank\" rel=\"noopener\">Professional Bio<\/a><\/p>\n<p><a href=\"https:\/\/www.linkedin.com\/in\/danielcrosby\/\" target=\"_blank\" rel=\"noopener\">LinkedIn<\/a><\/p>\n<p><a href=\"https:\/\/x.com\/danielcrosby?lang=en&amp;lang=en\" target=\"_blank\" rel=\"noopener\">Twitter<\/a><\/p>\n<\/blockquote>\n<p style=\"text-align: center;\">~~~<\/p>\n<p>\u00a0<\/p>\n<p>Find all of the previous <em>At the Money<\/em> <a href=\"https:\/\/ritholtz.com\/category\/podcast\/atm\/\" target=\"_blank\" rel=\"noopener\">episodes here<\/a>, and in the MiB feed on <a href=\"https:\/\/podcasts.apple.com\/us\/podcast\/masters-in-business\/id730188152\" target=\"_blank\" rel=\"noopener\">Apple Podcasts<\/a>, <a href=\"https:\/\/www.youtube.com\/playlist?list=PLe4PRejZgr0O7QcmQBElzBauNakxrSZre\" target=\"_blank\" rel=\"noopener\">YouTube<\/a>, <a href=\"https:\/\/open.spotify.com\/show\/5LGxKlY6fzXS3tGsjB23Cb\" target=\"_blank\" rel=\"noopener\">Spotify<\/a>, and <a href=\"https:\/\/www.bloomberg.com\/podcasts\/series\/master-in-business\" target=\"_blank\" rel=\"noopener\">Bloomberg<\/a>.<\/p>\n<p>\u00a0<\/p>\n<p><iframe class=\"lazy lazy-hidden\" style=\"border-radius: 12px;\" data-lazy-type=\"iframe\" data-src=\"https:\/\/open.spotify.com\/embed\/episode\/3op6GECCp4QvM96lKTRVTo?utm_source=generator\" width=\"100%\" height=\"352\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p><noscript><iframe loading=\"lazy\" style=\"border-radius: 12px;\" src=\"https:\/\/open.spotify.com\/embed\/episode\/3op6GECCp4QvM96lKTRVTo?utm_source=generator\" width=\"100%\" height=\"352\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/noscript><\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<p><strong>ATM Daniel Crosby Humans<\/strong><\/p>\n<p>\u00a0<\/p>\n<p>Humans are a species of incredible innovation in art science literature. Yet of all the things we\u2019re brilliant at investing isn\u2019t one of them.\u00a0 Why? Well, we\u2019re easily excited. We get focused on the wrong things, obsessed. with what just happened rather than what might happen next. We\u2019re bad at understanding math and we despise delaying gratification.<\/p>\n<p>Top all of this off with unjustified overconfidence, and you have a recipe for investing under performance. As it turns out, when it comes to investing, we\u2019re just not built for it.\u00a0 I\u2019m Barry Ritholtz. And on today\u2019s edition of at the money, we\u2019re going to discuss how to become more systematic and rules based in managing our money to help us unpack all of this and what it means for your portfolio.<\/p>\n<p>Let\u2019s bring in Dr. Daniel Crosby. He\u2019s the chief behavioral officer at Orion, where he develops tools, training, and technology, to help financial advisors apply behavioral science in their practice. He is also the author of the book, The Laws of Wealth, Psychology and the Secret to Investing Success. So, so Daniel, let\u2019s start with just a basic idea.<\/p>\n<p>\u00a0<\/p>\n<p>Why is a rules based approach to managing money so important? Yeah, very good to be with you. Well, one reason is because rules work, you know, when we look at a meta analysis, so this is a study of all the studies on how rules fair, simple rules, fair against a PhD level discretionary decision making, right?<\/p>\n<p>Rules match or beat expert level decision making 94 percent of the time, which is pretty staggering. And we see this across contexts. We see this everywhere from medical diagnosis to stock picking to financial planning, uh, to prison recidivism studies. That one\u2019s one of my favorite. They, they went from sort of having these soul searching interviews with prisoners to looking at two variables, you know, what are they in for?<\/p>\n<p>And how did they act while they were in and they increased the efficacy of their judgments by almost 400%. So they work is one reason and they\u2019re cheap is another reason. Uh, you know, it\u2019s, it\u2019s a lot cheaper to set up a checklist or a simple set of rules than to pay a bunch of CFAs,\u00a0 uh, to try and get it right.<\/p>\n<p>So they work and they work on a budget. So I love the idea of the checklist because it plays very much into an issue. That\u2019s a pet peeve of mine, which is investors tend to obsess about all these things. They cannot control things that are out of their jurisdiction while ignoring the things that they can control.<\/p>\n<p>Talk a little bit about. How creating a checklist allows you to focus on things that are within your control. Yeah. Barry, when I, when I wrote the book, you know, the very, the very first chapter, and I was intentional about the ordering. The very first chapter in the book is you control what matters most, because I found what I think you find when you tell someone you work in markets that you work in finance, they ask you about a hundred things.<\/p>\n<p>All 100 are outside of their power. What\u2019s the Fed going to do? What\u2019s the virus going to do? What\u2019s the war going to do? Who\u2019s going to win the election? Stuff that is a almost inevitably unknowable and be outside of their power. So what I think we have to encourage people to do is to take the power back and to frame it that way.<\/p>\n<p>Because things like fees, things like diversification, choosing to work with a professional, all of these things are within our control and are far more predictive of you crossing your financial finish line than any of that other, other stuff.\u00a0 There\u2019s a great story in Michael Lewis\u2019s book, um, about Sam FTX about Jane Street trading.<\/p>\n<p>And even though they got the 2016 election results correct,\u00a0 they still were unable to anticipate what the market reaction would be. So not only are these things out of your control and, and they are unknowable, but even when you know it, Hey, what\u2019s the reaction of tens of millions of traders going to be?<\/p>\n<p>We really have no idea. Yeah, no, it\u2019s true. Like no one thought Trump would win. And then most folks who thought that he would win, thought that it would tank the market, uh, both things were proven wrong, really, really amazing. So, so let\u2019s bring this back to the investing decision making process. You emphasize why the process of making good decisions is so much more important than trying to predict market movements, explain.<\/p>\n<p>Yeah, it\u2019s really about being the house and not the degenerate gambler, right? If you look at all the bright lights in Vegas, all that gets paid for by tilting probability in favor of the house. And if you look at a lot of casino games, the edge, the house has is not dramatic. I mean, in some cases it\u2019s infinitesimally small.<\/p>\n<p>\u00a0<\/p>\n<p>But tilting probability in your favor time and time and time again, showing up doing the things that are within your power time and time again, pays for some nice lights and some nice fountains as we see in Vegas. So that\u2019s, that\u2019s all we\u2019re trying to do here. Control the controllable tilt probability in our favor in a small way.<\/p>\n<p>You\u2019re not always going to get it right, but you\u2019re always going to be at the wheel. So I mentioned in the introduction that we\u2019re all filled with so much overconfidence. You have a chapter titled, you are not special. Tell us about why investors need to stay humble and why we\u2019re all subject to the same biases and errors as everybody else.<\/p>\n<p>Well, I love this one because I think it demonstrates how psychological biases can serve us, uh, they, they serve us well in some domains in life. If we look at overconfidence bias, it serves us really nicely. In some ways, people who exhibit it are happier. They\u2019re more successful. They\u2019re more likely to be successful entrepreneurs.<\/p>\n<p>God, they\u2019re, they\u2019re definitely more likely to run for office, right? There there\u2019s all of these things that, that overconfidence does. But when you apply it to markets, there\u2019s, there\u2019s three specific ways that we\u2019re overconfident. Uh, the first is we think we\u2019re better than average, right? Smarter, better, faster, stronger, better at picking stocks.<\/p>\n<p>And that\u2019s the one that gets the most publicity, but there\u2019s actually two others as well. One is we think we\u2019re luckier than average. So you ask people, you know, what\u2019s the likelihood of something happening to you, like getting divorced and like effectively no one says they\u2019ll get divorced, even though, you know, one in two people gets divorced.<\/p>\n<p>No one thinks they\u2019re going to get cancer or, you know, have diabetes or, you know, on and on and on. But if you ask people about their odds of finding love or winning the lottery, they, they dramatically overrate these probabilities. So we, we sort of tend to own the optimistic and delegate the dangerous.<\/p>\n<p>That\u2019s a second sort of facet of overconfidence. And then the third one is we think that we\u2019re more prescient about the future than we actually are. Like we think we\u2019re better at forecasting what\u2019s going to happen. So these three forms of overconfidence are a pretty toxic cocktail of bad decision making.<\/p>\n<p>So we really, you know, our mutual friend, Jim O\u2019Shaughnessy has this great line in his, his seminal work, what works on wall street that I\u2019ll butcher here, but it\u2019s effectively like, look, rule one, step one. Is understanding that you are prone to all of the same screw ups as the next person. And until you\u2019ve sort of deeply internalized that you, you shouldn\u2019t start.<\/p>\n<p>Yeah. Jason\u2019s why I guess Danny Kahneman, what he does to avoid. all of the behavioral biases and heuristics that him and Amos Tversky discovered. And his answer was nothing. We can\u2019t avoid it. They\u2019re, they\u2019re just totally unavoidable. Hey, if Danny Kahneman can\u2019t avoid them, you know, what hope did the rest of us have?<\/p>\n<p>So, There\u2019s another, uh, line I really appreciate and, and this perhaps is because I began on a trading desk and what led me to realize it was time to move on was how much fun I was having regardless of my P&amp; L. You write, if it\u2019s fun, you\u2019re probably not making money. I bet a lot of traders can confirm this.<\/p>\n<p>Tell us why fun and making money are not necessarily Consistent and what we need to do to be more methodical and more disciplined.\u00a0 Yeah. It\u2019s really like one of these harsh truths about, I refer to it in the, in the book as Wall Street, bizarro world, how the truths of every day are sort of one 80 to the truths of, of markets.<\/p>\n<p>\u00a0<\/p>\n<p>And one of the things that we find is some of the most exciting, most fun ways to, to try and make money in the markets are the most deleterious to our wealth. You know, you look at day trading, the most comprehensive study on day trading ever done. was out of Taiwan, and they found that one in 360 day traders show evidence of skill.<\/p>\n<p>So is day trading fun? Like, absolutely. It\u2019s a blast, right? Like making short term trades can be fun. It can be intoxicating. It can be exciting. But You know, the, the chances of you being good at it are vanishingly small. You look at other stuff like IPO investing, you know, everyone\u2019s got this story about if you would, you know, if you\u2019d put 10, 000 in Nvidia or Apple or whatever, you\u2019d be a gazillionaire now.<\/p>\n<p>Uh, but we know that on average, uh, the average IPO does 21 percent worse than the S and P 500 in the first three years. And so again, is, is IPO investing fun? Yeah, absolutely. But you are the gambler. You are the gambler and not the house. Uh, and you\u2019re unlikely to secure that Monet if you\u2019re, if you\u2019re engaging in these sorts of fun behaviors.<\/p>\n<p>Let\u2019s talk about forecasting is for weathermen. Why are we so bad at forecasting and what should we focus on? Well, it goes back to that. You know, it\u2019s one of those primary forms of overconfidence and the research on this is just wild. You know, Philip Tetlock did sort of the seminal research on political and financial forecasting and found that, you know, even the experts are terrible at this.<\/p>\n<p>And in fact, the more famous an expert, the worse they tended to be.\u00a0 Because the way you get famous as a market prognosticator is making sort of a once in a lifetime black swan prediction. And then you tend to continue to bang that drum because it worked the first time and you know, history on average is pretty average and then you\u2019re wrong.<\/p>\n<p>But the reason we\u2019re always going to look for this is the way that we\u2019re wired, right? Our brains are two to 3 percent of our body weight, but they\u2019re 20 to 25 percent of our caloric expenditures in a given day. And so when we look at people again, hooked up to an FMRI machine who are watching cable financial news, watching someone make predictions about what\u2019s going to happen, the part of their brain associated with critical thinking and decision making actually goes to sleep, which is candidly what we are looking for, right?<\/p>\n<p>We\u2019re looking for that peace of mind. We\u2019re looking to think less and go into energy saver mode. So as bad as we are at forecasting, there will always be a market for some sort of certainty. And I think the only thing that we can do is to work with a financial advisor who can give us some sort of certainty around our plan, our purpose, our immediate financial lives, instead of delegating that to some impersonal talking head.<\/p>\n<p>So I\u2019m glad you brought up the financial advisor. You discuss. how hard it is to do this alone and why you should seek professional advice and support to, if for no other reason than to help you manage your biases and your emotions, discuss your experience with people working with professionals. Yeah, this is, uh, this is one of probably the two most powerful things you can do to manage those behavioral biases that Danny Kahneman talked about, right?<\/p>\n<p>I mean, he, he talks, as you said, about the futility of it. I think the two best hopes we have against behavioral bias is automation and working with a professional.\u00a0 The data is very clear now that people who work at the professional tend to do better than those that don\u2019t. And when we look at a, uh, 2016 Merrill Lynch study.<\/p>\n<p>\u00a0<\/p>\n<p>The things that an advisor does for you are all additive. Like they sort of broke this down by the different things that an advisor does in his or her day. Everything from, you know, uh, security selection to asset allocation to tax alpha, it all helps. But the thing that helps the most Is again, this behavioral coaching, the emotion management, the guidance around decision making keeping you from investing in your son in law\u2019s dumb business, you know, just these, these pivotal points along the way.<\/p>\n<p>Uh, that\u2019s really where it adds about as four times as much value as the other stuff. And what\u2019s cool for me as the son of a financial advisor who works with financial advisors every day.\u00a0 Is people who work with an advisor have better marital communications. They have higher levels of aggregate happiness.<\/p>\n<p>They\u2019re more prepared for an emergency. Like they have all these non financial things in their life that get lifted because money touches everything we do. So if you can get that right, a lot of other boats in your life start to start to rise as well. So to wrap up, humans are great at a lot of things.<\/p>\n<p>But we also come prepackaged with a lot of evolutionary baggage. We\u2019re easily excitable. We make poor decisions. We think we\u2019re special. We\u2019re wildly, uh, over optimistic and we tend to overreact to every sign of trouble. Like it\u2019s the end of the world. We\u2019re much better off if we have a rules based systematic approach to managing risk and investing for the future rather than making these decisions on the fly.<\/p>\n<p>To help your portfolio, you really need to think about what is the best result for you over the long haul, not just making these decisions spur the moment. I\u2019m Barry Ritholtz. You\u2019re listening to Bloomberg\u2019s At The Money.<\/p>\n<p>\u00a0<\/p>\n<p style=\"text-align: center;\">~~~<\/p>\n<p>\u00a0<\/p>\n<p><iframe class=\"lazy lazy-hidden\" style=\"width: 100%; max-width: 660px; overflow: hidden; background: transparent;\" data-lazy-type=\"iframe\" data-src=\"https:\/\/embed.podcasts.apple.com\/us\/podcast\/masters-in-business\/id730188152\" height=\"450\" frameborder=\"0\" sandbox=\"allow-forms allow-popups allow-same-origin allow-scripts allow-storage-access-by-user-activation allow-top-navigation-by-user-activation\" data-mce-fragment=\"1\"><\/iframe><\/p>\n<p><noscript><iframe style=\"width: 100%; max-width: 660px; overflow: hidden; background: transparent;\" src=\"https:\/\/embed.podcasts.apple.com\/us\/podcast\/masters-in-business\/id730188152\" height=\"450\" frameborder=\"0\" sandbox=\"allow-forms allow-popups allow-same-origin allow-scripts allow-storage-access-by-user-activation allow-top-navigation-by-user-activation\" data-mce-fragment=\"1\"><\/iframe><\/noscript><\/p>\n<div class=\"printfriendly pf-button pf-button-content pf-alignleft\"><a href=\"#\" rel=\"nofollow\" onclick=\"window.print(); return false;\" title=\"Printer Friendly, PDF &amp; Email\"><img decoding=\"async\" class=\"lazy lazy-hidden pf-button-img\" data-lazy-type=\"image\" src=\"https:\/\/cdn.printfriendly.com\/buttons\/printfriendly-button.png\" alt=\"Print Friendly, PDF &amp; Email\" style=\"width: 112px;height: 24px;\"\/><img decoding=\"async\" class=\"pf-button-img\" src=\"https:\/\/cdn.printfriendly.com\/buttons\/printfriendly-button.png\" alt=\"Print Friendly, PDF &amp; Email\" style=\"width: 112px;height: 24px;\"\/><\/a><\/div>\n<\/div>\n<p><br \/>\n<br \/><a href=\"https:\/\/ritholtz.com\/2024\/08\/atm-humans-are-not-built-for-investing\/\">Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>\ufeff \ufeff \u00a0 \u00a0 At The Money: Humans Are Not Built For Investing (August 7, 2024) Of all the many things Humans do brilliantly well, investing isn\u2019t one of them. As a group, we are easily excited, focused on the wrong things, and filled with unjustified overconfidence. Full transcript below. ~~~ About this week\u2019s guest: [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":62,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[3],"tags":[],"class_list":["post-218","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-ekonomika-finansai-bankininkyste"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/posts\/218","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/comments?post=218"}],"version-history":[{"count":0,"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/posts\/218\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/media\/62"}],"wp:attachment":[{"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/media?parent=218"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/categories?post=218"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/europaskolos.lt\/index.php\/wp-json\/wp\/v2\/tags?post=218"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}