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

Episode Summary

Executive Summary: Psychologist and behavioral-finance expert Daniel Crosby argues that investing outcomes depend not only on returns and portfolio design, but also on investors’ emotions, habits, and ability to stick with a plan. He links meme-stock enthusiasm to loneliness, warns that always-available trading technology can encourage harmful overtrading, and urges firms to build behaviorally informed tools and advice. The discussion also covers risk assessment, trust in experts, major life decisions, homeownership, values-based investing, and defining financial “enough.”

Main Topics: Loneliness and meme-stock participation: Crosby connects meme-stock investing to social isolation: online communities offered belonging and a shared promise of getting rich while challenging institutions perceived to have favored Wall Street over ordinary investors. Trading technology, overactivity, and investor-focused design: Mobile access broadens participation, especially among groups historically underserved by investing, but can make consequential choices feel casual and encourage action bias. Crosby favors behavior-conscious platforms, just-in-time education, and testing interventions rather than assuming that alerts help. Advice, incentives, and investor behavior: Crosby says the financial industry should better explain that helping clients behave well may add more value than stock picking or fund outperformance. He acknowledges incentives can reward harmful engagement and says investors need enough financial “meta-knowledge” to recognize when to seek trustworthy help. Risk assessment and behavioral fit: A useful assessment distinguishes risk capacity (what an investor can afford to risk), risk tolerance (long-term willingness to take risk), and risk composure (how emotions affect risk perceptions). Capacity and tolerance inform portfolio construction; composure can flag who may need extra coaching during volatility. Decision-making under stress, memory, and the behavioral optimum: Emotional periods are poor moments for major financial decisions, and clients remember whether advisers supported them during crises. Crosby distinguishes mathematical optimization from behavioral fit: a choice such as paying off a low-rate mortgage may be mathematically suboptimal yet provide peace of mind that helps someone stay invested elsewhere. Enoughness, happiness, and personal finance choices: Crosby argues that evolutionary drives and the hedonic treadmill make people prone to wanting more. He cautions against treating homes as exceptional investments or reliable sources of lasting happiness, while suggesting that values-based customization may help investors feel connected to and remain committed to their portfolios. Trust in experts and priorities for behavioral research: Crosby attributes mistrust partly to forecasting difficulty, misleading early pandemic messaging, politicized truth, and the appeal of feeling uniquely informed. He advocates clearer, human-centered communication and greater education in statistics, probability, and the scientific method; he also wants more research on emotion, prediction, and self-awareness.

Key Arguments: Meme-stock communities gained appeal partly because they offered connection and a morally compelling shared mission during a period of isolation, not merely the prospect of financial gain. Technology can democratize access to investing, but easy account access and frequent checking can increase trading; research cited by Crosby across 19 countries associates more frequent checking and trading with worse investor outcomes. Financial firms should use technology to support good decisions, including timely prompts about consequences such as taxes, but should test these interventions: Betterment found that some well-intended volatility alerts prompted trading among clients who had not been worried. The industry should communicate that behavioral coaching is valuable. Crosby cites a survey in which most advisers said behavior management was their greatest contribution, while very few clients recognized it as a major source of value. Investment plans should account for both financial constraints and human behavior. The best theoretical portfolio is not useful if an investor cannot tolerate it; peace of mind can help people maintain an otherwise riskier investment plan. Risk capacity, tolerance, and composure are distinct. Composure is especially useful as an early-warning signal for coaching needs, rather than necessarily as a reason to reduce every anxious client's allocation. Stress and emotional extremes can distort long-term judgment. Crosby recommends remembering that conditions change and cautions against making large life or financial decisions simply because current circumstances feel intense. Homes can be deeply meaningful and useful as a form of forced saving, but Crosby argues that their emotional importance can cause people to overestimate their investment returns and lasting happiness benefits. Personalized or values-based portfolios may improve behavior by making investments feel concrete and personally relevant; Crosby supports this behavioral rationale without claiming that such portfolios necessarily change the world. Public trust requires more than correct analysis: experts need clear, human-centered communication, and citizens benefit from understanding probability and the scientific method rather than responding tribally.

Data Points: Americans reporting that they were very lonely: 50% - A pre-COVID survey cited by Crosby. Health impact attributed to social isolation: Twice as damaging as obesity; equivalent to smoking 15 cigarettes a day - Crosby cites research from BYU to emphasize that loneliness has serious physical consequences. Annual decline in fund fees: About 10% year over year for the last decade - Crosby describes falling costs as one reason access to investing has improved. Advisers who said behavior management was their most powerful contribution: 84% - Crosby cites Natixis research comparing advisers’ views of their value with clients’ views. Investors who said behavior management added much value: 6% - In the same Natixis comparison, clients more often valued stock picking. Annual return of a top-performing equity fund in 2000–2010: 18.5% - Crosby says the fund delivered this return while its average investor lost money because of the timing of purchases and sales. Long-run annual change in residential home prices: About 2%–3% - Crosby cites Robert Shiller’s historical analysis, characterizing home-price growth as roughly keeping pace with inflation. Behavioral biases documented: More than 200 - Crosby says the field may be overemphasizing lists of narrowly defined biases instead of practical applications.

Pivotal Quotes: "Excess is never permanent." — Daniel Crosby: One of his investing principles, offered as a reminder not to project extreme market or life conditions indefinitely. "If you're excited about it, it's probably a bad idea." — Daniel Crosby: A second principle used to caution against making major decisions in emotionally heightened periods. "All models are wrong, but some are useful." — Daniel Crosby, quoting George Box: Crosby uses the quote to argue that risk questionnaires need not be perfect to help inform allocation and advice.

Implications: Investors and advisers should prioritize plans people can stick with, use technology to support—not stimulate—trading, and tailor coaching to emotional risk. Firms and public institutions also need transparent, behavior-aware communication that builds trust and helps people recognize their limits.