Behavioral Finance For the Layman
Meet Dr. Daniel Crosby
By Diana Vilic
By Diana Vilic
“Standing out a little bit is a powerful signal in a leadership context” he tells me, and I almost spilled my coffee all over the laptop that’s virtually connecting us. I can’t help but laugh. Daniel Crosby, New York Times Best Seller, Psychologist, and Behavioral Finance expert, is on the other side of the screen smirking.
“Think about it,” he tells me, “Pragmatically, it works in the leadership context. We find that leaders are typically a little different. They may be a little taller, heavier, dress a little different. As a society, we like people who are 80% like us, but 20% different. Because the assumption ties to power. If you fall in line so directly to the mandates, you’re seen as a pawn. But if you’re onboard enough that you’re seen as a team player, but different enough that you stand out a bit, you’re actually seen as an authority and someone worth listening to.
I can’t help but ask him, “What about everyone else?” Was the magical ability to be weird and loved something unique to leaders, or did the rest of us have a chance. Daniel looks at me, his face turning serious, almost as if he was reflecting on a past lived life. “I’ve seen the damage done by seeing people try to become something that they aren’t. Back when I was a therapist, the most consistent source of melays and depression was emotional grey, people who were living in the grey and trying to live such unextraordinary lives—just so they didn’t get hurt. They'd try so hard not to fall in love or to go up for a job, because it may hurt. That was consistently a cancerous force in people's lives that they couldn’t put their finger on. They did everything right, played by all the rules, and they were miserable. I couldn’t help but see how detrimental it was to peoples beings that they were stifling their individuality.”
My gut started knotting as I reflected, it was impossible to not think of the past four years of my life. So many moments that ultimately lead to this project, and Daniel sitting in front of me.
Daniel Crosby is a unique character, an enigma almost. A former psychologist turned behavioral finance expert and author who helps organizations understand the intersection of mind and markets. Among his collaborations is "Personal Benchmark", a system of embedded behavioral finance delivered by Brinker Capital. His book “The Laws of Wealth”, was named the best investment book of 2017 by the Axiom Business Book Awards, and he was named one of the “12 Thinkers to Watch” by Monster.com, a “Financial Blogger You Should Be Reading” by AARP and a member of InvestmentNews prestigious "40 Under 40". It’s safe to say, Daniel doesn’t just understand human behavior, he very literally wrote four books on it, and is seen as a renowned expert in his field. He’s also mirthful, considerate, sincere, and insightful—making him the perfect consult for our founders issue.
After a few sips of coffee and banter, he remarks “An entrepreneur should know themselves best of all,” I can’t help but question why, seeing the puzzle look on my face, he continues, “entrepreneurship is mathematically speaking a stupid idea. We know that a vast majority of entrepreneurial endeavors fail, and if you don’t want to be a statistic, I think you need to know yourself, and what it is about you and your product or service that differentiates you from the world, why it’s an acceptable risk, and most importantly, know why you’re different or if you even are.”
When the conversation turns to entrepreneurs we’ve seen, I almost knew word for word what he’d tell me, “The best entrepreneurs get good at failing fast and saying no to ideas very fast.” I can’t help but laugh, by the time Daniel and I had the chance to sit down, that exact advice was echoed to me by six other mentors. Daniel laughs and carries on, “I think overconfidence is the metabias, overconfidence that subsumes all other bias. It’s the American Idol effect where someone god awful would get up and sing, and it’s easy to wonder why no one told them that they’re terrible. A lot of the times they have been told, they just didn’t listen. Early on in a business, the whole world is against you and because people are overconfident, they often have trouble differentiating legitimate critical feedback they’re getting and an idea that is so innovative that it isn’t immediately recognized by the marketplace”
I get excited, knowing exactly where to take the conversation, I’m convinced Daniel saw me jumping up and down in my seat like an excited toddler. “Tell me why everyone needs to know behavioral finance,” I exclaim, perhaps a little too loudly. “There’s basically two things that determine the outcome of your life, one is luck and one is decisions. Luck is out of our control, it’s highly predictive of how you’ll do, but you can’t do anything about it. All that’s left is decisions. Behavioral finance at its core is the study of how we make decisions. At the risk of sounding grandiose, it’s the whole ball game.”
If you were to do a google search on behavioral finance, it’s daunting and doesn’t seem applicable to anyone other than financial analysts. But as Daniel mentions, behavioral finance is the study of decisions. Broken up into two pillars, cognitive psychology, how people think, and the limits to arbitrage, when markets will be inefficient, behavioral finance is critical for anyone who wants to understand their behaviors and natural bias.
“One of my chapters in my first book is about how if you’re excited about an idea, it’s probably stupid. No one wants to hear that, but emotional extremes don’t lend themselves to good decision making. We know on one hand you can’t make a decision without emotion, it’s part of everything we do. And we know people who have trauma to the emotional processing centers of the brain can’t even make easy decisions about what kind of clothes to wear. There’s never going to be a time when emotions are divorced from the decision making process. But we can see to it that we aren’t making decisions at times of great emotional extremes. Great fear, excitement, paranoia, whatever it is, you need to wait to exit that state to do something big.”Sinking down in my seat, feeling a little attacked, and knowing even though I study behavioral economics, I fall victim to my own tendencies. Trying to gain insight for myself, I ask how we regulate ourselves when we’re in emotional extremes. “The system I use to try and get out of periods of great emotion management system called RAIN.”
R: Recognize the feeling that you are experiencing. Someone going through emotional excess may not recognize that they are going through this period.
A: Allow the experience to be as it is. When we recongize an emotion in ourselves, we want to change it.
I: Investigate the feeling with kindness. How does it feel in your body? Where are you feeling it most strongly? What types of thoughts does this emotion cause you to think about? Is it making you tense up or feel badly at all?
N: Non-identification. It’s important to not tie your self worth too closely to whatever emotion we’re experiencing.
I can’t help but wonder why we’re like this, why do we naturally need to be perfect or get so worked up with emotions until we combust? Why is everyone trying to prove themselves? When asked, Daniel pauses, reflecting on his training and experiences, “I’ll take it back to the research and back to being a little weird. There’s something called the Pratfall Effect, again being a little fallible makes you likable. So many of us are trying to be inhuman and perfect, to convince ourselves and the world that we’re worth something, that we become obnoxious. When you meet flawless people, they’re annoying, as a general rule we don’t really like them. It’s about being competent, but human. If you can balance those two things, the world is yours.”
As I finish my second cup of coffee and wrap up our conversation, Daniel says “I’m a big believer that we all just want to mean the world to a handful of people. A lot of people stretch themselves too thin and try to be everything to everyone. But we’re all really looking to matter to a handful of people.”