Episode 4: Hidden biases and what you can do about them

Oscarlyn Elder:

Welcome to I've Been Meaning To Do That, a podcast from Truist Wealth, a purpose-driven financial services company. I'm Oscarlyn Elder, co-chief investment officer for Truist Wealth, and thank you for joining us today. We started this podcast to help you take consistent action towards fulfilling your purpose. That includes setting objectives and then acting to move yourself closer to achieving them. Often there is a pause between setting an objective and taking action. During an earlier episode, I shared my own struggle with this in relation to updating my estate planning documents. Look, I just need` to do it. I have thought about it plenty, but the update hasn't happened yet. This is called an intention action gap. That means we know what we need to do, but don't actually follow through for a multitude of reasons. We delay or never get around to doing the it. We're human and sometimes we don't make as much progress toward our wealth objectives as we'd like, or we make decisions that aren't in our best interest long term or aren't aligned with our purpose.

That said, one of the biggest sticking points for most of us is this intention action gap. In this episode, we'll discuss some of those common cognitive or brain stumbling blocks and what you can do to overcome them. Our goal is to help you recognize stumbling blocks and biases that are impacting your taking action and making progress, and to also provide you tools that you can use to overcome the biases so that you keep moving forward, keep moving toward fulfilling your wealth objectives and purpose. We're providing a downloadable, printable PDF that you can use to take notes on this episode. It's available at the webpage for this podcast at truist.com/dothat. We've also provided a link in the description of this episode. Today, I'm joined by two folks who have spent their career studying the art and science of human behavior and how it affects our financial lives. First, I'm joined by Tim Houlihan, who is the enterprise director of behavioral Science at Truist. Tim, welcome to, I've been meaning to do that.

Tim Houlihan:

Oh, it's good to be here, Oscarlyn. Thanks for having me.

Oscarlyn Elder:

Can you share with our listeners what does it actually mean to be the enterprise director of behavioral science? That's a long title with a lot of complex words. So, what does that mean?

Tim Houlihan:

It means happiness for me every day, let me just tell you that. It's like a fantastic thing to be involved in helping bring behavioral science into the DNA of the organization, and we do that through influencing both our teammates as well as the customers that we have across all lines of business. So, it's just a fantastic job.

Oscarlyn Elder:

Wonderful. Well, Tim, again, thanks for being here. And we also have with us Daniel Crosby, who is Chief Behavioral Officer at Orian Advisor Solutions. He's the author of multiple books including The Laws of Wealth and The Behavioral Investor, and I'm so excited that he's going to be joining us for this conversation. So, Daniel, welcome.

Daniel Crosby:

Thank you for having me. It's great to be here.

Oscarlyn Elder:

Tell our listeners a little bit about your background and why you became so interested and intrigued in behavioral investing.

Daniel Crosby:

Yeah, it's a great question. So I am actually a clinical psychologist by education. My PhD is in clinical psychology, but about three years into my doctoral program, I started to burn out, candidly. I was just taking sort of the stress of working in a clinical setting with me home every day. So, I was 25 years old at the time. And so, I approached my dad, who is a financial advisor, and I said, "Dad, look, I'm stuck. I love learning about why people do the things that they do, but I don't think I want to do it in a medical setting." And he said, "Look, well, there's a ton of psychology in what I do."

And I had actually never supposed that before. I mean, I'd always sort of thought of my dad as a salesperson or a numbers guy, and that sort of simple comment from him put me down a path of discovering what behavioral economics and behavioral finance were, and trying to craft my career to help people like my dad, who of course, did not have the language to say, "Go check out behavioral finance." But just knew that his work was heavily behavioral in nature. So, that's how I've spent my career trying to help advisors and clients, much like Tim sort of incorporate behavioral science into the fiber of every part of this financial planning world.

Oscarlyn Elder:

That's fantastic. Your background really meshes with what we're trying to do on this podcast to help folks really begin to move forward, to set that intention, to set the purpose and just keep making progress. So, we've got a lot to unpack. And before we do that, I like to ask every guest about their purpose. Tim, what's yours?

Tim Houlihan:

Sure, I'm happy to Oscarlyn. For me, for many years, I've been interested in helping other people be successful, whether that's on a personal basis or on a professional basis. And I have mentored a bunch of younger people over the years and been involved in jobs that gave me the opportunity to assist people in helping them be their better selves. And so joining Truist here is really a great fulfillment of that, not only because it's such a purpose-driven company, but because the actual things that I get to do influence the positive outcomes. It will help customers make better decisions, it will help make them make better financial decisions specifically and help associates and teammates actually make better decisions about the daily lives that they have. So, again, this is my happy place, it really is. So I get to do it every day.

Oscarlyn Elder:

Wonderful. Daniel, how about you?

Daniel Crosby:

I would say, first and foremost, I'm a husband and father, and so sort of taking care of and being a good dad and a good husband is at the very top of my list. And if you look at the happiness and sort of the wholeness and the fulfillment literature, you're not going to get very far without good relationships. And so, I try and keep those relationships first and front and center in my life. Secondarily, this is a little bit meta, but I'm sitting here on my computer looking at this file called meaning book. I'm a huge devotee of Viktor Frankl. When I was a therapist, I sort of identified as a logotherapist, which is someone who helps people find their purpose and someone who keeps purpose front and center in people's lives as a way to elevate their existence.

And so, I have this book on finding purpose that I've been working on for years, very slowly, that I think is going to hopefully, be my crowning achievement. And I feel like my purpose is to help other people find theirs. And the psychology of purpose, it's like this hack that lifts all boats. If you can get purpose, so many other parts of your life are elevated by that and making it primal in your life. And so, after being a family guy, I think my purpose is helping other people find theirs.

Oscarlyn Elder:

That's incredible. I look forward to having you back on another episode to talk about that crowning achievement because it just sounds phenomenal. I'm going to quickly share my purpose so that you all have that. Since as we're going through this discussion, my purpose is to live in peace and joy and to create better futures. That's how I go about my personal life. It also feeds into my professional purpose as well. But that living in peace and joy, Daniel, is very relational as is creating the better futures. And that's in hopefully my family, my community, my work, and as broad as I can make that impact. So, with that, we are firmly grounded in purpose. And what I see is that in trying to fully live our purpose, sometimes, we encounter these cognitive stumbling blocks. And by cognitive I really mean brain. So our mind really place some tricks on us, essentially.

For this episode, we're going to talk about three of the most common tricks that get played cognitively on us. They're called status quo bias, regret avoidance, and availability bias. Tim, let's start with you. Can you explain to our listeners what is status quo bias?

Tim Houlihan:

Sure. It's like inertia. It's the thing that keeps us doing things that we've always done the same way we're always doing it. And it's got good evolutionary roots like almost all of these psychological biases do, but it is something that when it comes to making changes in our lives, keeps us stuck. I mean, Daniel talked about being stuck getting through his PhD program. In some ways, how could we not, right? You've put a lot of time and energy into achieving a specific goal, and I don't want to speak for Daniel in this regard, but I think it's a great example of wow, getting out of that is really hard because of status quo bias because of this incredible desire to keep doing things the way we've always done it. Daniel, forgive me for using your life as an example here, but is that fair to say it that way?

Daniel Crosby:

No, no, this is perfect. Now, I think you're right on, and I think my life is an example of many of the biases that we're going to talk about today. But for me, status quo biases, we are always trying to streamline the way that we think. And our brains... Oscarlyn, you talked about our brains. Our brains are small. It's 2% to 3% of our body weight, but they account for an enormous lift in terms of our metabolic expenditure. It's somewhere in the range of about 20%, 25% of your caloric consumption each day. And so, one of the things that we're always looking to do is make more streamlined decisions and status quo bias is one of the ways that we do this. It's like, "Well, this has worked. It's worked before. It'll work again. And I can kind of free up some cognitive capacity for doing new things and just stick with doing things the way that they've always been done."

And it must be said, most biases, this serves us really well in a lot of areas. A lot of these biases exist because they're good. You shouldn't have to rethink what type of toothpaste you use every day. It just doesn't matter. Just pick one and roll with it. And you even see, there's all these examples of powerful people like President Obama and Mark Zuckerberg sort of streamlining their wardrobes and thing like that to try and just leave decisional horsepower for things that matter. So yeah, Tim's right on with his definition of status quo bias, and it serves us really well in a lot of ways.

Oscarlyn Elder:

How is status quo bias related to risk averseness? Is there a connection there?

Daniel Crosby:

Yeah. So, one of the things that status quo bias teaches us to do is it confuses what we know with what's good or what's safe. So, you see things like, I lived in Canada for a season and Canada accounts for about 3% to 4% of the world economy, but the average Canadian has about a 70% allocation to Canadian equities because of status quo bias and related biases like home country bias. So, they confuse the things that they're familiar with or the things that they've always done with the things that are good and safe and risk-free. I mean, not to pick on Canada, you can pick on Canada because they're lovely, but no, this happens all over the world. It's just especially dangerous in a country like Canada that's relatively small and relatively segmented in terms of the economy, it's commodity heavy and things like that. So yeah, it does have big implications for how we take risk. And I think, sometimes, people are taking more risk than they think when they're engaging in status quo bias because that risk is masked by this sort of familiarity.

Oscarlyn Elder:

So, to summarize, status quo bias is really about our using almost routine, familiarity routine to help us get through the day because there's so many options and choices that are out there, but it's this arc to doing what we've done because it's comfortable and it's safe, and you all might have to help me find the words, but it's comfortable, it's safe, it's routine, and that bias may inherently prevent us from looking around at other options and other choices that we may have that that could actually propel us towards our objectives. Is that a fair way to button it up and put it in a nice wrapper, if you will?

Tim Houlihan:

That works just great, Oscarlyn. Yeah, it does.

Oscarlyn Elder:

Okay. All right. We've had a fantastic discussion about status quo bias, which is about being attached to our decision making in the past. A second stumbling block, regret avoidance is about the decisions that affect how we will feel in the future. Daniel, let's get into it.

Daniel Crosby:

Yeah, you actually defined it quite nicely there. It's making decisions today with an eye to how we project that we will feel tomorrow and trying to minimize regret. So, when you look at all these biases, fundamentally, the thing that we want to do is move through the world as simply as possible, feeling good about ourselves, and status quo bias messes with that. And so, does regret aversion. I mean, all these things, cognitive dissonance, regret aversion cause us to sort of revisit presuppositions of ours, revisit ways that we've acted and second guess them. All of that is cognitively expensive. All of that is psychologically taxing. And so, we try to make decisions to minimize regret. And then, again, I think you go into related territory like cognitive dissonance that I mentioned, because one thing we try and do is not make decisions that we'll regret, but then the other thing that we'll do is make mental gymnastics so that we don't regret anything we've done. We just work backwards from what we've done and say, "Well, hey, that was fine. That was fine. That was perfect."

Oscarlyn Elder:

So, Daniel, I want to hold one second. You've thrown out a complicated term cognitive dissonance, which actually was on my CFA level something exam back a few decades ago, but can you unpack that term?

Daniel Crosby:

Yeah. So, cognitive dissonance is when there's friction between a belief and a behavior. So, let's say to my kid, I yell at my kid, or I'm impatient with my kid, I'm sort of brought to a crossroads because I have a value that I shouldn't snap at my kids and that I should be patient with them. So, one of two things can happen at this crossroads. I can either feel bad about this and go apologize to my child and try and do better in the future, which is humiliating in the moment, causes me to lose face, causes me to work hard. Or I can say, well, that kid was being a punk and they deserved it.

So, cognitive dissonance, it really can get us in some ugly places because the easier thing to do is almost always to change your mind than to change your behavior. And so, a lot of the times when you run into people who are very weird ideas or are acting in ways that seem foreign to you, it's a lifetime of cognitive dissonance and choosing self-deception over hard work. And so, it can sort of... I mean, we're getting heavy now, but this thing, this can calcify and lead you as a pretty bad places.

Oscarlyn Elder:

Yeah. Well, thank you for defining that for us. I think that's really important for our listeners to hear. I didn't intend to get you off track about regret avoidance, but you connected the two. In one of your books you mentioned, if I remember correctly, that there are over a hundred cognitive biases that can impact investing. And those saying biases show up in our everyday life in different forms. You've specialized in how they impact investing, but they show up everywhere. So, what I'm hearing from you is cognitive dissonance, regret avoidance are all part of this stew pot and they interact to impact how we move forward or don't move forward. They impact how we show up in the world.

Daniel Crosby:

Yeah, it's well said.

Oscarlyn Elder:

All right. So Tim, jump in.

Tim Houlihan:

There's another interesting thing that I find peculiar about regret. First of all, it's a powerful motivator and there's two aspects of it. There's the prospective, there's the thinking forward, which is regret avoidance. And typically, a regret avoidance is, "I don't want to do the wrong thing. I don't want to act in the wrong way." And retrospectively, when we're thinking in the past, we tend to think about regret as, "I regret not doing certain things." That it's more common for us to look back and say, "Oh, I should have done that. I really wish I did that." But prospectively, and when we're thinking about the future, we tend to get all caught up in, "I don't want to do the wrong thing." And so it's a very odd juxtaposition that we have these two sides of regret in our lives at the same time. And that brings us to some interesting crossroads as well.

Oscarlyn Elder:

Yeah, that's very powerful. And I definitely relate to that, Tim. My husband and I just got off of a week with our daughter driving around the southeast, so we went on a week long college tour. And as I was talking to the I've Been Meaning To Do That team around recording dates, I actually said to them, "Look, I'm not giving up this time. My daughter's 16. I have two more February breaks with her, and I'm not going to look back in a few years and wish that I had been with her."

Tim Houlihan:

There you go. Yeah.

Oscarlyn Elder:

Right. So, I'm going to be disconnected. I'm going to commit to this publicly with you. So, the commitment's really important I think, for behavior. But I'm going to be with my family because I know I've only got a small amount of time where we have this time together. And I think that's a way that regret avoidance can be positive, right? Is that it can compel that behavior. But you're right, there are at least two sides to that coin.

Tim Houlihan:

Well, you looked at it in this beautiful way of saying, I'm going to avoid regret by actually doing something different. I'm going to change my behavior. I'm going going to act differently so that when I look back at some point, I'm not going to have that oh, I wish I would have kind of experience. So, bravo to you for that one Oscarlyn, way to go.

Oscarlyn Elder:

And it was a great time.

Daniel Crosby:

I love Tim's point here. So, Oscarlyn, first of all, War Eagle. I hope your daughter goes to Auburn and has as painful of football life as I do. But I think Tim's point is so great because you used something like regret aversion and you sort of flipped it on its head and made it work for you to make more purpose driven personal decisions. The first one that we talked about, status quo bias, I mean, status quo bias can lead us to some bad places. It can keep us paralyzed, it can lead us to mismanaged risk.

But also, status quo bias is at the root of perhaps the most profound behavioral finance intervention of all time, which is the Save More Tomorrow program developed by Shlomo Benartzi and Richard Thaler, which used status quo biased to say, "Hey, look, people are sort of lazy and locked in, so what if we just locked them into good behavior? What if we just locked them into a program of auto-enrollment and auto-escalation of retirement savings?" So, in a very real sense, you're using people's laziness for their benefit. And so, I love anytime we can take these biases, typically, we talk about them in ways that they're going to get us in trouble, but they can all be kind of flipped on their head.

Oscarlyn Elder:

Yeah, that's a great point. You're totally on point there. So, this has been a fantastic discussion around regret avoidance. I'd like to turn us to a third common bias, which is availability bias. Tim, this is a bias that folks have been discussing for decades, but it's really taken on some new meaning in recent years. Can you tell us about that?

Tim Houlihan:

Yeah. Availability bias is identified by Daniel Kahneman, the Nobel Prize winner, as maybe the most important and biggest issue that we have in our lives. And availability bias, just to give it a quick definition, is about paying more attention to things that are available to us. And by example, a lot of people are afraid of flying because they see things, there's the news footage of the plane crashed with flames and dramatic number of people dying and all this horror and terrible things when actually, statistically, flying is significantly safer than getting in your car and driving to the supermarket. So, the actual data would say, "Oh, flying is really not that unsafe. It's a really safe way to get around, in fact. But availability wise, it's like the first thing that comes to mind is the plane crash on the news, and that makes a lot of people uncomfortable about flying.

Oscarlyn Elder:

And does this connect back? Daniel earlier in the episode had talked about the energy that our brain needs on a daily basis and how we develop shortcuts to really make it through the day. Seems like availability would fit into that category, that it helps streamline us navigating a very complex world.

Daniel Crosby:

Yeah, it absolutely does. And Tim gives a great example going to the brain piece, though we recall some information better than others. And so another sort of funny example of availability bias is if you ask people to generate words that start with a letter, K, right? So, okay, you're playing along at home, think of some K words.

Oscarlyn Elder:

Kangaroo.

Daniel Crosby:

There you go, kangaroo, kite-

Oscarlyn Elder:

Kayak.

Daniel Crosby:

... and then you say, "Okay, now think of some words in which K is the third letter," and which list is longer. Okay, so pause the recording, give it a shot if you want to play along at home. Right? Well, there's three times as many words where K is the third letter as the first letter. But because of the way that the brain processes information, it's much easier for most people to generate words where K is the first. And so, again, brain processing. I talk about availability bias being confusing, what is loud with what is likely. So, it is more likely that you could find a word where K is the third letter, but it's louder, so to speak in your mind that K is the first letter. Tim's example is great too, right? A plane crash, as infrequent as it is, it's very unlikely, but it's very loud. It's front page news.

Oscarlyn Elder:

Right. That's really helpful. I'd like for a moment for us to talk about, because you all have studied these biases so much, are there demographic trends that you see within the data within the studies that could help our listeners understand how precisely the biases may impact them? So looking for demographic trends within the data.

Tim Houlihan:

These are pretty broad applications. We talk about these three biases. Pretty much everybody suffers from them and takes advantage of them in varying degrees. So when we think about demographics that have specific outcomes, there's been a fair amount of study that women are quicker to identify regret avoidance faster than men, that they're sort of more sensitive to, "No, no, no, I don't want to do that," or "I do want to do that because I will," just as you did, Oscarlyn, with taking the trip with your daughter, it's like, "No, I don't want to miss out on this opportunity, so I'm going to take advantage of that so I don't regret it in the future." Women tend to be faster and quicker at that.

Oscarlyn Elder:

Okay, that's interesting, given my experiences over the years. Daniel, any other demographic observations that you have for us?

Daniel Crosby:

I'm largely with Tim on this. I'm always running into people who are trying to say, "Does this really apply to me?" And one that I hear a lot is high net worth or ultra-high net worth investors, "Aren't we a little different?" And the answer is, not really, right? I mean, these things are sort of hardwired into us. You do see sort of differences around the margins, like men show greater levels of overconfidence than women do sort of the specific instance that Tim talked about. And what's interesting with overconfident and gender roles, to me, overconfident is almost sort of the granddaddy of all biases, okay? Because if you're overconfident, this sort of gives rise to a host of other problems because you know, don't do the work to identify and eradicate those other tendencies in yourself. So yeah, there's differences around the margins, but I would say, if you're looking for a way out, this applies to you too.

Oscarlyn Elder:

And so even though we have focused on these three biases, what I'm hearing from you is that we're going to get a bonus fourth today in this episode, which is overconfidence.

Daniel Crosby:

Yeah.

Oscarlyn Elder:

And it sounds like overconfidence is perhaps foundational and can impact the others. It's a, I don't want to say a catalyst, but a foundational bias. If we have it, we definitely need to be aware of it because it impacts how we gather data and how we assess the world. So that bonus, fourth, we're going to put a pin in that and we're going to come back to that in just a few minutes. My next question for you is, does one of the three main biases stand out as more prevalent than the other two? But maybe I'll change that to does one of the four since we've added an overconfidence, but does one really stand out?

Daniel Crosby:

I'm going to go with the bonus fourth granddaddy. Like I said, because imagine someone's deeply overconfident, they're sitting here listening to this podcast and they're hearing about these three, and rather than examining themselves and sort of turning that bright light of introspection back on themselves and saying, "Oh, how did these things play out in my life?" They're going, "Wow, my husband's like that. My wife's like that. My neighbor's like that." They're not seeing these things in themselves. They're not thinking about ways they can improve their behavior. And so for-

Oscarlyn Elder:

They may not have the mirror.

Daniel Crosby:

Of course.

Oscarlyn Elder:

I think we talked about this in our first episode or our second, was really having the courage to have the mirror that we hold up to really understand ourselves.

Daniel Crosby:

Perfect. Yeah.

Oscarlyn Elder:

And overconfidence may inhibit that mirror from popping up.

Daniel Crosby:

Yeah, overconfidence is a window onto other people, but not a mirror onto yourself. So-

Oscarlyn Elder:

Wonderful.

Daniel Crosby:

... I'm going with the granddaddy, fourth bias.

Oscarlyn Elder:

So, granddaddy for Daniel. Tim, anything that you'd like to add?

Tim Houlihan:

I'm going to play availability bias for 200, Oscarlyn.

Oscarlyn Elder:

Okay.

Tim Houlihan:

Because I think, that in a world of social media and the ability for us to so carefully curate the kind of content that we see, we can really go down a rabbit hole when it comes to thinking about how we should live our lives or the way that we like to live our lives, or that leads into decision making about our investments and about how we should treat our financial future, gets curated by what we already believe, and so that availability bias ends up confirming everything that we've already believed, when in fact it might not actually be the best because we're lacking the mirror. I'll go back to Daniel's mirror. If we don't hold the mirror up, if we don't look carefully, if we don't zoom out a bit, then we could suffer from that.

Oscarlyn Elder:

This has really been a fantastic discussion. After a very short break, we're going to come back and we're going to talk about how to recognize these cognitive biases in our own behaviors. Tim, Daniel, and I just had a great discussion about the three most common stumbling blocks, and Daniel added a bonus bias that we see in financial planning. Now, let's discuss how these biases show up in our behaviors and decisions. Daniel, let's hear your thoughts on this. Do you have some examples?

Daniel Crosby:

Yeah, so overconfidence is just about everywhere. I mean, it could lead you to not seek out the help of an advisor would be sort of one obvious place. It leads people to over trade, it leads people to under diversify. It leads people to be more active than they ought to be. All of these things,

Oscarlyn Elder:

And I want to add, you're really talking specifically about investing. I think, if we bring it to a higher level around financial planning, I think where overconfidence often shows up too is that people overestimate the potential for success of a specific outcome. I think, there tends to be a sense at times that this event, which maybe is a 50/50 event for happening, actually, when they start planning, becomes an 80/20, 80% chance of it happening and 20% not, versus maybe a 50/50. So, those assumptions that go into the plan can be impacted by overconfidence. Does that make sense?

Daniel Crosby:

Yeah. So, you've actually sort of intuited the research quite nicely. There's sort of three specific types of overconfidence. One is thinking that we're better than other people. So, in financial planning, "I know most people can't day trade and make money, but I can." The second is thinking we know more about the future than we actually do, which has obvious implications for sort of forecasting markets. And the third is thinking that we're luckier than average and say, "Okay, well the market's supposed to do this, but yeah, that won't happen to me." So, thinking we're smarter, better, luckier, more prescient about the future, all of these things cause us to make dicey decisions with our money.

Oscarlyn Elder:

It definitely rings true, and it's specifically in that context that I've seen that trusted advisor, someone outside of the family, outside of the client, outside of the individual, able to kind of question some of those assumptions as they're going through the financial planning process to try to bring the plan back closer to what is reasonable given the situation.

Tim Houlihan:

Well, and to double down on that, for the folks playing along at home, think about, do you consider yourself a better than average driver? Something like 75% or 85% of all drivers in the United States believe that they're better than average, which of course, is statistically impossible. It can only have 50% of the population being better than average.

Oscarlyn Elder:

And I'll say I do not suffer from that overconfidence. My husband reminds me regularly that I'm not a great driver.

Tim Houlihan:

Well, and this is a good place to actually zoom out a bit and solicit some advice. So, you sort of ask, "Well, what can we do about this?" Start by asking someone else. Ask a trusted advisor. Ask the person who is in the car with you the most to say, "How good of a driver am I? Am I really as good as I think I am?" And get some honest feedback. When it comes to investing, guess what? We have advisors. We have have people who are professionals to be that external, thoughtful, well-trained voice in this world and get outside of yourself to get some outside opinion to stop being influenced by it.

Oscarlyn Elder:

Are there any other behaviors or examples related to either status quo, regret avoidance, or availability bias specific to the financial planning journey that you all would want to call out before we move to our next question?

Tim Houlihan:

Well, I think, and Daniel, please jump in on this, but availability bias leads us to make decisions that are kind of parochial and closer to home when they might not be the best thing. There's a lot of research that says people in the Midwest tend to be more invested in agriculture, whereas people in Pennsylvania tend to be more invested in steel and things like that, and only because it's available, it's around a lot. It's in their sort of purview. But that might not be the best way to manage your portfolio. There might be ways of getting outside of what is simply comfortable in what you see that could actually be better for you from a financial perspective. I don't know. Daniel, if you want to jump in on that.

Daniel Crosby:

Yeah, that's right on with respect to status quo bias, and I think Tim touched nicely on this self-curated bubble that we put ourselves in with respect to availability bias. I think, a good investor needs to be cognizant of their media diet, and I think, in many cases, the right thing to do is to limit your media diet, not to artfully put together some huge list of all the shows you're going to watch every night, but to just kind of avoid it all together. So, I think, understanding that what we're putting into our mind and our heart is going to have a profound implication on how we make financial decisions, you start to get thoughtful about that.

Oscarlyn Elder:

That's a great point. You both have given our listeners a lot to think about. We're going to be right back to discuss what we can do to overcome these biases. Tim, you've already given us some previews around your thinking there, but a short break and we'll come back and start to talk about overcoming the biases. I am here with Tim and Daniel, and we've just had a great discussion about the causes of common behavioral biases and how we can recognize them. Tim, most of us have these biases, it's a state of being human, but all is not lost. There are definitely some steps that we can take to minimize their impact on our lives, and our behavior, and our decisions. So will you start us off around what you think our listeners can do to overcome these biases?

Tim Houlihan:

First of all, it's not easy. I don't want to make it sound like we've got some kind of panacea here, but maybe the first thing to do is to take two breaths and slow down. Daniel talked about us being cognitive misers, the need to preserve and reduce the cognitive load in any of our decision making. And so, that means that we make very quick decisions, and maybe one of the first things we could do is slow down. Take a couple of breaths and just pause a minute just to actually think of the question that we're trying to answer and just make a really conscious effort to say, "What is really the best course of action here?" For some specific reasons that we're getting ready to make a decision. I think, slowing down might be a good way to get started.

Oscarlyn Elder:

So, slow down. Also, I think our listeners will have taken the first step just by increasing their awareness of what can happen. So, increasing awareness of biases, slowing down. Daniel, what would you add to the recipe for how to overcome bias?

Daniel Crosby:

Yeah, so you're both right on. I have a layer cake recipe and the-

Oscarlyn Elder:

All right.

Daniel Crosby:

... the first layer is education, so that's going to take many forms. The first is what you've talked about, increasing your awareness of these things. The second, I think, was mentioned by Tim earlier, which is seeking out feedback. One of the things that is so telling about these biases is that we're largely blind to them, and that's sort of by design. And so, one of the things that we're going to get a lot of mileage out of is asking other people and even just looking at base rates. So, in this educational bottom layer of the cake, "Okay, do I think I'm a better than average driver? Well, how many tickets have I gotten?" The studies show that the more specific we can get about the thing that we're studying, the less biased we're going to be.

So, it's like, "How many tickets have I gotten? How many times have I going to driving school? How many accidents have I gotten into it? Let me compare that against the population." So, sort of educating yourself as the bottom layer of that cake. The middle layer is environment. All of us want to do the right thing with our money. We all have the same goals, but we're usually not as well-behaved as our desires. We're usually as poorly behaved as our environment. And so, just sort of setting up an environment, whether that be your media diet, whether that be your asset allocation, whether that be the fact that your money's just autodrafted out of your account every two weeks. It's a much easier thing to set up an environment where that money just disappears and goes into your savings than it is to week after week after week. Exercise the level of restraint and willpower that's required to do that. So, design your environment so that it optimizes for behavior.

And the third layer of the cake is encouragement. Get people in your corner, whether it's a spouse, a friend and advisor, someone that's going to help push you to do the right things. So, if you've got the right education, the right environment, and the right encouragement, the right people in your corner, I think it takes all three layers of that cake to really kind of change these deeply ingrained behaviors.

Oscarlyn Elder:

From an encouragement perspective, what I would add there is that having folks that you trust who will listen to you to understand what your purpose is, what your objectives are. I'm going to politely disagree with something that you said, Daniel. I'm not sure that everybody does have the same goal. I think objectives do tend to come in categories, but often what we want to achieve really is specialized, customized to our own journeys. And so, again, respectfully, I think there are some differences in goals, but having the folks around you to listen to you to understand that, and then, not only to challenge, but actually to ask the right questions, to ask those questions that can help you begin to process where those blind spots may be, where the stumbling blocks are, in a way that you are likely to hear it, and to pause, and to slow down.

So, folks know I like to over-engineer things. I talked about that in one of my episodes previously. But I think, it is really important when you're asking for that feedback that it be from people who will listen and understand you and then frame the feedback in such a way that you will actually hear it and absorb it.

Daniel Crosby:

Yeah, let me say a word on that if I could. First of all-

Oscarlyn Elder:

Yeah, absolutely.

Daniel Crosby:

... Southerner to Southerner, how dare you disagree with me? I thought the thing that we would do is disagree internally and then talk about each other behind our backs. That's more the Southern-

Oscarlyn Elder:

Oh my goodness.

Tim Houlihan:

That's [inaudible 00:39:44].

Daniel Crosby:

No. Something on that encouragement piece. There's a fascinating bit of research that shows when people make a public declaration of a behavior change, it actually is negatively correlated with reaching that behavior. So, if I come on and say, January 1st, I'm like, "Hey, everybody on Facebook, I'm going to lose 20 pounds this year." And so what happens is everyone goes, "Way to go. Good for you. You can do it." And that sort of gives me what I need. It scratches the itch, and I feel as-

Oscarlyn Elder:

Some initial quick affirmation.

Daniel Crosby:

Yeah, there's a quick dopamine hit, and it's as though I've already lost the weight when I haven't. So, not all encouragement is created equal. You need someone who's going to really hold your feet to the fire. You need someone who's going to come on March 6th and say, "Hey, how's that goal going? I want that for you. Have you been going to the gym? How have you been eating?" Rather than just being a cheerleader. So, you need someone to encourage you, yes, but they've got to be equal parts cheerleader and coach.

Oscarlyn Elder:

Right.

Tim Houlihan:

Yeah, like an accountability partner.

Oscarlyn Elder:

That's right.

Tim Houlihan:

I love that idea, Daniel. And another aspect of your layer cake environment. I think this is a big blind spot for us that we miss the importance that context plays in our decision making. We undervalue the role that context plays in our decision making. So, getting our heads around the idea that we are deeply influenced by what's around us, by how we've orchestrated our lives, how we've set up all of our routines and habits, all of that stuff is influencing us in good ways and in bad ways. And unless we pull ourselves out of that and start to take a look, "Well, how could we change our environment to make better decisions, to make actually, our routines and habits more successful and more likely to help us achieve our goals than we're really missing out?" That blind spot is just a horrible one.

Oscarlyn Elder:

Tim, what you just mentioned made me think about the importance from a financial planning perspective of our listeners developing a regular structure cadence to how they are checking in in relationship to their financial journey. So, having a regular cadence with your advisor, with your partner, your spouse, to check in and to understand where you are and moving towards your objectives, making that more rote, if you will, versus something that you have to especially plan for on a monthly, quarterly, or annual basis, could be very helpful. So, being proactive, defining the environment could be very impactful to our client's outcomes. All right, so we have really gotten into some great information during our time together. Hopefully, our listeners, hopefully, you have been taking notes during this episode because there's been a lot of great content. My challenge to you is to take those notes and go get the information that you've compiled from the second and the third episodes.

So, if you remember back, we had an exercise where you could define your values and your purpose statement from episode two, and then we talked about wealth objectives in episode three. So, if you'll take that information from episode two and three and parrot with your notes from this episode, which is episode four, and consider the four stumbling blocks that we've discussed... So, we've discussed overconfidence, status quo, regret avoidance, and availability bias. Think about those four biases and how they may be limiting your progress. We're asking you to hold the mirror up to yourself and perhaps work with your advisor, your spouse, trusted individual to give you the feedback to work on that recipe of education, environment, and encouragement. What I'll say is that awareness is really that critical first step and overcoming any of these stumbling blocks. So, you are on your way. That is the really good news, you are on your way. I'm also going to challenge you as you're on your way to think about that recipe. Again, education, environment, and encouragement. And with that, we will be right back.

I want to thank Tim Houlihan and Daniel Crosby for your incredible insights during our time together. You've given us the four stumbling blocks, status quo bias, regret avoidance, and availability bias, as well as the bonus one, which is overconfidence. Now, Daniel and Tim, I have every guest answer one question every episode. And that is, what's the one thing that you've been meaning to do but you haven't done and will commit to doing in the future? And as an addendum, this is not like Facebook, we're not looking to create that quick hit of dopamine and immediate affirmation. It really is just making the public commitment that this is something that you want to do, that you've been intending to do and you just haven't gotten it done. So Tim, I'm going to start with you.

Tim Houlihan:

So, this is just between us, like-

Oscarlyn Elder:

And the listeners.

Tim Houlihan:

Yeah. Okay. Well, you're my accountability partners on this, right?

Oscarlyn Elder:

Yeah. Yes.

Tim Houlihan:

Okay. So my wife and I have moved to Charlotte recently, and it's been a tumultuous series of things of getting settled right in a house. The one thing that I haven't gotten to is getting a gig in Charlotte, actually having a night out to play and perform because my passion outside of work and outside of behavioral science is music, much like Daniel's. And so-

Oscarlyn Elder:

Awesome.

Tim Houlihan:

I need to get a gig. I need to find an open mic, and I need to do that in the next month.

Oscarlyn Elder:

That's fascinating. I might be able to help you with somebody in the Charlotte area-

Tim Houlihan:

Good, thank you.

Oscarlyn Elder:

... who I think is into that scene. So, put a pin in that. We'll come back to that. Daniel, how about you?

Daniel Crosby:

I hereby publicly commit to drive to Charlotte to see Tim play, so... No, no, I'll bring it full circle. So, when I look at this meaning book, I've always written my books in relatively short order. It usually takes me six or so months to research them, and then, another three to six months to write them, which is fast for a book. This meaning book has been going on and on and on because I think it takes on this place in my mind where it's this special thing, and when you give birth to it, when you bring it out into the world, it's then susceptible to one star Amazon reviews and people being mean to your baby. And so, I commit, not only to come see Mr. Tim play in Charlotte, I commit to finish the meaning book and bringing the baby into the world.

Oscarlyn Elder:

Well, Daniel, we are excited about that journey, and when it's fully burst and out in the world, we're going to have you back so that we can revisit purpose. I think that'll be a great checkup. So, really look forward to having you back to dive into purpose again with our listeners. I'm going to give an update on my I've been meaning to do that, which I publicly committed to taking action on in a prior episode. I have called the attorney, and we have the date on the calendar, and so very soon, I'm going to be meeting with the attorney to update some of my documents. And I've also had a conversation with one of my relatives who I need to play a part in that estate plan. So, I really have taken those actions, which I had been in a holding pattern for way too long. So, I'll continue to keep listeners updated. I'm excited to have progress.

Daniel, any last words that you'd like to share with our listeners?

Daniel Crosby:

No, thank you. Thank you so much for having us. If people want to take these ideas seriously, I think it can be a life-changing thing. So, that's the thing that I love about behavioral science as applied to our financial lives. It has the potential to make you, not only a better manager of your money, but also a better person and live a richer life. So, I hope people will take these conversations seriously. So, thank you so much for having me.

Oscarlyn Elder:

And Daniel, where can people find you?

Daniel Crosby:

The best place to learn about my ideas is reading my books. The best two are The Laws of Wealth and The Behavioral Investor. I'm also very active on LinkedIn, Daniel Crosby, Ph.D., and on Twitter, @danielcrosby.

Oscarlyn Elder:

Thank you so much. I know that folks are likely to reach out to you, so thank you for sharing that contact information with them. And Tim.

Tim Houlihan:

This has been fun. It's always fun to hang out with Daniel, and this has been really great hanging out with you, Oscarlyn. So, thank you for that time. And if you're more interested in the general application of behavioral science, you can check out my podcast, which is called Behavioral Grooves, as in the grooves that we have in our habits and routines, as well as the grooves and music. And you get a little bit of both on Behavioral Grooves, and you can even check out episode with Daniel on Behavioral Grooves, but that's more about the general application of behavioral science and if you've got those inclinations.

Oscarlyn Elder:

Well, again, thank you both so much. It's been great talking with you.

Tim Houlihan:

Our pleasure.

Oscarlyn Elder:

Earlier in the episode, we mentioned a downloadable, printable template for taking notes. You can find it on the webpage for this podcast at truist.com/dothat. We've also provided a link to this template and the description of this episode. My thanks to Tim Houlihan and Daniel Crosby for joining me to talk about cognitive biases and financial planning. And thank you for joining me today. If you like this episode, please be sure to subscribe and tell friends and family about it. If you have a question for me or a suggestion for this podcast and our team, email us at dothat@truist.com. I'll be back soon for another episode of I've Been Meaning To Do That, the podcast that gets you moving toward fulfilling your purpose and achieving your financial goals. Talk to you soon. Take care.