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.
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