45 things smart investors never say

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

1. Fear of political strife – “I don’t like the President”

2. Concentrated position – “My grandfather gave me this stock”

3. Impersonal benchmarks – “Why am I down versus the S&P 500?”

4. Market timing – “Is now a good time to invest?”

5. Home bias – “Europe? I prefer the Red, White, and Blue!”

6. Tangibility bias – “I like to invest in things that I can hold”

7. Friendship bias – “I like to invest in people I know”

8. Anchoring/ “breakevenitis” – “I’ll sell when it gets back to what I paid for it”

9. Selling winners too quickly – “You never go broke taking a profit”

10. Mere exposure effect – “Buy what you know”

11. Zero risk bias – “I’ll keep this dry powder for a rainy day”

12. Performance chasing – “This has been hot…”

13. IPO investing – “Have you heard of this new company…?”

14. Shifting risk tolerance – “I’m a high-risk high-reward person”

15. Ostrich effect – “Why mess with a good thing?” (complacency)

16. Confirmation bias – “All of my friends say…”

17. Overconfidence – “It won’t happen to me…”

18. Hindsight bias – “How did you do in 2008?”

19. Restraint bias – “I’ll jump on the next March 2009”

20. Self-serving bias – “Why aren’t my returns higher?” (two-way street)

21. Affect heuristic – “I’m going with my gut on this one…”

22. Appeal to authority – “But Jim Cramer said…”

23. Status quo bias – “Rebalance? Why bother?”

24. Hyperbolic discounting – “I’ll start saving later…”

25. Gambler’s fallacy – “I’m on a roll!”

26. Herding – “My friend told me to check out…”

27. New era thinking – “Yeah, but this time is different…”

28. Representativeness – “This will be the Great Depression all over again”

29. Bias blind spot – “But I would never do that!”

30. Ambiguity aversion – “Why can’t you just give me a straight answer?”

31. Babe Ruth Effect – “Why did you have me in last year’s big winner?”

32. Dread risk – “I’m gonna buy gold”/ “What about the zombie apocalypse?”

33. Fundamental attribution error – “Why aren’t you beating the market? I could do better myself!”

34. Illusory pattern recognition – “This chart looks just like 1929!”

35. Money illusion – “I’m a millionaire! What do you mean keep working?”

36. Myopic loss aversion – “Excuse me, I have to make some hedging trades.”

37. Sunk cost fallacy – “Well, we’ve already gone this far so…”

38. Turkey illusion – “Recession? Never heard of it.”

39. Fetish for complexity – “I need hedge fund exposure! What am I paying you for?”

40. Declinism – “The way I see it, the world is just going to hell”

41. Framing – “Save 10%? Impossible.”

42. Illusory truth effect (believing a market myth frequently repeat) – “Sell in May and go away”

43. Information bias – “Let me just turn on CNBC”

44. Outcome bias – “You told me not to buy individual stocks and it went up. Ha!”

45. Post-purchase rationalization – “I mean, I NEEDED that.”

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

You will never regret your vacation

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Bronnie Ware is an Australian nurse who has spent her career in a palliative care unit, caring for those with very little time to live. As someone who interacts with the dying, she has had the privilege of speaking with these people about the things that make their life worth living, as well as what they wish they’d done differently. Ware summarized the top five regrets of those about to pass on in her excellent blog, “Inspiration and Chai.” The “Top Five Regrets of the Dying” are:

  1.  I wish I’d had the courage to live a life true to myself, not the life others expected of me.
  2.  I wish I hadn’t worked so hard.
  3.  I wish I’d had the courage to express my feelings.
  4.  I wish I had stayed in touch with my friends.
  5.  I wish I had let myself be happier.

Notice, not one mention of money and the only mention of work is to say they (especially male patients) wished they had done less of it. If you are like me (and perhaps like most people), you are chasing the wrong dream and setting the wrong goals. As you sit and evaluate your life as it draws to a close, I promise you that you will never regret the year your portfolio underperformed the benchmark, but you may well regret lost time spent living a life that confused money with what matters much more.

The Path Forward
In a money-obsessed world that has socialized us to chase the almighty dollar, it can be weirdly unsettling to learn that money isn’t everything. As much as we whine about money, having something that is the physical embodiment of happiness is nice. We can hold it, save it, get more of it, all while mistakenly thinking that getting paid is how we “arrive.” Realizing that money does not directly equate to meaning can leave us with a sense of groundlessness but once we’ve stripped away that faulty foundation, we can replace it with things that lead to less evanescent feelings of happiness. Breaking your overreliance on money as a substitute for real joy is a great first step, here are two ways to move forward upon having made this important realization:

Spend money in ways that matter – Let’s be balanced in the way we talk and think about money. It’s not the key to happiness, but it’s not nothing either. A lot of our troubles with money stem from the way we spend it. We think that buying “things” will make us happy. We engage in retail therapy which is quickly followed by feelings of regret at being overextended. Before we know it, we’re surrounded by the relics of our discontent; the things we bought to be happy become constant reminders that we’re not.

Instead of amassing a museum of junk, spend your money on things of real value. Spend a little more on quality, healthy food and take the time to savor your new purchases. Use your money to invest in a dream – pay yourself to take a little time off and write that novel about which you’ve always dreamt. Give charitably and experience the joy of watching those less fortunate benefit from your wealth. Finally, spend money on having special experiences with your loved ones. It’s true that money doesn’t buy happiness, but it can do a great deal to facilitate it if you approach it correctly.

Find a new metric – Part of the appeal of money as a barometer for happiness is that it’s so…well…quantifiable. Meaning, joy, happiness, and fulfillment are all abstractions that can be hard to get our hands around. Thus, we aim for something we can count (but end up sadly disappointed). So, take things that really will make you happy and try to come up with metrics for those things instead. Maybe you enjoy painting and you could set a goal to complete three new pieces by the end of the summer. Perhaps you want to be more service oriented and you could set a goal to engage in a charitable act each week. The impulse to measure happiness is a natural and good one, let’s just make sure we’re using a yardstick that delivers on its promises.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

 

Is there any wisdom in the crowd?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

“Anyone taken as an individual is tolerably sensible and reasonable – as a member of a crowd, he at once becomes a blockhead.” – Friedrich Von Schiller

I travel roughly once a week to conferences where, in addition to eating overcooked chicken, I am typically asked to speak to financial advisors about the foundations of behavioral finance. As anyone who travels for business well knows, it can be tricky in a new city to try and determine where best to eat, sleep, or watch a show. And while many nice hotels provide a concierge to guide you, the concierge’s advice is ultimately limited by the fact that it is just one person’s opinion. Having been steered amiss more than once by a concierge with a palate less sophisticated than my own (for surely it could not have been MY taste that was in question), I quickly learned to harness the power of the crowdsourced review. Apps like Yelp, Urban Spoon, and Rotten Tomatoes provide aggregated reviews that guide diners and moviegoers to restaurants and films that have received consensus acclaim.

While I may not always agree with the taste of any individual concierge or my local newspaper’s movie reviewer, I have never been disappointed with a movie or dish that has received widespread approval. In things that matter most (i.e., food and movies), there is wisdom in the crowd.

But the power of crowd thinking is not limited to picking out a tasty schnitzel or deciding whether to watch Dude, Where’s My Car? (18% on Rotten Tomatoes) – it is the bedrock upon which the most successful political systems are built. Sir Winston Churchill famously opined that, “The best argument against democracy is a five-minute conversation with the average voter,” a sentiment heard in many forms at election time. So why then has democracy proven to be so successful (or at least not entirely unsuccessful) over long periods of time? Why is it, paraphrasing Churchill again, “the worst form of Government except all those other forms that have been tried from time to time”? The answer is once again in the tendency of the crowd to be more wise, ethical, tolerant, and gracious than the sum of its parts. The alternatives, political systems like oligarchy and monarchy, live and die with the strengths or weaknesses of the few, which is a much higher risk/reward proposition than democracy. The average voter may be unimpressive, but the average of the averages tends to be the best game in town.

wisdom in the crowd2

If crowd wisdom can help us solve complex decisional problems and provides us with good-enough government, it seems intuitive that it has something to offer most investors, right? Wrong. Once again, the rules of Wall Street Bizarro World turn conventional logic on its head and require us to operate from a different set of assumptions.

Why is it then that a qualitative gap exists between investment and culinary decisions? Richard Thaler, behavioral economist par excellence, has identified four qualities that make appropriate decision-making difficult. They are:

  • We see the benefits now but the costs later
  • The decision is made infrequently
  • The feedback is not immediate
  • The language is not clear

Choosing a nice meal consists of clear language (“Our special tonight is deep-fried and smothered in cheese”), immediate feedback (“OMG! This is so good”), is made frequently (3 times daily, more if you’re like me), and has a mix of immediate and delayed costs (“That will be $27” or “I should have quit after three rolls”).

An investment decision, on the other hand, violates every single one of Thaler’s conditions. It consists of intentionally confusing language (What does “market neutral” even mean?), has a massively delayed feedback loop (decades if you’re smart), is made very infrequently (thanks for the inheritance, Aunt Mable), and has benefits that are delayed to the point that we can scarcely conceive of them (36-year-old me can scarcely conceive of the 80-year-old me that will spend this money). The crowd can provide us excellent advice on selecting a meal because it is a decision that is frequently made with results that are instantly known. Conversely, the wisdom or foolishness of a given investment decision may not be made manifest for years, meaning that the impatient crowd may have little wisdom to offer.

As we might expect from Professor Thaler’s research, the crowd gets it all wrong when deciding when to enter and exit the stock market. They enter at the time of immediate pleasure and long-term pain (bull markets) and leave at the time of immediate pain and long-term pleasure (bear markets). In A Wealth of Common Sense, Ben Carlson relates a study performed by the Federal Reserve that examined fund flows from 1984 to 2012. Unsurprisingly, “they found that most investors poured money into the markets after large gains and pulled money out after sustaining losses – a buy high, sell low debacle of a strategy.” Yet again we see that preferring the rules of every day to those of Wall Street Bizarro World means trading cheap emotional comfort for enduring poverty.

Jared Diamond’s book Collapse recounts the story of a people who tried to do what so many investors attempt in WSBW – inflexibly imposing their preferred way of life on an incompatible system. Diamond tells the story of the Norse, a once powerful group of people who left their homes in Norway and Iceland to settle in Greenland. The Vikings, who aren’t exactly known for their humility, doggedly pushed forward – razing forests, plowing land and building homes – activities that robbed cattle of grazable farmland and depleted the few extant natural resources. Worse still, the Norse ignored the wisdom of the indigenous Inuit people, scorning their ways as primitive compared to what they viewed as a more refined European approach to farming and construction. By ignoring the means by which the native people fed and clothed themselves, the Norse perished in a land of unrecognized plenty, victims of their own arrogance.

Like a Norseman in Greenland, you find yourself of necessity in a land with bizarre customs, some of which make little sense. This land is one in which less is more, the future is more predictable than the present and the wisdom of your peers must be roundly ignored. It is a lonely place that requires consistency, patience, and self-denial, none of which come easily to the human family. But it is a land you must tame if you are to live comfortably and compound your efforts. The laws of investing are few in number and easy enough to learn, but will initially feel uncomfortable in application. It won’t be easy but it is surely worth it – and it is all within your power.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

 

Why outcomes beat fear

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

It seems to be human nature to be fascinated by pathology. Sigmund Freud began his study of the human psyche by outlining how it was broken (hint: your Mom) and the discipline continued down that path for over a century. It was roughly 150 years before the study of clinical psychology was offset at all by the study of what we now call “positive psychology” – the study of what makes us happy, strong, and exceptional. Perhaps it is no surprise then that behavioral finance too began with the study of the anomalous and is only now coming around to a more solution-focused ideal. While a thorough review of the transition from efficient to behavioral approaches isn’t why we are here, it’s worth considering the rudiments of these ideas and how we can improve upon them.

For decades, the prevailing economic theories espoused a view of Economic Man as rational, utility maximizing, and self-interested. On these simple (if unrealistic) assumptions, economists built mathematical models of exceeding elegance but limited real-world applicability. It all worked beautifully, until it didn’t. Goaded only by a belief in the predictability of Economic Man, The Smartest People in the Room picked up pennies in front of steamrollers – until they got flattened.

On the strength of hedge fund implosions, multiple manias with accompanying crashes and mounting evidence of human irrationality, Economic Man begin to give way to Behavioral Man. Behavioral proponents began to document the flaws of investors with the same righteous zeal with which proponents of market efficiency had previously defended the aggregate wisdom of the crowd. At my last count, psychologists and economists had uncovered 117 documented biases capable of obscuring lucid financial decision-making. One hundred and seventeen different ways for you to get it wrong.

But the problem with all this Ivory Tower philosophizing is that none of it truly helps investors. For a clinical psychologist, a diagnosis is a necessary but far from sufficient part of a treatment plan. No shrink worth his $200 an hour would label you pathological and show you the door, yet that is largely what behavioral finance has given the investing public: a surfeit of pathology and a shortage of outcomes.

To consider firsthand the futility of being told only what not to do, let’s try the following.

“Do not think of a pink elephant.”

What happened as you read the first sentence of this section? Odds are, you did the very thing I asked you not to do – you imagined a pink elephant. How disappointing! You could have imagined any number of things – you had infinity minus one option – and yet you still disobeyed my simple request. Sigh. Oh well, I haven’t given up on you yet, so let’s try one more time.

“Do not, whatever you do, imagine a large purple elephant with a parasol daintily tiptoeing across a highwire connecting two tall buildings in a large metropolitan area.”

You did it again, didn’t you?

All feigned anger aside, what you just experienced was the very natural tendency to imagine and even ruminate on something, even when you know you oughtn’t. Consider the person on a diet who has created a lengthy list of “bad” foods. He may, for instance, repeat the mantra, “I will not eat a cookie. I will not eat a cookie. I will not eat a cookie.” any time he experiences the slightest temptation.

But what is the net effect of all his self-flagellating rumination? Effectively he has thought about cookies all day and is likely to cave at the first sign of an Oreo. The research is unequivocal that a far more effective approach is to reorient that behavior into something desirable rather than repeat messages of self-denial that ironically keep the “evil” object top of mind. Unfortunately for investors in a panic, there are far more histrionic “Don’t do this!” messages than constructive “Do this instead”, which is where The Center for Outcomes comes in. At the Brinker Capital Center for Outcomes, we have taken behavioral finance out of the textbooks and are putting it in the hands of advisors where it belongs. By utilizing our empirically-based, four-step process, advisors are given specific tools for communicating with clients in a persuasive manner. Click here to learn how to say “Yes” to outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice.  

Brinker Capital, Inc., a registered investment advisor. 

The financial advisor as emotional coach?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

One of the reasons psychologists can charge $200 per hour to ask, “How does that make you feel?” is because we have become great at putting fancy-pants labels on things that would otherwise be very intuitive. Take for instance the tongue-twisting “affect heuristic,” which is simply a reference to our tendency to perceive the world through the lens of whatever mood we are in.

For example, when giving a seminar on risk assessment, I often ask participants to write down the word, that if it were spelled phonetically, would be “dahy.” Go on, write it down and don’t over think it. It turns out the way you spelled the word has a lot to do with the kind of day you are having. Those that spelled the word as “die” may need a hug, while those that spelled the word “dye” are probably doing fine.

Ask someone having a bad day (those that wrote “die,” I’m looking at you) about their childhood and they are likely to tell you how they were chubby, had pimples, and never got picked first for kickball. Conversely, ask someone having a good day about their childhood and they are likely to recall summers in Nantucket and triple dips from the Tastee Freeze. Memory and perception are moving targets colored by our mood, not infallible retrieval and evaluation machines through which we make unbiased decisions.

financial advisor as emotional coach

So, what is the moral of all of this psychobabble? Think back to the last time you went shopping when you were hungry. Once you’ve brought that to mind, think back on the contents of your shopping cart. If you’re like me, you probably had a whole mess of HoHos, DingDongs, Nutty Buddies and Diet Coke (you don’t want to get fat, after all), but nothing very healthy or substantive.

The same rules apply to any life decision requiring risk assessment; if you try to make decisions when you are happy/sad/angry/in love/anxious/worried/euphoric, you are likely to end up with a life full of junk. When speaking to investors about the affect heuristic, I borrow an acrostic from the addiction literature – H.A.L.T. – which stands for hungry, angry, lonely or tired. The 12 step and other programs encourage those in recovery not to make decisions when they are in any of the emotional states described in H.A.L.T. and this advice is just as sound for investors. You do not view investment risk independent of your emotional state and so making long-term financial decisions in a short-term elevated emotional state should be avoided altogether. For help avoiding excessive emotion, try one of the following:

  • Exercise vigorously
  • Redefine the problem in terms of longer-term goals
  • Limit intake of caffeine and alcohol
  • Talk to a friend or your financial advisor
  • Don’t react right away
  • Shift the focus of your attention
  • Label your emotions
  • Write down your thoughts and feelings
  • Challenge catastrophic thoughts
  • Control whatever aspects possible including diversification and fees

The Center for Outcomes, powered by Brinker Capital Holdings, has developed an educational program to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

Brinker Capital is a privately held investment management firm with $21.7 billion in assets under management (as of December 31, 2017). For 30 years, Brinker Capital’s purpose has been to deliver an institutional multi-asset class investment experience to individual clients. Brinker Capital’s highly strategic, disciplined approach has provided investors the potential to achieve their long-term goals while controlling risk. With a focus on wealth creation and management, Brinker Capital serves financial advisors and their clients by providing high-quality investment manager due diligence, asset allocation, portfolio construction, and client communication services. Brinker Capital, Inc. is a registered investment advisor.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

 

The do’s and don’ts for periods of market volatility

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

We know it has been a stressful week for everyone involved in the market. In times like this, knowing what not to do is just as important as knowing what to do. Therefore, we created a list of things you should and shouldn’t be doing in periods of market volatility.

Do:

  • Do know your history
    • Despite what political pundits and TV commentators would have you believe, this is not an unusually scary time to be alive. Although you would never know it from watching cable, the economy is growing and most quality of life statistics have been headed in the right direction for years! Markets always have and always will climb a wall of worry, rewarding those who stay the course and punishing those who succumb to fear. Warren Buffet expressed this beautifully when he said, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shock; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Such it has ever been, thus will it ever be.
  • Do take responsibility
    • Which of the following do you think is most predictive of financial performance: a) market timing b) investment returns or c) financial behavior? Ask most men or women on the street and they are likely to tell you that timing and returns are the biggest drivers of financial performance, but the research tells you another story. In fact, the research says that you – that’s right – you, are the best friend and the worst enemy of your own portfolio. What happens in the financial markets in the coming years is absolutely out of your control. But, your ability to follow a plan, diversify across asset classes, and maintain your composure is squarely within your own power. At times when market moves can feel haphazard, it helps to remember who is really in charge.
  • Do work with a professional
    • Odds are that when you chose your financial advisor, you selected him or her because of his or her academic pedigree, years of experience, or a sound investment philosophy. Ironically, what you likely overlooked entirely is the largest value he or she adds – managing your behavior. Studies from across the industry put the added value from working with an advisor at 2 to 3% per year. Compound that effect over a lifetime and the power of financial advice quickly becomes evident.

Don’t:

  • Don’t equate risk with volatility
    • Repeat after me, “volatility does not equal risk.” Risk is the likelihood that you will not have the money you need at the time you need it to live the life you want to live. Nothing more, nothing less. Paper losses are not “risk” and neither are the gyrations of a volatile market.
  • Don’t focus on the minute-to-minute
    • Despite the enormous wealth-creating power of the market, looking at it too closely can be terrifying. A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss merely 27.6% of the time. Limited looking leads to increase feelings of security and improved decision-making.
  • Don’t give into action bias
    • At most times and in most situations, increased effort leads to improved outcomes. Want to lose weight? Start running. Want to learn a new skill set? Go back to school. Investing is that rare world where doing less actually gets you more. James O’Shaughnessy of “What Works on Wall Street” relates an illustrative story of a study done at Fidelity. When they surveyed their accounts to see which had done best, they uncovered something counterintuitive: the best-performing stocks were those that had been forgotten entirely.

The Center for Outcomes, powered by Brinker Capital Holdings, has developed an educational program to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800.333.4573.

Brinker Capital is a privately held investment management firm with $21.7 billion in assets under management (as of December 31, 2017). For 30 years, Brinker Capital’s purpose has been to deliver an institutional multi-asset class investment experience to individual clients. Brinker Capital’s highly strategic, disciplined approach has provided investors the potential to achieve their long-term goals while controlling risk. With a focus on wealth creation and management, Brinker Capital serves financial advisors and their clients by providing high-quality investment manager due diligence, asset allocation, portfolio construction, and client communication services. Brinker Capital, Inc. is a registered investment advisor.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

 

 

 

There will never be a perfect time to invest

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Consider something you’ve always wanted to do but that you’ve put off doing because it scares you. In fact, just think of something you’d eventually like to do but haven’t yet, since you may not even be aware of all your reasons for not having embarked on that journey just yet. Maybe that something is having a child. Maybe it’s starting a business. Or perhaps it’s writing a book, getting serious with a romantic partner, or any number of other aspirations you’ve yet to reach. Let’s say for discussion’s sake that the thing you are considering is starting a business. You ask yourself…

“Should I or shouldn’t I start a business?”

Easy enough, right? You make a t-chart, list the pros and cons and then make a decision! Well, let’s examine how you go about dissecting this question. You do your best to dispassionately weigh the pros and perils, but if you’re like most folks (and you are, remember, you’re not special) there is a flaw in the system. Drawing on his background in evolutionary psychology, James Friedrich has concluded that as we evaluate important decisions in our life, our primary aim is to avoid the most costly errors. That is, we make decisions that make us “not unhappy” rather than “blissful.” We want to be “not broke” more than we want to live abundantly. To use the above-mentioned example, you’re far more likely to focus on the potential perils of failing at business than you are the happiness and freedom that might accrue to you.

Never a good time to invest

The evolutionary roots of this system of self-preservation make sense. It was not all that long ago (in terms of evolutionary time) that our forebears were called upon daily to make life and death decisions. For people living on the savannahs of Africa, choosing to zig when you should have zagged could spell the end. Historically, decision-making has been very wrapped up in preserving physical safety and ensuring that physical needs were met. In this life-and-death scenario, minimizing risk at the expense of self-actualization is only logical. However, in the intervening millennia, things have changed and our thought patterns have not kept pace. At least in the US, we now live in a service economy that produces more ideas than it does “things.” We have moved from an agrarian to an industrial to a knowledge-based economy and our ability to cope with personal stressors has not kept pace.

What we are left with is a brain and a decision-making modality that is ill-suited for our modern milieu. We are programmed to choose safety, even at the expense of joy, in an environment where safety abounds and joy is hard to find. Daniel Kahneman and others have shown that people are twice as upset about a loss as they are pleased about a gain. Unless we learn to train our brains to evaluate risk and reward on a more even keel, we will remain trapped in a life of risk-aversion that keeps us from taking the very risks that might make us happy.

Because of the asymmetrical means by which we evaluated risk, it could be truthfully and plainly said that there is never a good time to invest…or have a baby…or start a business…or fall in love. After all, each of these requires us to make ourselves vulnerable, either personally, financially or both, to an unknown future with a very real downside. Markets crash, kids talk back, and businesses fail. But a life lived in shades of grey is the only thing less satisfactory than a life lived at risk of loss. There will always be worries, some founded, others not and investors who are paying attention will never have a sense that it is “all clear.” This uncertainty, this pervasive not knowing, is the hallmark of both life and capital markets and those that have mastered both come to love and embrace it.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Top blog posts of 2017

We’re closing out the year with our top five blog posts of 2017. From retirement and behavioral finance, to in-depth market perspectives, these are the best of 2017. Enjoy!

Jeff Raupp, CFARaupp_Podcast_Graphic, Director of Investments

Investment Insights Podcast: Where markets go from here now that they’ve rallied post-election

 

 

CookPaul-150-x-150

Paul Cook, AIF®, Vice President and Regional Director, Retirement Plan Services

Avoiding retirement regrets

A dozen steps to a smooth transition to retirement

 

Crosby_2015-150x150Dr. Daniel CrosbyExecutive Director, The Center for Outcomes & Founder, Nocturne Capital

Can money buy happiness?

Purchasing power and the big power of small changes

Purchasing power and the big power of small changes

Crosby_2015Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

“A nickel ain’t worth a dime anymore” — Yogi Berra

Odds are, you’re now familiar with the Parable of the Boiling Frog. A story that posits that a frog dropped in boiling water will hop right out of the pot, but that one placed in tepid water that is gradually raised to boiling will meet its demise. The absolute veracity of this metaphor is questionable, but the illustrative quality of the narrative is beyond reproach. The fact is, slow, incremental change can be damaging to us in profound ways. The imperceptibility of these changes leaves us helpless to react, and we only become aware of what’s happening once it is too late.

Sadly, there is a “boiling frog” dynamic at play in the way you think about money, something behavioral economists call the “money illusion.” As best described by Shafir, Diamond and Tversky, the money illusion “refers to a tendency to think in terms of nominal rather than real monetary values.”

In a nutshell, we think of numbers in a way that is disconnected from their purchasing power, and in doing so can make irrational personal financial decisions. Consider the ways in which a six-figure salary or being a millionaire are still considered useful shorthand for wealth. While these may have been meaningful distinctions in say, the ’70s and even eye-popping in the ’20s, they simply don’t mean what they used to because of inflation and decreased purchasing power. The fact is that going forward, multimillionaire status will be required of even middle-class Americans who want to retire with peace of mind.

purchasing power

Inflation creep is slow and insidious, just like the proverbial boiling water, and just like the water, it can have lasting detrimental effects. Consider Yale professor Robert Shiller’s comments on the money illusion as we mentally account for our housing purchases,

“Since people are likely to remember the price they paid for their house from many years ago, but remember few other prices from then, they have the mistaken impression that home prices have gone up more than other prices, giving a mistakenly exaggerated impression of the investment potential of houses.”

Thus, people may overextend themselves to get into an expensive house, hoping for a large nominal return over the years, never realizing that the numbers they are looking at may not even be keeping up with inflation.

While getting in over your head on a home represents excessively risky behavior precipitated by the money illusion, it can just as soon lead to inappropriate risk aversion. Consider the “flight to safety” that occurs during most economic downturns. Investors flood into treasuries, which may not even keep up with inflation, while ignoring equities, which are at their greatest value in years. Truly conceptualized, nothing could be less safe than putting your assets in a class that minimizes purchasing power. By conceptualizing assets in nominal terms instead of “real dollars,” investors irrationally lock in an absolute loss in their efforts to protect against a nominal one.

Financial professionals can help their clients understand purchasing power in a way that is aligned with their individual desires and aspirations. Advisers should emphasize that investors can be lured into focusing on illusory numbers that have little impact on their ability to meet their own needs. As we’ve seen, incremental negative changes can be as bad for your financial future as they are for a frog’s health.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Are you worrying about the wrong things?

Crosby_2015-150x150Dr. Daniel Crosby Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Take a moment and imagine the person you love the most. Perhaps it’s your spouse or partner; maybe it’s a beloved parent. If that person is near, I’d like for you to put the phone or tablet down and go give them a big hug. Tell them how much you appreciate them and all the reasons why you love them. If they aren’t proximal, say a small prayer of thanks or think good thoughts about the positive impact they have in your life before you return to reading. Go on…

…You back now? Ok, great, welcome back.

Now, I want you to realize that the person you’ve just spent the last few minutes idolizing is more likely to kill you than any stranger, terrorist, or bogeyman. In fact, your appendix is more likely to off you than Al Qaida or ISIS. We tend to fear all the wrong things. We’re scared of high-profile, low probability threats like terrorist attacks and home invasions, but we routinely ignore more mundane but probabilistic hazards like not wearing a seatbelt or eating unhealthily. In general, we stink at assessing risk in many predictable ways – chief among them is our tendency to worry disproportionately about low-probability-high-salience events.

Quick! Name all the words you can that begin with the letter “K.” Go on, I’m not listening. How many were you able to come up with? 

Now, name all the words you can in which K is the third letter. How many could you name this time?

If you are like most people, you found it easier to generate a list of words that begin with K; the words probably came to you more quickly and were more plentiful in number. But, did you know that there are three times as many words in which K is the third letter than there are that start with K? If that’s the case, why is it so much easier to create a list of words that start with K?

It turns out that our mind’s retrieval process is far from perfect, and a number of biases play into our ability to recall. Psychologists call this fallibility in your memory retrieval mechanism the “availability heuristic,” which simply means that we predict the likelihood of an event based on things we can easily call to mind. Unfortunately for us, the imperfections of the availability heuristic are hard at work as we attempt to gauge the riskiness of different ways of living.

In addition to having a memory better suited to recall things at the beginning and the end of a list, we are also better able to envision things that are scary. I know this first hand. Roughly six years ago, I moved to the North Shore of Hawaii along with my wife for a six-month internship. Although our lodging was humble, we were thrilled to be together in paradise and eager to immerse ourselves in all the local culture and natural beauty it had to offer. That is, until I watched “Shark Week.”

For the uninitiated, “Shark Week” is the Discovery Channel’s seven-day documentary programming binge featuring all things finned and scary. A typical program begins by detailing sharks’ predatory powers, refined over eons of evolution, as they are brought to bear on the lives of some unlucky surfers. As the show nears its end, the narrator typically makes the requisite plea for appreciating these noble beasts, a message that has inevitably been over- ridden by the previous 60 minutes of fear mongering.

For one week straight, I sat transfixed by the accounts of one-legged surfers undeterred by their ill fortune (“Gotta get back on the board, dude”) and waders who had narrowly escaped with their lives. Heretofore an excellent swimmer and ocean lover, I resolved at the end of that week that I would not set foot in Hawaiian waters. And indeed, I did not. So, traumatized was I by the availability of bad news that I found myself unable to muster the courage to snorkel, dive or do any of the other activities I had so looked forward to just a week ago.

In reality, the chance of a shark attacking me was virtually nonexistent. The odds of me getting away with murder (about 1 in 2), being made a Saint (about 1 in 20 million) and having my pajamas catch fire (about 1 in 30 million), were all exponentially greater than me being bitten by a shark (about 1 in 300 million). My perception of risk was warped wildly by my choice to watch a program that played on human fear for ratings and my actions played out accordingly.

The easy availability of financial news (especially the scary kind) paired with the human tendency to overweight danger means that many investors walk around in a state of near-panic all the time. All the while, they are ignoring things that are truly damaging wealth over time like bad behavior, excessive fees, a lack of diversification and inadequate savings. It is only by understanding how our brains can play tricks that we truly grasp that panic selling is more hazardous than a recession just as surely as a hamburger can be more harmful than a shark.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.