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At the Money: Here's Why Investing Is So Hard · Masters in Business

• 0:00
  Speaker 1: I'm Barry Ridults, and I'm excited to tell you about
• 0:02
  Speaker 1: my new podcast, At the Money. Each week, I'm going
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  Speaker 1: to spend about ten minutes or so diving deep into
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  Speaker 1: a specific topic that affects you and your money, acquiring it,
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  Speaker 1: spending it, and most of all, investing it. We'll talk
• 0:18
  Speaker 1: about things like portfolio construction, why fees matter, how to
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  Speaker 1: build a set of bond holdings, why it matters so
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  Speaker 1: much to manage your own behavior as an investor. Strap
• 0:31
  Speaker 1: in for At the Money, starting right now.
• 0:38
  Speaker 2: The psychology and behavior of some of your customers. The
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  Speaker 2: wall of worry is now fully rebuilt.
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  Speaker 1: Bad news is good news, and good news is bad news,
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  Speaker 1: and sometimes no news is welcome news.
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  Speaker 2: It's a tricky time. We're looking for fullbacks, we're looking
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  Speaker 2: for opportunity, really to get more positive on the market.
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  Speaker 2: There is this reflexive move when there's a sell off
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  Speaker 2: to buy. At what point does that? By the turn
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  Speaker 2: and the psychology can change.
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  Speaker 1: Have you ever wondered why investing is so hard? Why
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  Speaker 1: is it that your instincts always lead you astray? Why
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  Speaker 1: are stories so compelling but probabilities leave us cold? Why
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  Speaker 1: do you join the crowd buying in at the top
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  Speaker 1: and then panic sell at the bottom. As it turns out,
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  Speaker 1: you're just not built for this. I'm Barry Ridults, and
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  Speaker 1: on today's edition of At the Money, we're going to
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  Speaker 1: discuss evolutionary psychology and what it means for your portfolios.
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  Speaker 1: To help us unpack all of this, let's bring in
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  Speaker 1: Brian Portnoy. His firm Shaping Wealth helps financial professionals with
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  Speaker 1: both money and meaning. So Brian, welcome to At the Money.
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  Speaker 1: It turns out that investing is hard for a reason.
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  Speaker 1: Tell us about that.
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  Speaker 2: Yeah, thanks, Barry. We weren't wired for this. The brain
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  Speaker 2: between our ears is more more than one hundred thousand
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  Speaker 2: years old, all right, so we're working with pretty old machinery. Money,
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  Speaker 2: which we probably take for granted, is a relatively new invention.
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  Speaker 2: Let's just call it, to make it easy, three thousand
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  Speaker 2: years old. The brain's one hundred thousand years old. Money's
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  Speaker 2: three thousand years old. The way we evolved was not
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  Speaker 2: to spend and save wisely or to invest using modern
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  Speaker 2: portfolio theory. Now we are wired to survive in a
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  Speaker 2: wild and dangerous environment where money was not even a thing.
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  Speaker 2: So money and brains tend not to work very well together.
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  Speaker 1: So let's take some examples. Where does this evolutionary baggage
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  Speaker 1: that we're all stuck with, how does it lead us astray?
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  Speaker 1: Give us some examples.
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  Speaker 2: Well, let's talk about time now versus later. So we are,
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  Speaker 2: as humans really the only species that, in a sophisticated way,
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  Speaker 2: can mental time travel. We've got the future, we've got
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  Speaker 2: the past, we've got the present. And you know, we
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  Speaker 2: were raised. We grew up as a species in an
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  Speaker 2: immediate return environment, so there was a distant future. But
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  Speaker 2: when you're out on the savannah and you're trying to
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  Speaker 2: kill that animal and you're trying not to be eaten,
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  Speaker 2: you're really focused on the here and now. Well, if
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  Speaker 2: someone says, hey, you know, you're thirty five or forty
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  Speaker 2: years old and we're going to put together a thirty
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  Speaker 2: year portfolio for you, that literally doesn't make any sense
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  Speaker 2: to who we are as a human species.
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  Speaker 1: So let's talk a little bit about words and numbers.
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  Speaker 1: Why is it that we love a great story, but
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  Speaker 1: when we start thinking about probabilities and odds and numbers,
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  Speaker 1: our brains turned to mush.
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  Speaker 2: Yeah, it's just true that we were born as storytellers.
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  Speaker 2: And not as calculators. We're not particularly numerative. If I
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  Speaker 2: say two plus two, you don't calculate that, you just
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  Speaker 2: know it's for. But if I give you something even
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  Speaker 2: slightly more complicated, we begin to stammer over, well, what
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  Speaker 2: would the answer be versus the way that we as
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  Speaker 2: a tribal species developed many many years ago, thousands of
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  Speaker 2: years ago, which was sharing stories. So the brain has
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  Speaker 2: evolved to love and cherish stories. It's the way that
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  Speaker 2: we live our lives. In fact, as we listen to
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  Speaker 2: new information, we watch TV or read the internet, we
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  Speaker 2: are processing enormous amounts of information and picking and choosing
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  Speaker 2: the bits that map to the stories that we already believe.
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  Speaker 2: Some psychologists might call this confirmation bias numbers. They don't
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  Speaker 2: really compute literally and figuratively.
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  Speaker 1: So you talked about telling stories as a group. Let's
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  Speaker 1: talk a little bit about humans as social primates and
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  Speaker 1: the tendency to do what the crowd does. Why is
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  Speaker 1: that a problem when it comes to stocks and bonds.
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  Speaker 2: Well, there's a word for that, it's called hurting. But
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  Speaker 2: why do we heard to begin with? Well, you know
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  Speaker 2: you asked me at the start, you know what happened
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  Speaker 2: to get us going in this direction. Well, one was
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  Speaker 2: a focus on the here and now. Another was to
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  Speaker 2: focus on your local tribe, meaning that was a source
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  Speaker 2: of safety first and foremost, but it also became a
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  Speaker 2: source of meaning and identity and community. So humans, you know,
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  Speaker 2: we might think of ourselves as sovereign individuals, but in
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  Speaker 2: some ways, before we become sovereign individuals, we are born
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  Speaker 2: into tribal societies, tribal cultures. Our identities are formed through
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  Speaker 2: those affiliations, and as a result, we want to be
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  Speaker 2: with everybody else. It's really uncomfortable to go against the grain.
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  Speaker 2: So fast forward a few thousand years to twenty four
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  Speaker 2: to seven, fast moving capital markets. When you see people
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  Speaker 2: running for the door or running into this room where
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  Speaker 2: something interesting is taking place, and you're going to be like, huh,
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  Speaker 2: maybe I should go with them, because there is safety
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  Speaker 2: in numbers, at least from a genetic wiring point of view.
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  Speaker 1: So funny you say that. As a kid, I grew
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  Speaker 1: up watching Mutual of Omaha's Wild Kingdom, Yeah, and the
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  Speaker 1: marlinul Shada, the Savannah and just thousands of will to beast,
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  Speaker 1: and they would always zoom in on that one limping
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  Speaker 1: will to beast on the edge of the herd, and
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  Speaker 1: you just knew that guy was about to get separated
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  Speaker 1: from the crowd and it wasn't going to be good
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  Speaker 1: for him.
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  Speaker 2: It was not he was going to lose the race.
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  Speaker 2: I mean, we are wired for a dynamic that I
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  Speaker 2: simply called survive and thrive. Job number one every day
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  Speaker 2: is to stay alive. You don't necessarily need to thrive
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  Speaker 2: every day. You don't need to hit the jackpot every day,
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  Speaker 2: but you certainly need to stay alive because you get one.
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  Speaker 2: You got a one punch ticket, and you got to
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  Speaker 2: stick around. So veering from the crowd from a historical,
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  Speaker 2: from an evolutionary, from a psychological point of view, feels
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  Speaker 2: uncomfortable for a reason because our ancestors who did veer
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  Speaker 2: from the crowd, they're not really around to pass on
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  Speaker 2: their genes to us, right.
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  Speaker 1: The ones that the lines culled from the herd, That
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  Speaker 1: genetic line ends there.
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  Speaker 2: That's the way evolution works. We are an adaptive species.
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  Speaker 2: So there are certain genes and instincts that are more
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  Speaker 2: by luck than by design. They land well in the world,
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  Speaker 2: and those are the ones that get replicated. Those are
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  Speaker 2: the genes that profligate through our system our biological systems,
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  Speaker 2: and as a result, the human condition is what it is.
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  Speaker 1: So let's talk a bit about emotion. I'm a big
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  Speaker 1: fan of Danny Kanneman's book Thinking Fast and Slow. Why
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  Speaker 1: is it that our instinctual first reaction is this often
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  Speaker 1: over the top emotional reaction that gets our heart pumping,
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  Speaker 1: our breath quick, we begin to sweat. Why do we
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  Speaker 1: react that way?
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  Speaker 2: I mean, it comes back to this survival instinct, Barry.
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  Speaker 2: It's this hardwiring that we need to survive. We are
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  Speaker 2: so good, if you think about it, so good at
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  Speaker 2: sensing danger. If you walk into a room, could be
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  Speaker 2: in your home or in the office, or if you're
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  Speaker 2: socializing with friends. If there's something in that environment that
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  Speaker 2: feels slightly off, you are so finely attuned to it
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  Speaker 2: you are going to react. It's just who we are.
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  Speaker 2: And so when you talk about Danny Kanneman, one of
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  Speaker 2: my all time heroes, writer of Thinking Fast and Slow,
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  Speaker 2: inventor of behavioral finance, with almost Tabsky, you absolutely have
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  Speaker 2: that quickening heart rate, the pulses going up. You're sweating
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  Speaker 2: a little bit, because that is a natural biological reaction
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  Speaker 2: to a threatening environment. And the thing is a line
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  Speaker 2: on the savannah and a red line on a stock
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  Speaker 2: chart actually trigger us in the exact same way. At
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  Speaker 2: some level, danger is danger is danger.
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  Speaker 1: Huh. So when we look at how humans have evolved
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  Speaker 1: and adapted, it seems life on the savannah was hard,
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  Speaker 1: and our emotions get us excited, and that leads us
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  Speaker 1: to a fight or flight response, and that affects us
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  Speaker 1: in the modern capital markets. Tell us what this means
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  Speaker 1: for us today.
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  Speaker 2: One thing I'd want to stress is that you sometimes hear, well,
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  Speaker 2: let's take the emotions out of investing. Well, it's sort
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  Speaker 2: of like saying let's take gravity out of space. There's
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  Speaker 2: no way to get around it. We are emotional creatures.
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  Speaker 2: Emotions are actually sources of information so that we can
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  Speaker 2: navigate the world better. So there's nothing wrong with having
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  Speaker 2: an emotional reaction. Hey, my portfolio is declining in value.
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  Speaker 2: Am I still going to be able to retire comfortably?
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  Speaker 2: Those are totally natural, normal reactions. But what I'd stress
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  Speaker 2: is that we get away from thinking of ourselves as irrational.
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  Speaker 2: By the way, irrational is an economist's word for stupid.
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  Speaker 2: We're not stupid. Richard Thaylor, one of the other pioneers
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  Speaker 2: in behavioral finance, has said that people aren't dumb. The
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  Speaker 2: world is hard. The world is very hard. We're processing
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  Speaker 2: a lot of information. It is complicated times. So let's
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  Speaker 2: not think of ourselves as irrational. Let's think of emotions
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  Speaker 2: as a source of information and strength and think, well,
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  Speaker 2: we are normal. We are adaptive for a reason. It
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  Speaker 2: might land us in a difficult spot, but we can
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  Speaker 2: pull back from that and with a little bit of
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  Speaker 2: self awareness, make better decisions.
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  Speaker 1: So let me bring up something that Danny Conneman said
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  Speaker 1: that I found so fascinating. He said, even I full
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  Speaker 1: prey to my own cognitive biases and emotional reactions. If
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  Speaker 1: someone as knowledgeable and just a pioneer in the space
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  Speaker 1: as Danny Kahneman is susceptible to emotions leading him astray,
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  Speaker 1: what hope do the rest of us have?
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  Speaker 2: We have a ton of hope, Barry, a ton of
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  Speaker 2: hope because we're not supposed to be automatons. It's an
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  Speaker 2: awesome thing that we are emotional. It makes life rich
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  Speaker 2: and colorful. It's just that we want to make sure
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  Speaker 2: that we appreciate that emotion is a language with vocabulary,
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  Speaker 2: and as we navigate markets, as we navigate our financial lives,
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  Speaker 2: these feelings of greed, joy, fear, envy, anger. One they
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  Speaker 2: are normal, and two we can use those as a
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  Speaker 2: jumping off spot to understanding how we want to approach
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  Speaker 2: a situation and make things better. When Danny Conyman says, hey,
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  Speaker 2: I can't get rid of my biases, he's opening actually
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  Speaker 2: a really fantastic door for all of us to appreciate
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  Speaker 2: that this is just the way that we are. So
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  Speaker 2: the job here is not to change human nature. It's
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  Speaker 2: to understand human nature in ways that help us make
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  Speaker 2: better decisions in a very complicated world.
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  Speaker 1: So I love the way you're framing that. So let's
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  Speaker 1: take what's probably one of the two most damaging emotions
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  Speaker 1: in finance, which is fear. So we're recording this. Markets
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  Speaker 1: have been a little wobbly the past couple of weeks.
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  Speaker 1: After a good run from the lows in twenty twenty two,
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  Speaker 1: things have kind of stumbled a bit. And the genuine
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  Speaker 1: risk for investors is after this goes on for a
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  Speaker 1: few weeks or even months, they just throw their hands
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  Speaker 1: up and say, I'm not sleeping, I'm not comfortable. Get
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  Speaker 1: me out. Everybody who works with clients has heard that phrase,
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  Speaker 1: I can't take it anymore, get me out. Usually it's
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  Speaker 1: a great buying signal. Why is it that at Low's
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  Speaker 1: our panic reaches a crescendo.
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  Speaker 2: Well, it gets back to the fear instinct. The reason
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  Speaker 2: we feel fear is that we sense danger. We sense
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  Speaker 2: a threat to our security. It might not be our
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  Speaker 2: physical lives way back in the day, but our financial
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  Speaker 2: lives if they are under threat, well, maybe we can't
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  Speaker 2: afford to eat, maybe we can't afford our mortgage. These
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  Speaker 2: feel very uncomfortable. They are legitimate emotions. One thing I'd add, though,
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  Speaker 2: is that if we think of investing broadly less as
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  Speaker 2: a game or a casino something to be won, but
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  Speaker 2: as a tool in reaching our goals, we actually dampen
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  Speaker 2: down some of those harsher emotions that we might feel
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  Speaker 2: because we no longer are asking the question am I
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  Speaker 2: am I holding the right investments? How much money am
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  Speaker 2: I losing? We pivot to a more constructive question of
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  Speaker 2: am I closer to or further away from my goals?
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  Speaker 2: And the goals actually serve as a really fantastic bridge
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  Speaker 2: from a cognitive point of view. From an emotional point
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  Speaker 2: of view where you can really have a better conversation
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  Speaker 2: in your own mind, with your partner, with your financial advisor.
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  Speaker 2: It provides a context so that you're not being whipsawed
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  Speaker 2: by the daily machinations of the market. If you're paying
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  Speaker 2: too close of attention to that, you're probably not playing
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  Speaker 2: the game that you should be in terms of long
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  Speaker 2: term financial well being.
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  Speaker 1: Really really intriguing. So if I get this right, emotions
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  Speaker 1: are natural. Doesn't mean we're dom or stupid. It's part
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  Speaker 1: of who we are. But allowing your emotions to affect
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  Speaker 1: your thought to lead to bad decisions that could cause
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  Speaker 1: bad investments, bad timing, and bad behavior, and that leads
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  Speaker 1: to bad results. But at the very least, if you're
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  Speaker 1: aware of your emotions and put them into some context
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  Speaker 1: and don't allow them to overly affect your decision making process,
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  Speaker 1: hey you're halfway there to a successful financial result. The
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  Speaker 1: bottom line, don't allow your emotions to get the better
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  Speaker 1: of you. That's just your wet wear, that's just how
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  Speaker 1: you're built. You can listen to At the Money every week,
• 14:43
  Speaker 1: find it in our masters and business feed at Bloomberg
• 14:45
  Speaker 1: dot com, Apple Podcasts and Spotify Each week, we'll be
• 14:49
  Speaker 1: here to discuss the issues that matter most to you
• 14:52
  Speaker 1: as an investor. I'm Barry Redults you've been listening to
• 14:56
  Speaker 1: At the Money on Bloomberg Radio. He sa