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DoubleLine Podcasts

S8 E22 Exuberant Talk About Irrational Behavior with Daniel Crosby

DoubleLine’s Jeffrey Sherman and Sam Lau welcome Daniel Crosby, a psychologist and behavioral finance expert, to “The Sherman Show” to discuss what roles education and experience play in investment decisions and how automation can counter an investor’s worst impulses. Mr. Crosby is Chief Behavioral Officer at Brinker Capital and is the author of several books, including “The Behavioral Investor” and “You’re Not That Great,” and coauthor of the New York Times bestseller “Personal Benchmark: Integrating Behavioral Finance and Investment Management.” The podcast was recorded July 20, 2020.

Mr. Crosby wastes no time in establishing a theme for the episode with his response to the most recent University of Michigan Consumer Sentiment Index survey, which was below expectations. “Asking people how they feel is effectively useless,” he says in regards to the creation of the Irrationality Index. “People are really poor predictors and poor descriptors of their own behavior.” Mr. Crosby cites a recent study that says your coworkers are much better than you are as descriptors of your personality and predictors of your behavior. With his index, instead of asking consumers and CEOs how they felt about things, Mr. Crosby combines data points on how people actually behaved to put a number on how irrationally exuberant or irrationally fearful people were at any given moment.

While Messrs. Sherman, Lau and Crosby agree there is no substitute for experience, they all share examples of the risk of drawing the wrong lessons from a particular event, with people tending to overrate their abilities. Mr. Lau points to the traders who are quick to share how they timed the markets to perfection but never disclose their missteps. Mr. Crosby references a study in which the correlation was basically zero in how investors recalled their behavior and how they actually behaved.

Mr. Sherman asks why this disconnect seems to be a fundamental part of being human. Mr. Crosby says that there are two factors influencing people’s behavior. One is “rosy retrospection,” where people look back on events that weren’t that great, like a hectic family vacation at Disneyland, and only remember the moments that were positive. At the same time, human brains have an outsized stickiness for emotion-inducing negative events and are prone to hold on to the most-negative things that happen in order to steer people away from enduring them again.

In order to counter investors’ negative impulses, Mr. Crosby uses the three T’s: training, tools and technology. These factors are combined with the goal of providing “just in time” advice to prevent bad decisions in a time of panic. Personal advisers and automation of investment decisions are vastly superior to trying to educate oneself into a “willpower warrior” to take on the markets, he says.

Guest Speaker Bio

The views and opinions expressed herein are as of the date recorded and should not be construed as an offer to buy or sell any securities. Such views/opinions may differ from those of DoubleLine Capital or other of its affiliates and are subject to change without notice. DoubleLine has no obligation to provide any updates or changes. The following audio presentations represent DoubleLine’s intellectual property. No portion of these presentations may be published, reproduced, transmitted or rebroadcast in any media in any form without the express written permission of DoubleLine. DoubleLine has no obligation to provide any updates or changes. To receive permission from DoubleLine please contact info@doubleline.com.

Neither DoubleLine nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed.

DoubleLine is not providing any financial, economic, legal, accounting or tax advice in these podcasts. The receipt of these podcasts by any listener is not to be taken as constituting the giving of investment advice by any DoubleLine entity or individual to that listener, nor to constitute such person a client of any DoubleLine entity. The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

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