Daniel Crosby: 'If You're Excited About It, It's Probably a Bad Idea'

Episode Summary

Executive Summary: Dr. Daniel Crosby discusses behavioral finance, linking meme stock mania to loneliness and the pandemic. He argues technology is a double-edged sword, enabling new investors but encouraging overtrading. He emphasizes measuring risk capacity, tolerance, and composure, and advocates for behavioral optimal portfolios over mathematical ones. He critiques home buying as a poor investment due to emotional biases, and explores the concept of 'enough' using the PERMA model for happiness. The conversation also covers distrust in experts and the need for just-in-time education.

Main Topics: Loneliness and Meme Stock Mania (Priority: 5/5): Crosby connects the rise of meme stocks to pre-existing loneliness, exacerbated by the pandemic. He cites research showing loneliness is as damaging as smoking 15 cigarettes a day, and that the Reddit crowd offered a sense of community and purpose. Technology and Investing Behavior (Priority: 5/5): Technology lowers barriers for new investors (women, people of color, young) but also facilitates overtrading and action bias. Crosby notes that frequent checking leads to worse outcomes across 19 countries. Risk Assessment: Capacity, Tolerance, Composure (Priority: 4/5): Crosby advocates a three-pillar approach: risk capacity (affordability), risk tolerance (long-term willingness), and risk composure (emotional stability). He argues composure is key for behavioral coaching and early warning signals. Home Buying Biases (Priority: 4/5): Despite being a poor investment historically (2-3% annual return vs. stocks' 9-10%), people view home buying as their best financial decision due to emotional attachment. Crosby urges realistic expectations and understanding that homes are not great investments. Defining 'Enough' and Happiness (Priority: 3/5): Crosby discusses the hedonic treadmill and the difficulty of defining enough. He references Seligman's PERMA model (Positive experiences, Engagement, Relationships, Meaning, Achievement) as a framework for happiness beyond money. Distrust in Experts (Priority: 3/5): Crosby attributes distrust to forecasting difficulties during the pandemic, white lies by authorities, politicization of truth, and the appeal of conspiracy theories as 'gnosis'. He calls for better messaging and education in statistics and probability. Future of Behavioral Finance Research (Priority: 2/5): Crosby wants more research on the role of emotion and intuition in investing, predictive behavior using technology, and self-awareness. He criticizes the proliferation of over 200 biases and urges focus on application.

Key Arguments: Loneliness is a major public health issue (twice as damaging as obesity, equivalent to 15 cigarettes/day) and contributed to meme stock mania by providing a sense of community. Technology in investing is a double-edged sword: it democratizes access but also encourages overtrading and action bias, leading to worse outcomes. Risk assessment should include three components: capacity (affordability), tolerance (long-term willingness), and composure (emotional stability). Composure is often overlooked but critical for behavioral coaching. Homes are not good investments (2-3% annual return vs. stocks' 9-10%) but are perceived as best due to emotional biases. They are better viewed as forced savings. Defining 'enough' is difficult due to the hedonic treadmill. The PERMA model (Positive experiences, Engagement, Relationships, Meaning, Achievement) offers a better path to happiness than wealth accumulation. Distrust in experts stems from forecasting failures, white lies, politicization, and the appeal of conspiracy theories. Solutions include better messaging and education in statistics. Behavioral finance should move beyond cataloging biases to practical applications like just-in-time education and predictive technology.

Data Points: Loneliness prevalence: 50% - Americans surveyed before COVID said they were very lonely. Health impact of loneliness: Twice as damaging as obesity; equivalent to smoking 15 cigarettes a day - Research from BYU on social isolation. Fund fee decline: 10% year over year for the last decade - Crosby notes falling fund fees. Advisor vs. client perception: 84% of advisors say behavior management is most powerful; only 6% of clients agree - Natixis research on value added by advisors. Best fund performance 2000-2010: 18.5% per year - But average investor in that fund lost money due to poor timing. Home vs. stock returns: Homes: 2-3% per year; Stocks: 9-10% per year - Robert Shiller's historical data on home prices. Number of behavioral biases: Over 200 - Crosby criticizes the proliferation of biases.

Pivotal Quotes: "Excess is never permanent. And the second is if you're excited about it, it's probably a bad idea." — Dr. Daniel Crosby: Discussing why big life changes during stressful times are risky. "There's a big difference between what we'll call the mathematical optimal and the behavioral optimal." — Dr. Daniel Crosby: Explaining why paying off a mortgage early can be good for peace of mind even if not mathematically optimal. "The best financial decision they had ever made was the purchase of a home... How is it that an investment that is in reality so bad is the one that everyone lists as their top?" — Dr. Daniel Crosby: Highlighting the emotional bias in home buying decisions.

Implications: Listeners should recognize that behavioral biases are powerful and often counterintuitive. The industry needs to design technology that promotes good behavior (e.g., just-in-time education) and tell a new story about what adds value. Individuals should focus on defining 'enough' and use frameworks like PERMA for happiness, while being skeptical of emotional investment decisions.