Your Brain is Playing Tricks On You - 18 Surprising Biases That Control Your Life with Dr. Daniel Crosby
In this episode we discuss why it’s so important to study and understand psychology if you want to master any aspect of life. We look at evolutionary science behind how your brain can often play tricks on you. We share a simple and impactful model from psychology for dealing with stressful and tough situations, and we discuss the dangerous illusion of the “quest for certainty” and how you should actively embrace taking risks in your life with our guest Dr. Daniel Crosby.
Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. His most recent book, The Behavioral Investor, provides an expert look at the useful mix of psychology and investment science. His work has appeared in the Huffington Post and Risk Management Magazine, as well as his monthly columns for WealthManagement.com and Investment News.
In order to understand how the financial and capital markets work - we have to understand human behavior.
Since almost everything we do is largely a function of interacting with humans - in order to understand life, business, the world - we have to understand human behavior and the human mind
Psychology underpins most of reality - in order to understand anything you have to understand the human mind.
Human nature is the “bottom turtle” in most disciplines and facets of reality
Evidence based growth is a powerful niche - because the leadership and personal development space is full of voodoo, bad thinking, and wrong common sense
The evidence based approach is harder but ultimately much more fulfilling and impactful
Things that have served us well from an evolutionary perspective often serve us poorly in the modern world and the financial markets
Loss aversion is a great example of a pro-evolutionary trait that malfunctions in modern society
The human brain hasn’t been upgraded in over 200,000 years.
Your 200,000 year old brain is trying to cope with systems that are tens if not hundreds of years old - this leads to a number of problems and issues.
We are wired to act - we feel a burning need to take action and do something - and yet often times the best investment strategy is to do nothing
In the world of investing - the less you do, the better off you are. The research is crystal clear on this.
The best performing investors are people who either died or forgot about their trading account!
“Success begets failure.” As you win, you become more convinced of your skill, and you start to make worse and worse decisions, becoming sloppy and undisciplined
You must be a rules based, systematic investor when it comes to decision-making.
Bad design —> bad decision —> bad outcomes.
Set great rules and follow them slavishly.
Most people self report incorrectly. They think they work more than they do and they think they have less free time than they do. You probably under-report to yourself how much time you spend on TV.
You have more free time than you give yourself credit for.
The free time we’ve gained as a society has been replaced minute for minute with watching TV.
There is a very real, physical side, of dealing with stressful and difficult situations
Before you do any interventions to prevent anxiety - you can get a HUGE amount of mileage out of taking basic care of your body - sleeping better, drinking less caffeine, getting in some moderate exercise.
People who have to pee are better at managing risk. “Inhibitory spillover.”
There is a huge interplay between the mind and the body.
The more you study performance and achievement - you see again and again that success is about the mastery of the basics, there is no magic bullet.
The “RAIN" model for dealing with stress (based on cognitive behavioral therapy)
Recognition
Acceptance
Investigation
Non-identification
Catastrophizing often puts us in a negative spiral.
Emotional states are fleeting - they don’t define you.
We are more than what happens to us - at any time we can change our RESPONSE to any stimulus.
Self esteem science is junk science. 15,000 studies were examined on self esteem - and what they found was that the research was largely junk, and self esteem has no predictive ability on achievement.
There is NO substitute for TAKING RISK, DOING HARD THINGS and SINKING AND SWIMMING ON YOUR OWN MERITS.
The only way that you will truly feel good about yourself is by taking risk and putting yourself out there.
The biggest risk of all is not taking any risk.
In our best efforts to protect ourselves from harm we bring about the very thing we are trying to avoid. You aren’t really protecting yourself - you’re brining about the absolute realization of what you’re really scared of.
The quest for certainty is very dangerous. There is uncertainty. It’s part of the game. The alternative of embracing uncertainty is to always settle for the lowest common denominator.
Once you own the fact that the world is uncertain, it changes your perspective.
The goal is to tip the scales of probability in your favor.
In an uncertain world, process and evidence are the core things to focus on. Control what’s controllable.
Look for models for living that are data driven and make common sense.
If something seems to good to be true it probably is.
Personal progress and investment success involves sacrifice and discipline and hard work.
The “backfire effect” - often times when presented with data and evidence that disagrees with people’s world view, people often become MORE committed to their idea or belief than they were before.
Meet people who don’t share your beliefs and try to understand why they hold the beliefs that they do.
Homework: Go somewhere that makes you uncomfortable.
Homework: Seek first to get your own house in order. Take a hard look at yourself.
Thank you so much for listening!
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Want To Dig In More?! - Here’s The Show Notes, Links, & Research
General
[Social] Daniel Crosby Twitter
[Social] Daniel Crosby LinkedIn
Daniel’s Podcast Standard Deviations
Daniel’s Site for Nocturne Capital
Media
[Article] PubMed - “Inhibitory spillover: increased urination urgency facilitates impulse control in unrelated domains” by Tuk MA, Trampe D, and Warlop L.
[Article] Psychology Today - “Let it R.A.I.N.” by Rick Hanson Ph.D.
[Article] “Backfire effect” Posted by: Margaret Rouse
[Article] Think Advisor: 'Buy What You Know' Is 'Dumb Advice' By Jane Wollman Rusoff
[Article] Think Advisor: 3 Behavioral Biases That Hurt Investors By Ginger Szala
[Article] Abnormal Returns: Q&A with Daniel Crosby author of The Behavioral Investor
[Article] Brinker Capital Blog: “You will never regret your vacation” by Dr. Daniel Crosby
[Article] ETF Trends: “Five Questions: Behavior in Investing With Dr. Daniel Crosby” by Jack Forehand
[Article] NerdEcon: A Book Review: The Laws of Wealth by Nicholas Haberling
Wealth Managment .com Author Directory
[Podcast] Listen money Matters - The Laws of Wealth – A Chat With Daniel Crosby
[Podcast] EO Fire - 1846: Behavioral finance and the science of being less stupid with Dr. Daniel Crosby
[Podcast] Patrice Washington - Dr. Daniel Crosby: The Best Thing You Can Do is Nothing
[Podcast] Art of Manliness - #222: The Laws of Wealth
[Podcast] Part-Time Money - 035: The Secrets to Investing Success and Building Wealth with Author Dr. Daniel Crosby
Videos
Daniel’s YouTube Channel
TEDTalks - TEDxHuntsville - Daniel Crosby - You're Not That Great: A Motivational Speech
TEDTalks - Sex, Funds, & Rock N' Roll: Daniel Crosby at TEDxHuntsville
TEDTalks - Can being weird make you rich and happy?: Daniel Crosby at TEDxBYU
TEDTalks - Value Investing and Behavioral Finance - Dr. Daniel Crosby
InvestmentNews - Daniel Crosby: Emotion and Investing
InvestmentNews - Daniel Crosby: The future is behavioral
Municipal Employees' Retirement System of Michigan - Dr. Daniel Crosby - Keynote Speaker
Books
The Behavioral Investor by Daniel Crosby
Man's Search for Meaning by Viktor E. Frankl
The Laws of Wealth: Psychology and the secret to investing success by Daniel Crosby and Chuck Widger
Personal Benchmark: Integrating Behavioral Finance and Investment Management by Daniel Crosby and Chuck Widger
You're Not That Great by Daniel Crosby
Episode Transcript
[0:00:04.2] MB: Welcome to The Science of Success. Introducing your host Matt Bodnar.
Welcome to the Science of Success. The number one evidence based growth podcast on the internet. With more than three million downloads and listeners in over a hundred countries.
In this episode, we discuss why it’s so important to study and understand psychology if you want to master master any of life. We look at the evolutionary science behind how your brain often playas tricks on you. We share a simple and impactful model from psychology for dealing with stressful and tough situations and we discuss the dangerous illusion of the quest for certainty and how you should actively embrace taking risks in your life. With our guest Dr. Daniel Crosby.
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[0:02:35.1] MB: In our previous episode, we asked, “How do you make decisions that let you see beyond your everyday inbox, busy work and the demands of others?” We uncovered that there are huge mismatches between how you think you spend your time and how you actually spend it.
We shared how you can deal with the fear and the reality of disappointing other people and not meeting their expectations and we shared one simple strategy in 30 minutes that can help you reclaim control of your time, with our guest Laura Vanderkam. If you want to finally take control of your time, listen to our previous episode.
Now, for our interview with Daniel.
Today, we have another exciting guest back on the show, Dr. Daniel Crosby. Daniel is a psychologist and behavioral finance expert who helps organizations understand the intersection of the mind and the markets. His most recent book, The Behavioral Investor provides and expert look at the useful mix of psychology and investment science.
His work has appeared in the Huffington Post, Risk Management Magazine as well as wealthmanagement.com and Investment News.
Daniel, welcome back to the science of success.
[0:03:47.1] DC: Great to be here, thanks for having a repeat guest.
[0:03:49.8] MB: Yeah, absolutely, well we’re excited to have you back on the show, there’s some really great examples and research studies and things you pull out in the book, we thought it would be a great opportunity to not only look at a lot of these concepts and the context of the financial markets but also really expound upon them even more broadly and share these ideas with the listeners.
To begin, one of the themes, or kind of core ideas that you begin the book with is this notion that in order to understand how the capital markets work or in layman’s terms, how the stock market or the financial markets work, we have to understand human nature, tell me about that idea?
[0:04:27.6] DC: The idea is that capital markets, stock markets are human creations that are driven up and down by humans and so it’s only as we understand human behavior that we truly understand capital markets. I think a lot of novices in the stock market will say, you know, “The way that this works is I look for good companies and I buy them and then I’ll do well.”
Unfortunately, it’s not that quite easy and there’s a whole lot of irrationality, there’s a ton of psychology and human nature that’s baked into market. So that’s the thing that makes them frustrating but that’s also the thing that makes them exciting for people like me is, it’s not just accounting, right? It’s actually a canvas on which we’re painting the human struggle and that is what makes it so fascinating for me.
[0:05:11.8] MB: I think you could even go one step further and extrapolate this idea, since almost everything we do is largely a function of human interaction whether it’s business, whether it’s life, the world at large, the reality is that in order to understand almost anything, especially how the world works, we have to begin with the understanding of human behavior and the human mind.
[0:05:34.1] DC: Well, I think that’s exactly right and that’s one of the things that I love to joke about is how being a psychologist is so great because we can co-opt every other discipline effectively, right? Even when I’m watching The Super Bowl and yawning as was the case this week. Even as I’m watching The Super Bowl, all of this is just psychology, it’s all the same things we see in capital markets.
It’s human behavior, it’s momentum, it’s coming back from defeat, it’s keeping your head held high. Absolutely, almost anything you would ever encounter has human nature as sort of the bottom most hurdle. I give this example in the book of how we used to think that atoms, we have this notion of atoms early on but we used to think that they look like little solar systems basically.
We thought everything was sort of a fractal that was solar systems all the way down, everything was just sort of a little solar system within a larger system within a larger system and it’s only as we understood sort of the fundamental parts of an atom that we’re able to harness atomic power to either fuel a city or demolish a city and I say the same thing about human nature. It’s only as we understand that human beings are the thing that’s at the very bottom of this.
We can understand a handful of the tendencies to which we’re most prone that we’re able to create systems and processes to help us master markets and help us master ourselves. I think a correct understanding of human behavior’s a prerequisite as you said to almost any successful endeavor.
[0:07:14.5] MB: That’s such a great point and in many ways, really, the reason why we embark many years ago to begin and start the science of success to follow the same quest that you’ve applied within the discipline of finance but much more broadly of how do we understand the human mind and how do we look at specific instances of when our brains might malfunction or short-circuit and learn from those mistakes or those biases and how they can impact our behavior.
[0:07:42.3] DC: Well, at the risk of putting words in your mouth, you know, your podcast, your show is all about evidenced based growth and I think that’s such a powerful niche because in the sort of human progress personal development, leadership space, there’s so much voodoo and there’s so much sort of bad thinking and common sense that it’s refreshing to see someone like you doing what you're doing.
I’m trying to bring that same thing to markets and the reason that I wrote this book relatively hot on the heels of another book is because I was going to conferences and hearing all this sort off folk wisdom passed down from trading coaches and you know, different people who are trying to make help traders and hedge fund folks and asset managers make better decisions.
You know, knowing the research as I did, I knew that some of what they were saying was inconsistent with the research. I want us to be evidence based investors, just the same way that you’re about evidence based growth and I think the evidence based approach is sometimes counterintuitive, it’s almost always harder to swallow because it usually asks more of us but I think it’s ultimately more fulfilling and has more power to get you where you’re going.
[0:08:55.7] MB: Great insight and you know, one of the things I really enjoyed about your book is this idea that there’s a number of concepts, mental models, et cetera throughout the book that apply to the financial markets but obviously everybody who is listening here isn’t necessarily a trader or someone involved in that world and yet, I think there’s some really fruitful insights that we can pull out of them.
One of them just to dig a little bit deeper was one of the early ideas you talk about in the book is this idea of how humans or how the brain in general as we’ve been talking about is this thing that evolved over thousands, millions of years and yet it’s been thrown into modern society which is developed in the last couple of hundred years.
There’s all kinds of areas in places where the brain short circuits or misfires and cause us to do something that feels right and seems like it’s a good idea but ultimately is a really bad decision.
[0:09:50.6] DC: Yeah, I think one of the most important themes of the book as you said is that things that have served us well evolutionarily, often serve us poorly in capital markets. If you look at something like loss aversion, you know, our fear of dying or our fear of losing something, that served us very well over time.
There used to be 11 or 12 different humanoid species and we wiped them all out and the reason that we’re still here and they’re not is because honestly, because we were a little more cowardly than they were. We were more fearful, we were more prone to pack up and move on, we were more prone to run back in the cave and hide than they were.
Their bravery got them killed ultimately and that led us to procreate and to thrive. But the same sort of fearful mindset that kept us safe on the Savannah's of Africa keeps us all in cash through this roaring bull markets and doesn’t lead us to compound our wealth in a way that keeps up with inflation.
You know, likewise, the brain itself hasn’t had an upgrade in in over 200,000 years. When they look at the skulls of our ancient ancestors, hundreds of thousands of years ago, they can hypothesize that their brains look just like ours. We’ve got these 200 year old brains that are trying to cope with financial markets that are about 400 years old. Developed financial market’s only about 400 years old. The brain evolved to help us make quick split second decisions and the best investors have a profoundly long term mindset.
There’s a handful of ways in which the brain wants us to do one thing that’s comfortable and evolutionarily adaptive and it is exactly 180 degrees the opposite of what Wall Street demands of us to be successful.
[0:11:45.1] MB: One of those ideas that I really enjoyed and this is something that I uncovered back when I was doing a deep dive on Buffett and Monger is this idea of how we’re often wired to act and yet markets reward inaction. Tell me a little bit more about that?
[0:12:01.2] DC: Yeah, there’s some really fascinating studies on how markets reward us doing nothing, right? You think about almost every part of your life. I just got back from the gym, I’m trying to get fit like everyone else, early in the year, I’m still dedicated to my goals for the year but you know, I just got back from the gym so if I want to get stronger, I lift more weights.
If I want to get smarter, I read more books, if I want to get good at a job I spend more time on that job but when it comes to investing, we find again and again, that the less you do, the better of you are. Again, it’s the inverse of what you’d expect. There’s really great studies on this.
First of all, this has been studied in 19 different countries and in every country in which it’s been studied, the more active someone is, the more they mess with their account and check in to their account, the worse that they tend to do. There’s also a great study cited in James O’Shaughnessy book, What Works on Wall Street, where a large asset manager wanted to look at their retail accounts.
That’s like you know, your everyday mom and pop accounts. They wanted to drill down and understand, what were the behaviors of the best performing accounts in this large asset manager. They found that there were two things that these accounts had in common. The two things were that they had either forgotten that they had an account or that they had died.
You know, they go in looking for the evidence of skill and intellect and width and trading systems and what they find is you know, forgetfulness and death. We see again and again that our brains are wired to act but markets reward doing nothing.
[0:13:41.8] MB: Such a fascinating mental model and a great example of what’s completely counter intuitive. Because it’s so easy to get caught up in the fear, the need or the desire to constantly check your account to constantly pull things in and out to react to the news that’s always flashing and blaring and telling you about the latest crisis. I love the example of basically the best traders of the people who forgot that they had a trading account or the people who had died, it’s incredible.
[0:14:10.8] DC: Yeah, you’ve got research out of Taiwan that shows that one in 360 day traders are successful. Meanwhile, you’ve got the dead folks and the forgetful folks over here kicking butt. I mean, it is hard to wrap your mind around but these people who are sitting in front of four screens with every chart in the world on them are getting outperformed by people who are just going about their lives. But yet the research is unequivocal. It’s very strong at this point.
[0:14:38.2] MB: You know, another one of the examples you had was this idea of how success begets failure. How we can – how success can cause the becomes sloppy and undisciplined. Tell me a little bit more about that?
[0:14:51.8] DC: Yeah, there’s interesting reasons, psychological and physiological. In the book, I talk about – tried to take a deeper dive on the sociology, the physiology of some of these concepts. On the physiological reason why success begets failure. It has to do with the rush of testosterone. We find in the animal kingdom that animals, say rams who are fighting for lady rams or wait, I guess they’re sheep.
Anyway. Rams who are fighting for partners, right? They’re butting heads, they’re combatting one another, when they win, they’re flooded with testosterone and so they take on a bigger run, they’re feeling good, they’re feeling powerful, they take on another ram, beat that one , flooded with more testosterone.
At some point, this rush of testosterone, kind of goes to their head and they lose their critical thinking and decision making skills and they’ll bite off more than they could chew, they’ll take on an opponent that they have no business taking on because of this rush of testosterone.
We see that, John coached, the author of The Hour Between Dog and Wolf which is another excellent book. He studied this and people who were traders on the floor of the stock exchanges in New York and London. He found that successful traders have this extreme rush of adrenaline and testosterone when they were on a tear.
This caused them to become strangers to their rules, to let go of the risk management protocols, to take bigger and bigger risks just like a ram who is fighting for his lady. They took bigger and bigger risk that ultimately tended to end in their undoing and so you know, a big theme of the book is all around mental models, systems processes and following these plans rather than discretionary decision making, sort of you know, seat of your pants decision making.
Because very real sense. As you win, you become more convinced of your skill and you start to let go of what you know to be true, you start to let go of your rules.
[0:16:58.2] MB: You had a great, very simple heuristic for explaining this in the book which is this idea that bad design lead to bad decisions and lead to bad outcomes.
[0:17:08.3] DC: yYah, absolutely. Getting that design right is all important and one of the things that we have to be careful to do is to create a system that you can’t override because you know, in my personal life, I’m a rules based systematic decision maker with my investments but I tell you, there are times when I want to override those rules, there’s times when those rules look crazy to me and I’ll tell you, one of the most immediate example that comes to mind is when Trump won the election.
Love him or hate him, most people thought that this was going to bring a lot of uncertainty into the markets and people no less auspicious than Paul Krugman, a Nobel Prize winning economist for saying this is the end of the US market as we know it. Yet, all of my rules, all of my systems were saying no, stay the course, you know, all my signals were staying, keep doing what you’re doing and I was able to do that but man, everything in me was scared, you know?
Everything in me was scared that the market was going to crash and that hasn’t been the case, it’s been far from the case. It’s just one, I mean, you know, I think investors who have been at this a while can cite a hundred instances of where the design was telling you one thing and in your head was telling you another thing and you had to stick with those rules. There’s a great guy with the best audited track record, investment track record of all time.
A guy named Jim Simons who is an award winning mathematician and hedge fund “gillionaire”. He says we set great rules and we follow them slavishly and that’s something that I tried to live buy and in my investing life and in my personal life. There’s just things you need to do every day. Spend 30 minutes on self-development and reading something that’s going to feed your mind and your spirit, you know?
An hour at the gym, do whatever. There are going to be days when that doesn’t seem like the thing to do but I can promise you, if you can stick with it, over time, you’ll come out ahead.
[0:19:04.3] MB: The piece of that that’s sort of unsaid is this idea that it’s really important to spend a lot of time and energy on the front end, investing in building those rules, in building those decision criteria and creating the effective designs that you then put in place.
So many people get caught up in the reactivity of everyday life and never set aside a half a day or a few hours to really think through and do some homework and some research and say, what should these rules be and how should I set them up?
All the work is the hard part of sitting down on the front end and actually creating the system. After you’ve done that, it’s much easier to follow it.
[0:19:47.7] DC: I mentioned something in the book that I’ve not gotten any takers on but I say that asset managers should work four days a year, they should have access to their models and make tweaks perhaps quarterly or less and that they should spend the rest of their time reading.
Basically reading and contemplating and considering opinions that diverge from their own and you know, nobody’s taking me up on that but we have this idea that people need to be hammering away at a problem at all times of the night and day. We left very little time in modern life in this sort of cult of business that we’ve created for contemplation, for reflection, for creating mental models like you talked about that will do all of the work for us going forward.
If you can get it right that first time, you’re going to be so well served by just simply following that playbook and yet most of us I think in the corporate world are so trapped in the business of putting out every little fire that we don’t have time to be contemplative and I think that that’s a real dramatically to the detriment of people’s wellbeing and even to the detriment of the companies that we work for. I’m 100% on board with what you’re talking about.
[0:21:05.2] MB: How do people start to proactively create a time, the space, to build these better designs and create better decision criteria?
[0:21:16.3] DC: Well, I think the first thing we have to do is be honest with ourselves about how we spend our time. One of the most consistent findings in psychology is that people just miss apprehend and misreport their own behavior. If you ask people what their average workweek looks like and then you observe their average workweek. Most people say they work way more than they do.
Most people say they have much less free time than they actually do. If you ask people about stuff like you know, their TV consumption and stuff, they’re going to tend to report that – under report that by about 50%. I think the first thing we have to understand is, you’ve got time for the things that you value, we have to stop making excuses about how busy we are because most of us, you know, unless you’re working three jobs to just get by.
Most of us have more time than we give ourselves credit for, we as a civilization have more free time, more discretionary time than anyone has ever had in human history. A recent study I found showed that the free time that we have gained has been replaced minute for minute with watching TV. We have an inordinately increased amount of time relative to people who lived 50 and especially a hundred years ago and what have we done with that extra time?
Well, we stare at our phones and we watch Netflix. I think the very first thing you have to do is take ownership of your time to take ownership of how busy you are or not, and then allocate that time to stuff that has long term impact and not try and snow yourself as to how busy you really are.
[0:22:57.7] MB: I had a listener email me this week with a very similar story, how he used to feel trapped, how he used to feel like he never had any time, he was constantly putting out fires and after listening to a couple of different episodes of the podcast.
He had this breakthrough and realized that he was spending hours a day on things like Facebook and Instagram and all this stuff and completely shifted the way he was allocating his time and realized that he had tons and tons of free time that he could spend on all kinds of things and start to really focus on improving and developing himself and it’s amazing what – it’s almost like once you get a little wedge in there and crack open a little bit of that contemplative time, it really starts to compound on itself and create more and more time and more ability to focus.
[0:23:42.2] DC: Well that’s right, you know, I consider myself probably like most people, a good steward of time, I consider myself a reasonably productive person but then I got the new iPhone and it gives you a second by second reporting of how much time you’re spending on your phone and it’s shocking to me. You know, I get that report every week and I just think about the opportunity cost of the hours and hours.
I spend, staring at my phone or scrolling through Twitter or on angry birds or whatever. It’s like you know, I can be doing a lot of good in the world in the time that I spend, you know, the time that I waste on here. I think when you have a really candid look at yourself, you’ll see that you have more opportunity than you think.
[0:24:28.0] MB: I’m going to jump around a little bit because there is a number of different things I want to talk about from the book. One of the other interesting themes that you had was this idea of the physical side of dealing with stress and dealing with risk. Tell me a little bit more about that.
[0:24:46.0] DC: I think most people think about stress as almost entirely a psychological phenomenon and that’s partially true but there’s so much more we could be doing from a physiological standpoint. I have not always worked in finance, I was for a time and a season, a clinical psychologist and that’s what my PHD is in.
One of the things that I found very consistently is that people would present to me with things like sort of garden variety anxiety. It would come in and talk about how they’re being anxious, they were having panic attacks, things like this and I would always start with things like diet, exercise and nutrition and often, what I found is people were filling their bodies with insane amounts of you know, caffeine, they were sleeping poorly, they were not exercising, they were not surrounding themselves with the people that cared about them.
I would say, look, before we do anything else, you can get so much mileage with just having two cups of coffee a day and going on a 30 minute walks and nobody wants to hear that. Nobody – everybody wants the magic pupil, everybody wants you to speak the magic words into existence that are going to help them feel better but the mind and the body work in a reciprocal fashion and feed off of one another.
Yes, part of stress is mental and part of it is physical and it’s such an under appreciated way of managing stress is to watch what you eat, to manage your sugar intake, to decrease your consumption of caffeine and to get regular exercise. If everyone was doing these things, we would see a fraction of the cases of stress induced disorders that we do now.
There’s also interesting, one of probably my favorite study in the whole book talks about people’s willingness to take risk who had to pee. They found that people who had had a lot to drink and had to use the restroom were actually able to manage risk better than people who did not need to use the restroom.
They called it inhibitory spill over, basically, you were already inhibiting yourself, you’re already holding it, you’re already holding back and this tendency to hold back physically, generalized to a tendency to hold back psychologically and when taking financial risks. I think we are just beginning to scratch the surface of the inner play between the mind and the body and you know, I was happy to discover that the secret to being a great investor was just always needing to pee.
[0:27:25.4] MB: That’s a great example and it’s so fascinating. You know, the more I study performance and achievement, I see the same pattern again and again which is that success is not about finding a magic bullet, there are no magic bullets, it’s just about mastering the fundamentals and mastering the basics.
[0:27:45.0] DC: That’s exactly right.
[0:27:48.2] MB: You also shared in the book, when dealing with stress, a great model called the rain model, I’d love to hear more about that?
[0:27:58.4] DC: Yeah, the rain model, I think I cited two different places in the book and really, it is very intuitive and it just talks about recognizing, accepting, investigating and non-identification. So recognizing first like, “Okay, I am stressed” right? And then beyond that accepting it. You know a lot of jumped straight to judgment. We’re so programmed to jump straight into judgment and this judgment that psychologist that’s referred to as catastrophizing sets us down a negative spiral.
You know go, “Oh you know I am stressed. Oh great, here we go again, I am freaking out. This is going to be terrible. I am not going to be able to go to work, no one is going to love me.” And we go down this downward spiral that just gets worse and worse. So first we have to recognize it and then we have to accept it. We just say, “Okay it is what it is,” this scary eastern philosophy sort of meditative practice of saying, “Look, okay I am stressed. It is not good or bad, it just is.”
Then we investigate the sources of that stress and see if there is anything we can do about it right? We say, oh you know maybe I am stressed because of this. Maybe I am stressed because there is something unspoken between me and my partner and I should go have a conversation with them. You know maybe I am stressed because I am sitting at this desk all day and I need to go stand up and stretch and get a drink or take a walk, whatever it is you investigate it.
And then I think the coolest part of it is this non-identification piece because I think so many times we conflate our emotional reality in a moment with our self-worth. We think, “You know I am anxious therefore I am intrinsically a basket case,” and that is not the case. You know emotional states are of necessity fleeting and so this doesn’t define you. You know you’re not defined by your anxiety. You are not defined by your depression, whatever emotion it is that you’re feeling.
And so this is a really powerful model that I talk about in two different places in the book and try to give references so people can dig a little deeper if they are interested.
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[0:31:40.2] MB: What would be a specific practice or application to apply the R.A.I.N model for somebody who is listening who’s currently dealing with a really stressful situation?
[0:31:51.0] DC: So the R.A.I.N model is really about – it is really a lot like cognitive behavioral therapy. So it is really about recognizing and challenging beliefs which is really all about what CBT is about. So we’ve got an activating event so whatever it is that’s upsetting you and you can say in that moment, “I’m going to choose to respond to this differently.” We’re not going to say the activating made me do something. It is taking this power back.
So this could be anything from a disappointment at work, a personal failure, a heated argument with a loved one. It could be a 100 things, any kind of activating event that puts you in a funk, you can say, “I can choose to be different. I can choose to approach this differently and I don’t have to feel or act any certain way as a consequence of what’s just happened.” You know this is basically the fundamental thinking of I think the greatest call it a self-help book that was ever written.
Man’s search for meaning is this reality that we are more than what happens to us and that in any place and at any time, we can choose our response to a stimulus and I think it is a powerful way to move through the world that takes back ownership of your choices and your emotions and says, “I am not a victim of my circumstances.” So yeah, there is all kinds of places I think you could apply this.
[0:33:18.4] MB: Tell me about – another part of the book you dig into this idea of self-esteem science and how I think the phrase you use is you call it junk science. There’s so many people that have been impacted by this. I want to hear a little bit about what your thoughts are on it.
[0:33:36.9] DC: Yeah, so I am 39. I’ll be 40 late this year and so I grew up very much in this gold star generation when the research on self-esteem was right at the forefront of our best thinking psychologically and we thought that the way to get people to make better choices, to live our lives was to just tell them that they were great but you know effectively to shower them with praise and I see this in a way that I was raised by my parents.
I see this in the way that I was taught at school, sort of everyone gets a trophy, everyone gets a gold star and I am forgetting the exact number. I believe it was 15,000 different studies that were examined in a meta-analysis. So that’s just a study of all the studies on self-esteem and what they found first of all that most of the research was just junk science. Most of it was just pop psychology and then of the non-junk science, most of them showed that self-esteem didn’t predict anything.
It didn’t predict how well people would do in school. It didn’t predict whether or not someone would live a life of crime. It didn’t predict anything much and they found that basically, people have a strong BS meter. People know when they are being complimented for nothing and people know when they are being complimented for having genuinely achieved something and so effectively what they found in the self-esteem research is there is no substitute for taking risks.
Doing hard things and sort of sinking or swimming on your own merits because the only way that your self-esteem is truly built is by doing hard stuff like taking risk, doing hard stuff and then yes, being complimented, being recognized but recognizing people for getting 7th place and you know, knowing that they still got a ribbon, they know they got 7th place. It doesn’t work and this is an invitation to be cruel or to be dismissive of people who aren’t on the metal stand of course.
But what it is, is I think again, a mental model for life. Say, “You know the only way that I am going to really feel good about myself is taking risks, putting myself out there, putting in the hours, doing the work and then hoping the rewards come.” There is just no shortcut to feeling good about yourself.
[0:36:01.4] MB: And this ties into what we were talking about earlier, how the brain is hardwired to have things like loss aversion and the social risks of taking these things whether it’s starting a business, whether it is quitting your job, all of these different things seem really, really interesting and really, really risky. It might be something as simple as making a sales call because of our evolutionary programming and yet the reality is that it’s not life or death. It is not as scary and dangerous as it often seems but our mind is malfunctioning essentially.
[0:36:33.2] DC: Yeah, that is exactly right and I can’t – I mean it is my own quote. I can’t quote it right now but there is a paragraph in the book where I essentially say, “The biggest risk is not taking any risks.” You know the biggest risk is not that you start a business and you know it fails which frankly will likely happen if you start a business, that’s what happens to most small businesses is they fail but the bigger risk is still just spending 40 years in a job you hate.
You know I came across clients all the time who were not dating, not loving, not putting themselves out there because they were scared of getting hurt and in the process of not trying to get hurt, they were hurting themselves. So a lot of times because of the way that we’re wired and because we are so risk averse and we’re so loss averse, in our best efforts to protect ourselves from harm we bring about the reality of the very harm that we are trying to avoid.
And that is such a powerful concept to internalize to say, “Look am I truly protecting myself or am I bringing about the absolute 100% realization of the very thing I am scared about?” Because I think that is often the case.
[0:37:43.4] MB: I think the way you describe it in the book was the quest for certainty and how dangerous it can be.
[0:37:49.6] DC: Yeah absolutely. I think there’s a place where I talk in the book about this quest for certainty and I sight research that shows that human kind is more comforted by a negative certainty than a potentially positive uncertainty. So I specifically give the example of adult children of alcoholics. You know I talk about some of the damage that is done by alcoholism which is the leading cause of child abuse and one of the leading causes of death.
That is drunk driving in the US, I say “Look alcoholism does all this harm and yet a slight majority of adult children of alcoholics go on to marry alcoholics.” Now you would think rationally that children of alcoholics knowing the pain brought on by substance abuse would run a hundred miles away when they began to date someone with a drinking problem and yet they tend to marry people with drinking problems because the devil that you know is less psychologically intrusive than the devil that you don’t know.
So that’s again, something that we have to investing and in life just own that there is an uncertainty. There is uncertainty, it is part of the game and we have to embrace it because the only other alternative is to just always be settling for the lowest common denominator and this thing that we are familiar with.
[0:39:15.4] MB: You make another really good point and this is something that I think about a lot and I also bring it to conversations a lot which is this idea that life is uncertain. People always want a sure thing. They are always trying to make sure that they are making the perfect decision. They are making the right choice that whatever life choice they’re making at this particular threshold is something that has to be absolutely perfect.
And the reality is, you could walk across the street in 10 minutes and get killed that life is completely uncertain. We just don’t know and the great part about investing as a skillset and one of the other tools that taught me about this which is poker is that you start to realize that you can do everything right and things don’t necessarily work out and the flip side is you could do everything wrong and sometimes it still works out too but either way, the world is an uncertain place.
And you have to be able to operate and think and make decisions in the context of uncertainty to do anything and to be happy and to achieve any real results in the world.
[0:40:16.8] DC: Yeah that is exactly right and I think once you own that the world is uncertain and I think that death is one of the things that makes it so absolutely uncertain just like you said, once you own that the world is uncertain, once you have mourned the loss of that uncertainty or that justness or the fairness of the world because there is none to be had unfortunately, I think the best you can do is control the controllable.
You want to tilt probability in your favor at every turn so yes, you might get hit by a drunk driver one day but you should never drive drunk, right? You can tilt the probability in your favor with investing too, right? You could do these things, you could invest in a way that is low turnover, low cost, many of the things that I talk about in the book but yeah, even in spite of this there are going to be times where doing the right thing is going to feel awfully bad.
And in fact in investing sometimes your neighbor gets rich for doing the wrong thing. You know your neighbor could throw all of her money and pot stocks and make a fortune owning one single pot stock and you have your diversified portfolio that is doing quite as well. Well, you still did the right thing and so taking this process, trusting the process, taking this process based approach to living and to investing is I think an important way to think about it.
Controlling everything that is controllable and realizing that there is much that is out of your control and this is sort of the best you can do.
[0:41:48.0] MB: That makes me think of even the broader category we’re talking about earlier, the idea of evidence based growth itself is rooted in the same mental model or the same framework, right? In an uncertain world, we have to have process, we have to have evidence, we have to have something to use as a framework to understand reality. You know people say, “Oh well you can have an evidence based approach but scientific studies and psychology studies are proven wrong all the time. So I am just going to go with whatever my gut tells me is right.”
But the reality is, you have to look at which models have the most predictive power, which models are the most effective just because a certain model is wrong some of the time because nothing is certain, doesn’t necessarily mean that it’s still not the right model and the right process to be using and you really have to do a lot of the hard work of thinking on the front end and understanding which models are you going to invest your time and energy and which processes are you going to follow and execute on.
[0:42:44.1] DC: Yeah, it’s interesting. I talk a little bit about choosing a good model in the book and I think we are not helpless there. There are some things we can look to, to determine whether or not a model is replicable or whether or not it’s one to build your life around and so the first thing is we want evidence in the data, right? We want just like your podcast is all about, we want to be evidence based. We want the data to support what we are doing.
But the second thing is we need to be philosophers too. We need to see that this makes some philosophical sense that there is some common sense to it. In the world of investing there is a couple of funny indicators. We that overtime the S&P 500 moves in the S&P 500 have been correlated with the production of butter in Bangladesh at about 96%. Now would you want to invest with someone who is going to buy and sell based on Bangladeshi butter production?
Well no because it is stupid like you know philosophically it makes no sense even though that the data are there. So I think if you look for models for living that are both data driven and have an element of intuition to them, they feel right philosophically or from the common sense standpoint, I think you won’t be led astray much.
[0:44:04.6] MB: You know that reminds me of another topic you talk about in the book which is this idea of looking for truth in the wrong places and in many ways that’s another example of one of these cognitive biases or mental models of how our brain’s misfire but it also shows that we can easily get deceived about what kinds of data and information and evidence we should be supporting.
[0:44:28.3] DC: Yeah, so one of the things that I talk about in the book is the power of story and story can be used like most psychological concepts to our benefit or toward detriment but I sight a research out of Princeton that looks at people who are listening to stories, you know two people who are hooked up to an FMRI that is measuring their brain activity. So if you and I are sitting across from each other having a conversation about nothing in particular, our brain activity doesn’t look all that similar.
But the minute that you started to tell me a story, our brains become actively synced and so the power of story is very alluring. So this is one way that we can be misled or look for truth in all the wrong places is through a seductive story. So I would tell people to be on guard against anyone that is trying to sell something via a story. It isn’t necessarily bad but just know that you’re susceptible at this point. The other thing I think people like to be told is that that things will be easy.
This is another way that we look for truth in all the wrong places is that we want things to be easy and you see this I think at financial services more than anywhere else. It is like if something seems to be good to be true than it probably is. You know the truth about personal progress and investment success is that they both require an element of sacrifice, of discipline and hard work and any formula that doesn’t include those ingredients I think is one that is set up to fail and it is likely profiting someone at your expense.
[0:46:02.3] MB: You also shared a really interesting example of the idea of the backfire effect and how sometimes information that we don’t want to hear or disagree with can have really interesting consequences.
[0:46:15.7] DC: Yeah, so the backfire effect is pretty incredible. I think the example I gave in the book is of parents who are failing to vaccinate their children. So there’s all these parents I think especially in Southern California or other affluent parts of the country who have stopped vaccinating their kids because they fear that it contributes to autism spectrum disorders and so as a result, you are seeing diseases in this country that you have never seen in a hundred years.
You’re seeing measles outbreaks in Orange County and things like this that are just wild and are totally unnecessary and so the science of course contradicts this and says that you should vaccinate your children but what happens is when people are given a strong message when their beliefs are strongly rebuffed with facts and then they survey these people and the strength of their belief after the fact, they find that in many cases they have doubled down on their beliefs.
And so I think we have to be careful and this is why I quit Facebook a couple of years ago because you are watching this people argue about politics or religion or whatever it is screaming at each other sighting facts and understanding that nobody’s minds are getting changed that way. You know people are really, really recalcitrant to front and center attacks under deeply held beliefs. I think the way that you change someone’s mind is through relationships.
Through contact and through bringing people into exposure with different ways of being and different ways of thinking. So I think the best among us, the most growth minded among us will actively seek out opportunities to expose ourselves to new ideas and new people and new context because that is how you grow but we are very, very resistant to fact only attacks on our beliefs. They just don’t work very much.
[0:48:12.5] MB: It’s a fascinating piece of research and so interesting. So tell me a little bit more about the strategy that you’ve seen or recommend for influencing people without a direct frontal assault using facts and data.
[0:48:29.3] DC: So I think the best thing you can do is bring people into contact with people who don’t share their world view and so it is easy to hate or stigmatize or vilify an idea. You know whether you are for abortion or against abortion, whether you are left or right leaning in your politics, it is easy for us to put labels on the people that espouse these beliefs and from a distance, snip it then and attack them and we saw in the last election.
This is so disheartening to me but we saw that over 60% of people who voted for Trump didn’t know anyone who is voting for Clinton and vice-versa. So whoever your preferred candidate was, most people said they did not have a single friend who was voting for their non-preferred candidate. So we have really quarantined ourselves geographically, religiously, politically, even the news media makes it possible for us to sort of self-select into our biases and our ways in a way that wasn’t applicable 50 years ago.
Everybody had a more or less interest nightly news program. Now you’ve got every flavor of news that you want and people just tend to select the one that is most consistent with their own predispositions and biases. So I don’t think there is any substitute for just meeting people who don’t share your beliefs and understanding that they are good people too. They arrive at these positions for reasons that are probably larger they mirror the reasons that you arrive at your differing positions.
They are trying the best they can. They love their families too, they are good people too and so I think that that’s how minds gets change. As people with different world views work shoulder to shoulder and we can see that we are not the demons we made each other out to be, I think that is how ideas change and I think I hope the listeners to your program will be proactive about seeking out both opinions and especially people that they wouldn’t normally because I think that’s the most powerful way to bring about change.
[0:50:41.7] MB: So for listeners who have listened to this conversation and want to concretely implement some of the themes and ideas that we’ve talked about today, what would be one action item or piece of homework that you would give them to start executing on some of these things?
[0:50:58.9] DC: So I would suggest consistent with that last point, I would suggest that you would go somewhere that makes you uncomfortable. You know whether it be to a different religion’s religious service, whether it be to a political rally of your non-preferred political stripes, whatever it is even something as small as watching your non-preferred news channel for 30 minutes to an hour tonight instead of tuning into your favorite strand of biased news that would be my number one recommendation.
Because the danger with reading a book like mine, I always get a little bit frustrated when people read something like The Behavioral Investor and they write to me and they go, “Oh wow, you know I read the part about egotism or emotionality and that was totally my neighbor,” or that is totally my wife and you know I have to write back and go, “You know the reason I wrote this is so that you could be self-critical.” The reason I wrote this is so you could turn that bright light of introspection back on yourself.
And so I think we have to seek first to get our own house in order and I think a way to do that is both by reading a book like this, which I hope will challenge your assumptions but even more than that, exposing yourself to new situations and just being cognizant of your responses.
[0:52:18.2] MB: And for listeners who want to find the book, find you, find your work online, what is the best place for them to do that?
[0:52:24.0] DC: Yeah, so the book is The Behavioral Investor. It’s available on Amazon and anywhere else you buy books. I am very active on LinkedIn, Daniel Crosby PHD and on Twitter @danielcrosby and I also have my own podcast called Standard Deviations. So any of those will be just great.
[0:52:40.2] MB: Well Daniel, thank you so much for coming back on the show, for sharing all these wisdom and digging into these topics. Some really, really interesting insights.
[0:52:48.4] DC: Thank you for sharing your platform.
[0:52:50.8] MB: Thank you so much for listening to the Science of Success. We created this show to help you, our listeners master evidence based growth. I love hearing from listeners. If you want to reach out, share your story or just say hi, shoot me an email. My email is matt@successpodcast.com. I’d love to hear from you and I read and respond to every single listener email.
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