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At the Money: Investing Is Hard · Masters in Business

• 0:01
  Speaker 1: BAA. Have you ever wondered why investing is so hard?
• 0:20
  Speaker 1: Why is it that your instincts always lead you astray?
• 0:24
  Speaker 1: Why are stories so compelling but probabilities leave us cold?
• 0:29
  Speaker 1: Why do you join the crowd buying in at the
• 0:32
  Speaker 1: top and then panic sel at the bottom. As it
• 0:35
  Speaker 1: turns out, you're just not built for this. I'm Barry Retoults,
• 0:40
  Speaker 1: and on today's edition of At the Money, we're going
• 0:43
  Speaker 1: to discuss evolutionary psychology at what it means for your portfolios.
• 0:49
  Speaker 1: Let's bring in Brian Portnoy. His firm Shaping Wealth helps
• 0:53
  Speaker 1: financial professionals with both money and meaning. So Brian, welcome
• 0:58
  Speaker 1: to At the Money. It turns out that investing is
• 1:02
  Speaker 1: hard for a reason. Tell us about that.
• 1:05
  Speaker 2: Yeah, thanks, Barry. We weren't wired for this. The brain
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  Speaker 2: between our ears is more than one hundred thousand years old,
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  Speaker 2: all right, So we're working with pretty old machinery. Money,
• 1:17
  Speaker 2: which we probably take for granted, is a relatively new invention.
• 1:21
  Speaker 2: Let's just call it, to make it easy, three thousand
• 1:24
  Speaker 2: years old. The brain's one hundred thousand years old. Money's
• 1:27
  Speaker 2: three thousand years old. The way we evolved was not
• 1:31
  Speaker 2: to spend and save wisely or to invest using modern
• 1:36
  Speaker 2: portfolio theory. Now, we are wired to survive in a
• 1:40
  Speaker 2: wild and dangerous environment where money was not even a thing.
• 1:45
  Speaker 2: So money and brains tend not to work very well together.
• 1:48
  Speaker 3: So let's take some examples.
• 1:50
  Speaker 1: Where does this evolutionary baggage that we're all stuck with,
• 1:54
  Speaker 1: how does it lead us astray?
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  Speaker 3: Give us some examples.
• 1:57
  Speaker 2: Well, let's talk about time now versus later. So we
• 2:01
  Speaker 2: are as humans, really the only species that, in a
• 2:04
  Speaker 2: sophisticated way, can mental time travel. We've got the future,
• 2:08
  Speaker 2: we've got the past, we've got the present. And you know,
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  Speaker 2: we were raised, we grew up as a species in
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  Speaker 2: an immediate return environment, so there was a distant future.
• 2:18
  Speaker 2: But when you're out on the savannah and you're trying
• 2:20
  Speaker 2: to 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
• 2:27
  Speaker 2: someone says, hey, you know, you're thirty five or forty
• 2:29
  Speaker 2: years old and we're going to put together a thirty
• 2:31
  Speaker 2: year portfolio for you, that literally doesn't make any sense
• 2:35
  Speaker 2: to who we are as a human species.
• 2:38
  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
• 2:45
  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. I say
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  Speaker 2: two plus two. You don't calculate that, you just know
• 3:01
  Speaker 2: it's for. But if I give you something even slightly
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  Speaker 2: more complicated, we begin to stammer over, well, what would
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  Speaker 2: the answer be versus the way that we as a
• 3:11
  Speaker 2: tribal species developed many many years ago, thousands of years ago,
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  Speaker 2: which was sharing stories. So the brain has evolved to
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  Speaker 2: love and cherish stories. It's the way that we live
• 3:24
  Speaker 2: our lives. In fact, as we listen to new information,
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  Speaker 2: we watch TV or read the internet, we are processing
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  Speaker 2: enormous amounts of information and picking and choosing the bits
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  Speaker 2: that map to the stories that we already believe. Some
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  Speaker 2: psychologists might call this confirmation bias. Numbers they don't really
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  Speaker 2: compute literally and figuratively.
• 3:45
  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
• 4:10
  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
• 4:16
  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, or
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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: marl 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: wild of 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.
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  Speaker 3: To be good 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, the.
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  Speaker 3: Ones that the lines culled from the herd. That genetic
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  Speaker 3: 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 3: So let's talk a bit about emotion.
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  Speaker 1: I'm a big fan of Danny Kanneman's book Thinking Fast
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  Speaker 1: and Slow. Why is it that our instinctual first reaction
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  Speaker 1: is this often over the top emotional reaction that gets
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  Speaker 1: our heart pumping, our breath quick, we begin to sweat.
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  Speaker 3: Why do we 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 hard wiring that we need to survive. We
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  Speaker 2: are so good, if you think about it, so good
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  Speaker 2: at sensing danger. If you walk into a room, could
• 7:14
  Speaker 2: be in your home or in the office, or if
• 7:16
  Speaker 2: you're socializing with friends. If there's something in that environment
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  Speaker 2: that feels slightly off, you are so finely attuned to
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  Speaker 2: it you are going to react. It's just who we are.
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  Speaker 2: And so when you talk about Danny Kannoman, 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
• 7:39
  Speaker 2: that quickening heart rate, the pulse is going up, you're
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  Speaker 2: sweating a little bit. Because that is a natural biological
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  Speaker 2: reaction to a threatening environment. And the thing is a
• 7:51
  Speaker 2: line on the savannah and a red line on a
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  Speaker 2: stock chart actually trigger us in the exact same way.
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  Speaker 2: At some level, danger is danger is danger.
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  Speaker 3: Huh.
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  Speaker 1: So when we look at how humans have evolved and adapted,
• 8:05
  Speaker 1: it seems life on the savannah was hard, and our
• 8:08
  Speaker 1: emotions get us excited, and that leads us to a
• 8:13
  Speaker 1: fight or flight response, and that affects us in the
• 8:16
  Speaker 1: modern capital markets. Tell us what this means for us today.
• 8:21
  Speaker 2: One thing I'd want to stress is that you sometimes hear, well,
• 8:24
  Speaker 2: let's take the emotions out of investing. Well, it's sort
• 8:27
  Speaker 2: of like saying let's take gravity out of space. There's
• 8:30
  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
• 8:35
  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 3: So let me bring up.
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  Speaker 1: Something that Danny Conneman said that I found so fascinating.
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  Speaker 1: He said, even I full prey to my own cognitive
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  Speaker 1: biases and emotional reactions. If someone as knowledgeable and just
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  Speaker 1: a pioneer in the space as Danny Khneman is susceptible
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  Speaker 1: to emotions leading him astray, what.
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  Speaker 3: 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 Conman 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,
• 11:02
  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
• 11:10
  Speaker 1: few weeks or even months, they just throw their hands
• 11:13
  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.
• 11:21
  Speaker 1: I can't take it anymore, get me out. Usually it's
• 11:25
  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
• 11:41
  Speaker 2: a threat to our security. It might not be our
• 11:43
  Speaker 2: physical lives way back in the day, but our financial
• 11:48
  Speaker 2: lives if they are under threat, well, maybe we can't
• 11:50
  Speaker 2: afford to eat, maybe we can't afford our mortgage. These
• 11:54
  Speaker 2: feel very uncomfortable. They are legitimate emotions. One thing I'd add, though,
• 12:00
  Speaker 2: is that if we think of investing broadly, less as
• 12:04
  Speaker 2: a game or a casino something to be one, but
• 12:08
  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
• 12:21
  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
• 12:28
  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
• 12:34
  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
• 12:48
  Speaker 2: by the daily machinations of the market. If you're paying
• 12:51
  Speaker 2: too close of an attention to that, you're probably not
• 12:54
  Speaker 2: playing the game that you should be in terms of
• 12:56
  Speaker 2: long term financial well being.
• 12:58
  Speaker 3: Really really intriguing.
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  Speaker 1: So if I get this right, emotions are natural doesn't
• 13:04
  Speaker 1: mean we're dom or stupid.
• 13:06
  Speaker 3: It's part of who we are. But allowing your.
• 13:09
  Speaker 1: Emotions to affect your thought process to lead to bad
• 13:13
  Speaker 1: decisions that could cause bad investments, bad timing, and bad behavior,
• 13:20
  Speaker 1: and that leads to bad results.
• 13:24
  Speaker 3: But at the very least, if you're aware of your.
• 13:26
  Speaker 1: Emotions and put them into some context and don't allow
• 13:30
  Speaker 1: them to overly affect your decision making process, hey you're
• 13:36
  Speaker 1: halfway there to a successful financial result. The bottom line,
• 13:41
  Speaker 1: don't allow your emotions to get the better of you.
• 13:44
  Speaker 1: That's just your wetwear. That's just how you're built. You
• 13:52
  Speaker 1: can listen to At the Money every week, find it
• 13:55
  Speaker 1: in our Masters and Business feed at Bloomberg dot com,
• 13:58
  Speaker 1: Apple Podcasts, and Spotify. Each week, we'll be here to
• 14:01
  Speaker 1: discuss the issues that matter most to you as an infestor.
• 14:05
  Speaker 3: I'm Barry Rittolts.
• 14:07
  Speaker 1: You've been listening to Add the Money on Bloomberg Radio.