#671: How Your Brain Undermines Your Finances [TOP HITS]

      Welcome to Greatest Hits Week — a week of five episodes from our archive, highlighting the letters F-I-I-R-E.

      Today's letter F represents Financial Psychology. We will be having an in-depth discussion that has transformed how countless listeners perceive money.

      This episode first aired in November 2022, but its insights remain highly pertinent. Dr. Daniel Crosby explains why your brain can be your portfolio's worst adversary — and what actions you can take in response.

      ______

      Money ranks as the foremost source of stress in American lives, year after year, without fail. This is what Dr. Daniel Crosby found when he examined decades of research by the American Psychological Association.

      In this rerun from our Greatest Hits Vault, Crosby discusses why your brain undermines your investment choices. As both a clinical psychologist and a behavioral finance expert, his insights will alter your perspective on money.

      Your body influences your financial decision-making in unexpected ways. For instance: individuals who need to use the restroom tend to become more risk-averse investors. This phenomenon is known as inhibitory spillover. When you're managing your bladder, it also constrains your financial choices.

      Another example is that judges impose harsher sentences when they are hungry, as evidenced by thousands of court rulings. The timing of a judge’s last meal is a great predictor of whether a defendant will receive jail time.

      We examine four behavioral aspects that erode wealth: ego, conservatism, attention, and emotion.

      Crosby presents data not often shared with investors: 74 percent of individual stocks are expected to yield a lifetime return of zero. Three out of four companies eventually declare bankruptcy. Despite this, people continue to invest in individual stocks, hoping to discover the next big success like Apple.

      Value investors frequently experience depression and social isolation. This occurs because contrarian investing conflicts with our basic evolutionary instincts. Humans have thrived through collaboration, which is our unique advantage over other species. Bears have claws, turtles have shells, and we have teamwork.

      Crosby describes the Ash experiment, highlighting how peer pressure distorts perception. When nine individuals give an incorrect response regarding line lengths, three-quarters of participants conform. Recent brain scans reveal a more disturbing truth: social pressure can physically alter how people perceive the lines, changing their reality.

      We discuss solutions via Crosby’s “three E’s”: education, environment, and encouragement. Simply reading about biases is insufficient; effective systems and support from others are essential.

      One impactful study indicates that individuals who view a photo of their children for five seconds before making a banking decision save twice as much money.

      This conversation demonstrates that financial issues do not vanish with wealth; they simply take on a new form.

      Resources:

      Afford Anything podcast episode #413

      Timestamps:

      (Note: Timestamps may differ based on individual devices due to varying ad lengths. The provided timestamps are approximate and may deviate by several minutes.)

      (0:00) Finance as America's primary stressor

      (1:20) Transitioning from a state of brokenness to wellness

      (3:20) The pervasive impact of money on life

      (6:20) The relationship between income stability and happiness

      (9:00) How hunger influences financial judgments

      (12:25) Our misalignment when it comes to investing

      (16:15) The role of laziness and cognitive shortcuts

      (18:30) Cooperation as a critical human survival mechanism

      (21:40) Four behavioral risks outlined

      (27:00) Ego and the trap of overconfidence

      (32:35) The effects of conservatism and familiarity bias

      (37:25) Exploring the three E’s of behavior transformation

      (41:10) Risks related to attention and probability

      (45:35) Emotional factors that disrupt decision-making

      (49:15) When fear can be beneficial versus detrimental

      Thanks to our sponsors!

      Boldin: Model your retirement scenarios, evaluate every “what if,” and confidently take charge of your financial future. Start your planning at go.boldin.com/afford.

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