Carl Richards: 'Let's Focus on Being a Little Less Wrong Tomorrow'

Episode Summary

Executive Summary: In this episode of The Long View, Carl Richards discusses the 'behavior gap'—the difference between investment returns and investor returns due to well-intentioned but suboptimal behaviors. He argues the financial industry focuses too much on investments rather than connecting money to personal goals. Richards emphasizes that security is not a number but a feeling, and recommends asking better questions, using mindfulness around time and money, and embracing discomfort for growth. He advocates for a more human-centric approach to financial planning, prioritizing values over spreadsheets.

Main Topics: The Behavior Gap (Priority: 5/5): Carl Richards defines the behavior gap as the difference between the return of the average investment and the return of the average investor, caused by well-intentioned behaviors that lead to suboptimal results. He has expanded this to include any gap where behaviors produce neutral or negative outcomes. Connecting Money to Goals (Priority: 5/5): Richards stresses that the biggest disconnect in financial planning is the lack of connection between how capital is used and what is truly important to the individual. He shares a story of a retired investment banker with $20 million who felt no advisor linked his capital use to his personal goals. Mindfulness and Time/Money Tracking (Priority: 4/5): The discussion covers the importance of being mindful about how time and money are spent. Richards suggests using tools like RescueTime to compare claimed values with actual behavior, and adopting a 'no shame, no blame' attitude to explore spending patterns and feelings. Redefining Security (Priority: 4/5): Richards argues that financial security is not a measurable number but a feeling, and that more money does not necessarily solve financial insecurity. He references Pema Chödrön's work to illustrate that certainty is a myth and we must learn to surf uncertainty. Asking Better Questions (Priority: 4/5): Richards emphasizes the importance of asking good questions in financial planning, such as Dan Sullivan's 'If we were meeting three years from now, what would have to happen?' He notes that advisors should focus on understanding problems rather than providing solutions. Doing Hard Things (Priority: 3/5): Richards advocates for doing hard things as a path to growth, using his own practice of cold water bathing as an example. He suggests that small daily disciplines can set a productive tone for the day. Humanizing Behavioral Finance (Priority: 3/5): Richards agrees with Meir Statman that behavioral finance should not be framed negatively. He notes that even experts like Kahneman still make behavioral mistakes, and the goal is not to cure but to recognize and put guardrails around human tendencies.

Key Arguments: The financial services industry is too investment-centric and fails to connect capital use to personal goals, which leads to poor investor behavior. Security is a feeling, not a number; more money does not automatically create financial security. Advisors should move from being solution providers to problem understanders, focusing on diagnosis before prescription. Mindfulness around spending and time can be practiced with non-judgmental observation ('isn't that interesting?') to align actions with values. Doing hard things, like cold water bathing or focused work, is essential for growth and sets a productive tone for the day. Behavioral finance should be framed as understanding normal human behavior rather than criticizing cognitive errors.

Data Points: Age of Carl Richards: 48 - Richards mentions he just turned 48 and still feels uncertain about life goals. Email checking frequency: 17 minutes - Richards states that only 10% of people go more than 17 minutes without checking email on their computers, based on RescueTime data. Net worth of anecdotal client: $20 million - Richards shares a story of a retired investment banker with $20 million who felt his advisors did not connect his capital use to his goals.

Pivotal Quotes: "We've tried a thousand times to tie up all the loose ends, and yet the ground is still shifting beneath our feet." — Carl Richards: Richards quotes Pema Chödrön to illustrate the futility of seeking complete financial certainty and the need to embrace uncertainty. "The checkbook and the calendar never lie." — Carl Richards: Richards uses this anonymous saying to emphasize that revealed preferences through spending and time use show true priorities, regardless of stated values. "If we can design the best portfolio ever created, and one behavioral mistake, a decade, really, and we might as well have, you know, sort of proverbial hidden it under the mattress." — Carl Richards: Richards highlights the critical importance of behavior over portfolio construction, showing that even perfect portfolios fail with behavioral errors.

Implications: For financial advisors, this means shifting focus from investment selection to understanding clients' goals and values. For individuals, it means practicing mindfulness around time and money, embracing discomfort for growth, and recognizing that security is a feeling, not a number. The pandemic has provided an opportunity to reassess what truly matters.