Q&A with a behavioral finance expert

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I had the privilege of meeting New York Times bestselling author Dr. Daniel Crosby at FinCon in 2014. During his keynote address at the conference, he spoke about the intersection of finance and behavioral psychology. As anyone in the financial industry knows, investors’ emotions and behaviors can make or break the achievement of their goals. In an effort to learn more about how this concept shapes the way advisers interact with their clients and market themselves, I conducted a Q&A with Dr. Crosby to coincide with the release of his second book, “The Laws of Wealth: Psychology and the secret to investing success,” which was released on June 27. Find Dr. Crosby on Twitter @danielcrosby and on LinkedIn.


dan crosby updatedCan you introduce yourself and explain your role in the financial services industry?

I have two primary roles: one as a consultant around financial behavior and the second as an asset manager. My consulting work is through Brinker Capital’s Center for Outcomes, a program designed to help advisers become better at doing what they do best – manage investor behavior. Studies from Vanguard, Morningstar, Aon Hewitt and others show that investors who work with advisers receive a 2 to 3 percent boost in annualized returns as a result of behavioral coaching. Of course, an adviser’s best advice is only as effective as it is influential to the client, so we help advisers become more persuasive.

On the asset management side, I incorporate the great body of research around decision-making into my stock selection at my firm, Nocturne Capital. I am of the opinion that asset management is grossly over-engineered and fails to implement much of the extant behavioral finance research. So, if there is an overarching goal, it is to help investors make and keep more money by adherence to sound psychological principles.

We’re all very excited about your new book, “The Laws of Wealth: Psychology and the secret to investing success.” What lessons and tips will RIAs who read the book take away from it?

Part One of the book is about managing yourself and Part Two is about managing your wealth. The first half speaks to my 10 commandments of investor behavior. Ten simple, but not easy, behaviors that will help you keep more of your money. Part Two is a bit wonkier and talks about the research on behavioral asset management. Basically, how you can increase returns by taking advantage of the fear and greed of others.

What sparked your interest in behavioral finance?

I was originally a finance major in college but took a two-year break (after my freshman year) to serve a mission for my church in Manila, Philippines. After two years of helping people turn their lives around and seeing lots of untreated mental illness, I thought that the best course for me would be to pursue a degree in psychology. About halfway through graduate school, I was already getting stressed out by having to talk to people at the lowest points in their life and wanted more positivity in mine. I began to look for business applications of psychology that would combine my love of thinking about why people do what they do with a non-clinical setting. I’m the son of an adviser, so investment management was where I started and ended my search.

The financial services industry, as well as the markets, are constantly evolving, and regulations are always changing. To wit, the DOL fiduciary rule was announced in April. From the perspective of a financial behavioral psychologist, what can RIAs, advisers and others do to prepare themselves for the constant changes, and how should they explain things to their clients? On one hand, they want to be transparent, but on the other hand, no one wants to cause undue stress upon their clients.

One of the primary advantages to working with an adviser is having someone to help you separate signal from noise. The presence of 24/7 news channels and financial TV is to draw attention, not to serve the needs of clients. The Fed releases 45,000 pieces of economic data each month, and the adviser has to help the client understand two things – most of it doesn’t matter and what they should do about the parts that do matter. That said, the DOL fiduciary rule is a big disruptor and certainly qualifies as important “signal” for clients everywhere.

How has behavioral finance influenced how financial services are marketed?

Very little, for better or worse. Behavioral finance has been used as a marketing tool (e.g., “Come do business with us; we get investor behavior.”), but I have seen very little evidence of what I call behavioral best practices integrated into the marketing approaches themselves. Exceptions to that rule include efforts by Brinker Capital, Barclays, Prudential and others, but most are still operating from a very traditional, staid approach. I’d suggest that marketers everywhere read Robert Cialdini’s excellent book, “Influence: The Psychology of Persuasion” and tweak their programs accordingly.

In your opinion, what are best practices for financial services firms to market themselves? What mistakes do you regularly see them make?

I live in Atlanta and recently visited the World of Coke tourist trap as a business field trip to try and dissect Coke’s efforts at becoming the branding legend that it is today. The thing that struck me more than anything was the way that Coke markets a lifestyle and not a product. Coke’s brand has always been about optimism, bringing the world together and being a part of happy moments. You will see exactly zero advertisements comparing the relative merits of Coke to Pepsi, because Coke gets that no one cares and that people aren’t that rational. Smart marketers in our space will talk less about basis points and alpha and more about the kind of life their product provides.