The Soul of Wealth: Behavioral Secrets to a Purposeful Life ft. Daniel Crosby

[00:00:07] Daniel

I swear to God, like I’ve been hearing this for 15 years. You know, you could pull that quote every year for the last 15 years. And like, you’ve left a lot of money on the table if you listen to it.

And so, what’s the biggest downside for you? Is it fear of missing out or is it fear of regret? And I think most of us are wired to privilege one or the other.

[00:00:36] Intro

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level.

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we’ll have about investment performance is about the past. And past performance does not guarantee or even infer anything about future performance. Also, understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions. Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:32] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely Kevin Coldiron, to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor.

In the series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. And with that, please welcome Kevin Coldiron.

[00:02:09] Kevin

Okay, thanks, Niels. Welcome everyone. Our guest today is Dr. Daniel Crosby. He’s a New York Times bestselling author who’s an expert on integrating the ideas of behavioral finance into the practice of investing. And he’s here today to talk about his new book, just released a few weeks ago, called The Soul of Wealth.

The book is a series of short essays that link monetary wealth to deeper aspects of wealth, relationships, values, state of mind, the things that make up the soul of wealth. So, we’re going to talk today about practical suggestions for how to change your thinking and your actions in small ways to live a wealthier life.

That sounds like fun to me, hopefully fun to you as well. So, Daniel, thanks for taking the time to join us today and welcome to the show.

[00:03:01] Daniel

Thank you very much. It’s my pleasure.

[00:03:03] Kevin

Okay, so I’m curious. The title of your day job is Chief Behavioral Officer, and I was wondering if you could tell us what that means.

[00:03:16] Daniel

Are you saying I don’t have a real job?

[00:03:19] Kevin

It sort of sounds like being a parent – Chief Behavioral Officer. I’m curious.

[00:03:24] Daniel

No, it’s great. I got introduced recently at an event and someone said there were more people that had been to space than had been chief behavioral officers. So, I thought that was pretty funny. There’s really a couple of things that I do. I do a lot of public facing work.

I work for a firm that is about half asset management and about half advisor technology. So, I do a lot of PR and public facing stuff like this for the firm. But then the other pieces of my job, I create technology.

So, you know, we are a tech firm, an advisor software firm. So, I’ve done things like created an advisor risk tolerance questionnaire that considers the behavioral dimensions of risk, and things like risk composure and risk taking behavior, in addition to things like tolerance and capacity. We’ve developed tools that help couples have better conversations about money.

We did some research into what, what people fight about when they fight about money, which was a lot of fun by the way, and developed some tools around that, develop some financial personality profiles that we integrate with AI to help personalize our reporting.

So, there’s all this sort of like the human side meets the tech side is a lot of fun in addition to sort of the educational and public relations type work that I do.

[00:04:52] Kevin

Okay, all right, I got it. Since you said I have to ask, what do people fight about?

[00:04:56] Daniel

Okay, number one thing (there were like five things, the number one thing that they fight about is kind of brilliant. It’s whether the best use of money is to enjoy today or to secure tomorrow.

And if you think about it, of course the right answer is, you know, both. It’s some combination of those two things. And yet people tend to be thoroughly decamped into, you know, one is right or the other is wrong. And they’re pretty indignant about whatever their preference is. And it takes on a real values-based air.

So, someone who has sort of a ‘save for tomorrow’ mindset thinks that, you know, the ‘live for today’ person is sort of unserious and frivolous. And conversely, the person who has the sort of ‘live for today’ focus thinks the ‘save for tomorrow’ person is a fun hater.

And so, it’s, it’s really fun. You know, Carl Jung has this quote, you know, “Until you make the unconscious conscious, it will direct your life and you will call it fate.”

So, you know, a lot of people just grow up with these attitudes, sort of unexamined, unarticulated, unhighlighted, and they just have these attitudes about wealth that they never honestly, really consciously took out and examined or accepted. And so, it’s fun to create a technology that allows couples to see where they sit relative to each other and work towards moderation, because both things are important, of course.

[00:06:36] Kevin

That’s exactly what my wife and I fight about, or one of the things we fight about. I’m at the ‘save for tomorrow’ end of the spectrum. She’s at the hey, let’s enjoy it, you only live once end.

Yeah, so it’s fascinating that you said that. I’m going to have to have you in for a therapy session.

[00:06:55] Daniel

I’m very happy to save your marriage. But, you know, the funny thing is, though, me and my wife are both on the ‘save for tomorrow’ front. We’re both lame. If you think about that, you might…

[00:07:09] Kevin

Be more dangerous in some sense?

[00:07:11] Daniel

Well, it is. And both things are problematic. Right? You know, the problem with two people who have divergent opinions is that they’re going to fight. But at least both dimensions are represented within that dyad. People like myself and my wife, if we never examine it or pick it up, it’s easy for us because we’re so on the same page.

We’re never going to fight about it, but we may live in such a way that we die with a pile of money and, like, a lot of missed opportunity. And so, whether there’s agreement or disagreement, you’re fighting different battles, but both need help.

Are you fighting against group-think or dissension, basically?

[00:07:55] Kevin

So, I guess that’s kind of related to the first question I wanted to ask you, which is, was your ongoing interaction with clients, when you were working in developing this technology, was there something there that prompted you to write this book? Were you hearing things that made you think, hey, I need to write a book that’s kind of more about the wealth in the kind of broadest possible sense, not just the value of your account?

[00:08:22] Daniel

Yeah, there were micro and macro considerations that led to this.

So, sort of at the micro level, my job puts me in orbit of some rich and, you know, financially successful people. Many of them are supremely happy, but many of them are not. And you know, many of them, from the outside looking in, people would say, wow, I mean, this person has climbed the mountain. They have everything they could ever want. But I’m privy to some of the internal workings, and it’s just not as good as it looks from the outside. And so, at the micro level, I just sort of had lots of those interactions that made me sit up and think.

At the macro level, this is a bit of a soapbox of mine. So, you’ll have to pardon me, but when this country was founded, 85% of the world was living in backbreaking poverty, like 250 years ago. I mean, worldwide, nobody had money. They were living on what is today, $2 or less a day. Today that number is 9%, which is, you know, 9% too high. But we’ve, we’ve made a lot of progress.

And there is this burgeoning middle class, and the world has never been healthier, safer, better, resourced, richer, despite, you know, what the news would tell you. And there’s plenty of bad news to go around.

If you look at the timeline of human history, we have spent most of human history just, you know, red of tooth and claw, eking out an existence, trying to not die and to live 30 years. And then suddenly, we’re doing pretty well.

And just as we’re getting long lives and healthy, and everybody’s got 2,000 calories a day, we become really dejected. Like, we have this mental health crisis and everyone’s lonely and everyone’s sad. The average American home has tripled since World War II, and yet people feel like they’re less rich than their grandparents. And so, there’s this massive disconnect.

Most Americans under the age of 50 say that they are lonely. The modal number of friends an American male has, when they ask men about how many friends do you have, the most frequently occurring response is zero.

So, I mean, it’s like we’ve got this weird societal disconnect where there is simultaneously so much financial abundance and yet this deep impoverishment, at the spiritual, existential, psychological level, and trying to make sense of that disconnect and do my tiny part to put a brick in the bridge between those worlds is why I wrote the book.

[00:11:28] Kevin

How would you like, ideally, people to (I don’t know, consumers – that’s probably not the right word), but how would you like people to read your book? Is it something that… I have a little book called the… I don’t know, it’s basically one or two pages that you read every day about stoic philosophy – basically don’t get worked up about things you can’t control. And I have to read that repeatedly every night just to kind of remind myself.

Would you recommend people kind of tackle your book in the same way? Like just take it piece by piece or how would you like people to do it?

[00:12:09] Daniel

Oh, well, I’m just happy that they’re reading it at all. But, you know, it’s interesting. It’s interesting.

So, the book came out two weeks ago, today. In the introduction to the book, there’s some language in the introduction that basically says, look, there’s 52 weeks in the year, you’re going to take a vacation. There’s 50 chapters in the book. Effectively, you should treat this almost like a daily devotional, like you probably treat your Ryan Holiday book, or whatever you’re reading. I assume it’s Ryan Holiday.

But then, since the book has come out, I’ve gotten all these messages from people who are like, hey, I’m taking it a week at a time, just like you suggested. And I’m like, hurry up and read the damn thing because I want to get your feedback.

[00:12:54] Kevin

I need the reviews on Amazon.

[00:12:56] Daniel

I need reviews on Amazon. So, I’m being testy. I’m just happy that people are reading it.

But I think a lot of these (at the risk of being self-important), I think a lot of the messages in the book are the kind of things where they’re simple but powerful. So, there’s a message that you could read that you would maybe need to sit with for a minute and talk about with your buddy, or talk about with your spouse, or mull over or talk about with your therapist, or whatever.

Jokes aside, Amazon review jokes aside, I am very happy when people tell me they’re approaching it from sort of this meditative, slower approach.

[00:13:40] Kevin

Okay, so let’s talk about some of those just simple ideas. I mean, there’s a chapter called The Time Will Never Be Right. And in that you talk about the fact that you see investors standing on the sidelines for too long.

They either get a windfall, an inheritance, some type of cash inflow, and they’re so scared of making a loss on it, that they’re paralyzed, they don’t invest right away. And then you show some data that, you know, basically shows the opportunity cost of sitting on the sidelines. And that resonated with me. I think it would resonate with a lot of people.

How do you help them get over that? How do we deal with that kind of fear that, shoot, if I invest now, it might be just at the wrong time.

[00:14:29] Daniel

Yeah, one of the things that I like to do with all of these chapters is tie life to money. And, you know, I was a therapist for some years. My PhD is in clinical psychology. And when I was a therapist, one of the most common life mistakes I would see people making is sort of waiting for that perfect moment, thinking that there would be that perfect moment to do the thing, you know, to have a child, to talk to the pretty girl at the bar, to start the business, to whatever. And it was profoundly my belief and my observation that to do the most important things in life, there’s never really a good time.

The most valuable things in life, you know, as a husband, as a father, the most valuable things I’ve ever done in life were profoundly disruptive and would have been profoundly disruptive at any point. I mean, children are wrecking balls, right? They’re my greatest joys and they will absolutely wreck your life, and there’s just no good time to have a kid. The same thing is true of markets.

I mean, markets are the greatest machine for wealth creation ever invented, and they are profoundly fickle, and stupid, and scary, and there’s just never a good time. And so, I try to present the data. A lot of that data is from Nick Maggiulli, who did some great research on this that basically just shows like, hey, the time to invest is now – on average, the time to invest is now.

For people who are paralyzed by that though, I still think something like trickling in or dollar cost averaging in, while it is not mathematically optimal, I think there’s sometimes like the spreadsheet optimal. The spreadsheet optimal is always to lump sum invest, on average. Like Nick’s research shows that.

But I think there’s a behavioral optimal as well, which is if you’re so paralyzed by this, and you’ve got this windfall, and you’re scared that you’re going to put it in and the next day it’s going to drop 50%, that something like trickling it into the market, while it is not on average spreadsheet optimal, could be the behavioral optimal. And a behavior in motion tends to stay in motion and a behavior at rest tends to stay at rest.

And so, whether it’s, you know, talking to the person you want to go on a date with, or investing that money, I think taking a small step in that direction is a good first step.

[00:17:19] Kevin

Yeah, I like how you put that. I mean, sometimes that’s framed as minimizing the fear of regret. If you put it all in lump sum today, the market falls by 20%, you live with the regret. If you kind of average it in over a year or something, then you kind of minimize that.

Does that approach mean for you and for your firm that valuation doesn’t really matter? Like, for instance, I think a lot of people and I’ve mentioned and talked about this on the show with other people, a lot of people sort of my age who’ve kind of lived through multiple market cycles have struggled in the last 20 to 30 years with this kind of what seems like a persistent overvaluation in equities. And that overvaluation kind of helped in the early 2000s .com but since then, not so much.

And so, I think there’s been a tendency for people, like I, of my vintage to probably be underinvested because of this persistent overvaluation, or what we think is an overvaluation. So, does that valuation enter the equation for your firm on kind of the advisory side? Or are you more just like, hey, the time to invest is now, and valuation doesn’t really tell us anything.

[00:18:40] Daniel

Yeah, my firm doesn’t ask me how to invest our assets. So, I won’t presume to speak for the CFAs. But you know, when I think about something like valuation, there are sort of two things at play here. And this is the line we have to walk. The first is that valuation is an excellent medium to long term predictor of equity returns. And so, I think it should be factored in. I think it should be considered. But I think markets also have a way of humbling us.

And you know, I can’t remember if it was Goldman or who, that came out with their research in the last week or two that said, you know, hey, look, equity returns over the next decade are going to be 3% because of steep valuations.

[00:19:26] Kevin

It was Goldman, yeah.

[00:19:28] Daniel

I swear to God, like I’ve been hearing this for 15 years. You know, you could pull that quote every year for the last 15 years. And like, you’ve left a lot of money on the table if you listen to it.

And so, what’s the biggest downside for you? Is it fear of missing out or is it fear of regret? And I think most of us are wired to privilege one or the other.

For me, it’s fear of regret. So, like, I have been underinvested, on a valuation basis, for the last long time as well. But that’s okay. Like, I’m still fine. I’m still investing money every two weeks. I’m still taking an appropriate amount of risk, but I know what’s right for me.

So, I think psychologically, every one of us, we could get more granular on the risk profiling piece. But, at a high level, most people are big picture one or the other, you know, fear of missing out or fear if failure, fear regret. I’m definitely a fear of regret guy. You invest accordingly and you take your lumps on either side of that.

So, the markets will, you know the old saw about always making the most people look stupid. I mean, you have seen that for the last decade plus. And the same people that told you not to invest for the last decade are now telling you not to invest for the decade ahead. And you have to take it with a grain of salt, I think.

[00:21:08] Kevin

Yeah, I’ve got a couple questions related to that. I guess one is, and I know your firm has a financial advisory arm, so if you’re listening, just understand that, but my view on financial advisors has kind of changed over time because I was a professional investor for a long time, and I kind of saw RIAs maybe as expensive and there wasn’t a lot of evidence that they added value. And so, I was always skeptical of them.

But I’ve kind of changed over time. And the reason is really what you just said, that maybe having someone who’s not yourself investing your money gives you that distance, and so, separates you from whatever bias that you have, say, in my case, tendency to be too worried about valuation. You give it to someone else and they just invest, and then it creates that emotional distance.

So, I was kind of curious if you agree with that and if so, or if not, does it make sense even for professional investors to have someone else looking after their money just to create that psychological distance?

[00:22:25] Daniel

So, it’s interesting. First of all, let’s talk about it from the soul of wealth perspective. There’s a lot of data on people who work with financial advisors having higher levels of aggregate happiness, sleeping better at night, being less likely to get divorced, having higher levels of marital communications, being more ready for an emergency. So, this is like positive halo effects because money touches every part of our lives, you can’t consider it in a strictly dollars and cents value.

That said, if you look at research out of Canada and other places, people who work with a financial advisor have greater terminal wealth than their same income peers who don’t.

So, there are all of these non-financial things that accrue, these positive psychological and non-financial things that accrue to people who work with financial professionals which make it worth the price of admission. But they also make more money.

Now, if you ask the average investor why is that? Why, in Canada, do we see that people who work with advisors have more money than those that don’t? They would say they have access to esoteric products, they’re good stock pickers, et cetera. None of that is true, right? Like none of that is true.

When we look at the reasons why people with financial advisors outperform those that don’t have them. It’s exactly what you talked about. It’s getting them to take an appropriate level of risk, which we know accounts for 90 something percent of the variance in outcomes is just the level of risk that you took. And they have saved them from three to five disastrous screw ups in the course of their career.

It’s not because advisors have special knowledge of asset allocation or stock picking. They’re encouraging them to take an appropriate amount of risk, which is either way more or way less, in some cases, than they probably would take in isolation, which is the biggest driver of returns.

And they’re saving them from investing in their son-in-law’s business, you know, I’m serious, like saving them from investing in their son-in-law’s business. I had lunch with a friend yesterday who lost millions, plural, in meme coins. If he had had a financial advisor, that would not have happened. That is what financial advisors do.

They help you take an appropriate amount of risk, and they keep you out of your own way three to five times. Where the dumb thing that you’re about to do is deeply consequential and again, I work for a firm that serves financial advisors. My dad is a financial advisor. So, take that all as you will. But that’s what I see in the data.

[00:25:33] Kevin

That leads me on to another, I guess, chapter which I think is related and it’s called Taking the Worst Case Off the Table. So, I think that’s appropriate given that we were talking about kind of fear of regret here.

In that chapter you talk about this philosophy of goals-based investing. So, I wonder if maybe you could just describe your thought process in terms of taking the worst case off the table and explain to people what goals-based investing is. How does it work?

[00:26:07] Daniel

Yeah, yeah. If I may, each of the chapters has sort of a historical or literary anecdote. And the one from this chapter I really like, I’ll just tell it briefly.

It was the Hyundai Assurance program. So, back during the great financial crisis, nobody is selling cars because who wants to plop $50,000 down when you might lose your job? But Hyundai had this brilliant idea. I mean, if you, look, I can’t remember exactly what unemployment was then. Maybe 9%. But if you’ve got 9% unemployment, you’ve got 91% employment. So, just probabilistically speaking, most people who are buying your cars are not losing their jobs.

And yet 100% of people are worried that they might. And so, what Hyundai did is they took the worst case off the table. They said, look, if you buy a Hyundai, and if you lose your job, we will take it back full freight. We will give you, dollar for dollar, everything you paid for it, and we’ll take it back used. And so, it took the worst case off the table for people, and they had their best quarter ever. They blew the roof off, and it was this huge win for them. And it allowed them to give people the psychological safety they needed to take a risk. The same thing is true with other parts.

So, the psychological principle at play here is called mental accounting, which is that we partition money into different buckets in our mind. And our expectations of how we should save, spend, invest it, differ greatly based on how it’s partitioned.

This is completely irrational. Money’s fungible. Money is money is money. But it is something that we all do. So, what I talk about there is, I say, hey, look, take whatever you need, six months, two years. The length of an average bear market is what, two or three years? So, take two and a half years worth of cash, put it under your mattress effectively, and just know that, yeah, every six or seven years, things get kind of hairy. The market’s probably going to drop 25% to 45%. That’s okay. You have enough money to ride that out, and that lets you take appropriate risk with the rest of your money.

I actually did something like that with my house a couple of years ago. People are going to laugh at this. But it’s the difference between spreadsheet optimal and behavioral optimal. I found that I was playing it too safe with some of my assets, and I still had a mortgage. And I said, look, I want to pay my house off. Now, I had (I can’t remember) a 3% mortgage or something. I mean, you would walk over broken glass for that mortgage today.

So, I paid off my house knowing that it was mathematically suboptimal, but also knowing that it would free me up to take a lot of risk with my remaining assets. Because this idea that me and my wife and my children are going to live on the street was the worst case for me. And the moment I paid off my house, I’m like, we’re good. We may eat ramen in this big house, but we have a house. And so, it allowed me to do the right thing with the rest of my money.

So, I think this idea of whether it’s a safety bucket, whether it’s ticking off some goal like a house, whatever that looks like for you, this idea of buying yourself some psychological safety so that you can go live your life and invest your money the rest of the way. I think it’s a useful concept.

[00:30:00] Kevin

How does that work for someone who maybe doesn’t have the resources to put six months or two years of cash in the bank, just someone who’s got a job and is saving regularly. How do they create that kind of psychological safety for themselves?

[00:30:16] Daniel

Well, I think there you need to first get on a path. I think that’s, candidly, the first bucket you need to fill with those. regular savings contribution, you fill that safety bucket first, you take the worst case off the table first, and in the meantime, you make your allocation decisions accordingly. So, yeah, I think that’s the first bucket you fill, though. That’s the first place your attention goes. Because I think a lot of people try and shoot the lights out first. And that’s perhaps not the way to do it.

[00:30:48] Kevin

So just saying, hey, okay, I’m saving X percent of my income every week, or every month, or whatever. That’s building some psychological safety right there, that I’m actually taking some action for my future.

[00:31:04] Daniel

Yeah, because I think you want to buy that. I think you want to buy that safety first. There’s this idea in psychology of primacy and recency. And if you look at a sequence, so think about someone, whether it’s a life or a career… For me, I finished my PhD and started working and saving money, let me do the math, like five months before the great financial crisis. So, I get out, I start saving, I start investing, and immediately just get hammered. That has had a material impact on how I view markets. I mean it has.

My first lesson in markets, and in saving and investing was this can go away very fast. These were things that have probably made me more gun shy than I should be, to this day. So, I think, for early savers, for people who are early in that sequence, you want that money to stick around. You want that money to buy you some psychological safety.

I think one of the best things you could do for someone who’s early in their saving investing journey is to buy yourself peace of mind and then go try and take more risk with that after you’re able to buy yourself that six months of safety.

[00:32:25] Kevin

I’m going to jump around a little bit here. So, I’m just sort of picking up on aspects of the book that really resonated with me. One thing I think that connects pretty much all your advice is this notion of simplicity. Simple things you can do to improve the broader value of wealth.

And one of them has to do with, and I think the title of the chapter is called Simplicity Saves, has to do with picking an investment strategy. And you talk about some academic research where people grouped mutual funds into quintiles, groups of five, purely based on fees, not manager skill or anything like that, just fees. And the ones with the lowest fees had consistently better performance than a high fees one.

And my question was, and this is maybe a little bit in the weeds, I guess, but was that subsequent outperformance because of the fees? So, it’s like, hey, they’re lower costs, so that advantage accumulates up over time, or is it more than that? Is that kind of like a signaling effect of that this is a better product somehow? This is a company that cares more for the customer, if you see what I’m saying.

[00:33:49] Daniel

I do. I do see what you’re saying. The signaling effect is interesting. The way that I have always understood it is you want to control the controllables. There is precious little that we can control in markets. And one of the things that you know for sure is that a dollar you spend in fees is a dollar that is coming out of your returns.

A thousand other things might happen, but we know that for sure. Now, I like, but candidly had not considered the idea that it’s also reflective of sort of a customer centricity and customer care. But I think at the most basic mathematical level, it’s just like, look, you know it for sure and like it’s coming out of your hide. And that’s one thing you can control. And so, you should.

[00:34:47] Kevin

So, let’s talk about… You know, the book is called The Soul of Wealth, and there’s a lot in there about values. And there are a couple of stories that I thought were interesting that had to do with the reasons why you save. There’s a chapter called Your Money Needs a Why. And you talk about how giving a precise purpose for an account not only increases the likelihood that you’re going to save for it, but actually your kind of, I guess, satisfaction with the actual savings. I’m wondering if you could maybe explain that idea a little bit more, because that seemed to be something that really anyone could do without much trouble at all.

[00:35:34] Daniel

Yeah, there are a few places in the book where there is a significant body of research around something that is so simple but so powerful, it almost feels like science fiction. And this is one of them. And, you know, the idea here is I think a lot of times we treat trading, investing like a video game or just this, you know, we get too in the weeds with the charts or the technical analysis or something like that. And the money becomes divorced from the part of our life that it’s trying to serve. And the research around this is wild.

So, a couple of observations. So, Morningstar found that named accounts… So, if It’s Kevin FundABC123 versus Kevin’s Retired to Vale Fund, named accounts tended to have 15% more wealth than unnamed accounts, which is a pretty robust thing.

SEI, the asset manager, found that during the great financial crisis, they had part of their clients in named accounts and part of their clients in unnamed accounts. People in the named accounts were 10 times less likely to liquidate their accounts in the great financial crisis, like in the March of 2009 type area, than people in named accounts. And this is weirdly why I’m a proponent of ESG and SRI investing for strictly behavioral reasons.

I think that this is like a tangent. I probably am going to step in it here, so pardon me, but I have so little faith in the change the world impact of ESG; like public equity ESG. I just don’t think it does much to make the planet better or anything like that. But from a behavioral perspective, I think it’s so powerful because if someone is spooked in the market, and it comes time to sell, you know, QQQ versus my Women’s Leadership Fund, that’s a very different conversation. One is personal and personally meaningful, and one is just like a video game; it’s just a number pinging back and forth on a screen. And so that naming is super powerful.

[00:38:04] Kevin

You know, you say that the more specific the name, the better. And the more, I guess, the more you can put around that, the more salient your vision of what that’s going to get you, the better.

[00:38:20] Daniel

Yeah. In a different chapter, I talk about Michael Phelps and visualization. Michael Phelps in visualization, if you remember, to his 20, whatever, gold medals he won, you know, he would visually map out every turn and every stroke before he would get in the pool. And they found research that was, I can’t remember, 70 something, I believe it was 72% greater savings among people who had a salient goal.

So, a lot of times we stop with, you know, what’s your goal? Oh, I want to whatever, like, I want a house in Aspen. Okay, cool, that costs whatever, $3 million. But we stop there and it’s just not vivid, it’s not salient, it’s not personal. And so, the study found that it’s like, well, what does the house look like? Where does it sit on the mountain? Where does the sunlight hit it?

And I know this gets kind of woo. I mean, this gets kind of vision boardy. But these are not woo companies that are doing this research. These are hardened academics and fund companies that are doing this research that shows that you really need a vivid vision of where you’re headed and what this money is for, if you’re going to take the ride.

The last bit of research was out of Canada, 2009, they showed people a picture of their kids and then kind of turned them loose with their bank account. And people who looked at a picture of their kids made much better choices with their money.

They saved more than twice as much as a control group because they just rooted themselves back in this meaning. So, it is a little woo, but I think it’s one of the best chapters in the book to just say, like, what is this all for?

Because I think we get in this kind of number go up mindset, or this more, more, more mindset, and the dollars get divorced from their purpose. And I think that’s a precursor to some pretty bad behavioral choices.

[00:40:35] Kevin

Yeah, I agree. That really stuck out to me too. And I think the choice of using the Michael Phelps analogy to introduce it was a really good one because that’s a guy competing at the absolute highest level where fractions of a second make the difference and he’s literally visualizing each aspect of the race. And it works. So, it makes sense that that would translate.

Yeah, so, are you saying that if I created a savings account that was, Kevin Can Hit a Reliable Backhand In 10 Years, that that would actually come to pass?

[00:41:10] Daniel

My friend, I don’t know if there’s enough money on earth. I don’t know anything about your backhand. I’m sure it’s great.

[00:41:23] Kevin

Okay. So, you know, savings, I think what a lot of people think about saving, it takes a lot of willpower to say, okay, I’m going to put money aside. Especially when you’re young or you don’t have that much money, you don’t have much disposable income. So, the ability to set aside something that you really could use day to day is challenging.

And you have an interesting bit in the book about willpower where you say, actually the way we’ve traditionally thought about it has changed and that has some pretty big implications for savings. I wonder if you could go through that with us.

[00:42:02] Daniel

Yeah, so, with respect to saving and indeed investing, I don’t know that we talk enough about what you just introduced quite nicely, which is everything we do in markets is psychologically difficult. We are wired as a human species. We are wired for immediacy. We are wired for current pleasure. We are wired for certainty. Saving requires a present loss. I mean, that’s how we perceive savings – as a present loss. Investing requires uncertainty and long-termism. And like none of this do we do well.

So, it’s all very hard. And a lot of times I think the popular imagination says, well, we just have to white knuckle our way through this. And in the chapter on willpower, I look at the research on willpower and say, look, there are a couple of things that come out. First is that the folks who exhibit ”willpower” are not white knuckling it. They have good habits.

And in the case of savings in particular, the best habit of all is automation. So, the thing about automation that’s so beautiful, if you think about behavioral biases, humankind is lazy and status quo prone. And that leads to all kinds of bad behaviors. It leads to us being fat and terrible and not saving, and all these things. Well, we can actually use our laziness and our status quo pro-ness to our advantage and let those things work for us in a savings context.

If we automate every two weeks, when I get paid, whatever, 10%’s coming out, we are just as likely to set and forget that as we are the HBO subscription that we’ve been, you know, paying for. Which reminds me, by the way.

[00:43:56] Kevin

Cancel the HBO subscription.

[00:43:58] Daniel

Yeah, honey, cancel the HBO like, which we’ve been doing.

So, this is one of those things, I talk about martial arts in the book and you know, this idea of a circular theory of self defense, when somebody throws a punch at you. My son takes karate, and when someone throws a punch at you, you don’t try and take the full brunt of that punch and stop it. You roll with that resistance and let that attacker use their own exertion against themselves. And that’s what we can do with behavioral biases.

We can say, hey, yeah, I’m kind of lazy and I’m kind of forgetful, so why don’t I be lazy and forgetful to my benefit, and not my detriment. So, that’s the first thing we found about willpower is that it’s really good habits.

Then the second thing we found is that it’s avoiding temptation. Having an understanding of your triggers and the things that set you off, or the things that put you in a bad place, and avoiding them. Not white knuckling your way past them, avoiding them.

[00:45:01] Kevin

Well, that’s interesting because that feels like it loops back to the role of a financial advisor in the sense that, if my fear is that market corrects by 15% and I saw it coming, and I didn’t do anything, that maybe again, having that advisor, having that distance removes the temptation for me to try to be timing the market all the time.

[00:45:24] Daniel

Well, I think you’re exactly right. It allows us to offload that mental bandwidth. To say, somebody is thinking about that, somebody is worrying about this. I don’t have to go watch CNBC and try and figure out what the Fed’s going to do because I’ve got a guy or a gal that’s taking care of that. And yeah, so, you know, it’s the willpower.

I’ve been on a health journey this year. I’ve lost a bunch of weight and one of the reasons I had gained a bunch of weight is that my wife is a beautiful, statuesque Norwegian who can eat whatever she wants to eat and it’s no problem. And so, I had to have a conversation with her and say, look, if you bring an Oreo into this house, I will eat it. I’ll eat a sleeve in fact. So, we can’t do that. It’s not about willpower, it’s about surrounding yourself, putting yourself in the right environment. So, automate the right habits and avoid, you know, the triggers.

I think for the average person, watching cable financial news and trying to be a sound long-term investor are antithetical responses. It’s just not good.

[00:46:43] Kevin

What do you think about the idea of, I guess it kind of goes back to the mental accounting thing, but like a little kind of a side pot of money that you can sort of play around with? So, you watch CNBC, or you hear your buddy at the golf course or whatever talking about something and you can take a bet on that in your side pocket account. But if you blow up, you still have your kind of base savings. So, you can kind of scratch the itch. Is there value in that in the sense of beyond getting just the immediate pleasure of speculating? Is there value in that it stops you from screwing around with your main bucket of money?

[00:47:21] Daniel

Yeah, I’ve recommended that many times, you know, taking 1% to 5%, you know, kind of depending on how set up you are. But like, taking that 1% to 5% allocation because for a lot of us, myself included, markets are enjoyable. I like following this stuff, and I like hitting a bid, and I like rolling the dice. I just don’t want to do it with my kids, college. You know, it’s the cheat meal of your financial life. It’s fine.

Yeah, I think it’s fine as long as it’s done in a prudent way. It gives you something to talk about on the golf course. It scratches that itch, and I think it’s absolutely fine.

[00:48:03] Kevin

So maybe, as we kind of wrap up here, talk about kind of a broader idea of what the role or the importance of happiness is in terms of savings and wealth. I mean, there’s a lot of reference to happiness in your book and there’s a lot of reference to happiness research. If you do this, you’ll be happier. If you don’t do this, you’ll be happier. This type of spending makes you happier, et cetera.

But there’s also some stories about Nelson Mandela, about Helen Keller, about suffering. And it made me think that, should we really be talking about happiness that much? Because it feels like that might not really be a worthwhile or even an achievable goal. And as you said right at the beginning, I mean, certainly at the highest, highest possible level, the accumulation of material resources seems to be negatively correlated with happiness.

So, I don’t know, maybe that’s not a specific enough question, but if I circle back, I’d say, you know, do we spend too much time kind of thinking about happiness?

[00:49:15] Daniel

It’s a little amorphous, but it’s also one of the best questions I’ve ever been asked on a podcast because I do think we spend too much time thinking about happiness. So, animals can experience happiness. And humans are animals. A chimpanzee or a deer can experience happiness because happiness is, in a lot of respects, just sort of the absence of pain or like the absence of discomfort. That’s a big chunk of what happiness is. And I think a life spent in pursuit of the absence of pain or the absence of discomfort is kind of a low bar, a shallow pursuit.

I think the thing that we should be about is meaning, or joy, or whatever you want to call this idea of sort of fulsome living that has elements of happiness. Yes. We all want to be as pain free as possible. None of us are looking for suffering. But whether we’re looking for it or not, it’s coming. I mean, that’s just kind of how life is. And so, it’s all about what do we do with that suffering when it comes.

So, I think some of the worst people you’ll ever meet are people who are optimizing for happiness. They end up being kind of vapid. I’ve done a deep dive on meaning and purpose research lately, and I’m a product of the Alabama public schools. And so, I’m always trying to simplify things. I’m always trying to make things as such that I can get my arms around them.

And if you think about something like meaning, or life purpose, it seems like laughably grandiose. But it really comes down to three things, as best I can tell. And it’s believing, belonging, and becoming.

So, people who have a felt sense of life being meaningful or purposeful, which is bigger than happiness, they believe in something. They have a worldview. It could be stoic philosophy, it could be Buddhism, it could be Catholicism, it could be yoga, it could be whatever. But they have some mental lattice work for making sense of the craziness of the world.

You need a belief system, and organized religion has been on the decline for a very long time. And there’s many reasons why organized religion has shot itself in the foot. But in the absence of that, people need something, and I don’t think that people are always getting it.

And so, people need to believe in something, and they need a framework for making sense of the world. That’s believing. The second is belonging. We need a tribe. Like we need people who love us and who we love. And being other focused and other serving is a huge boon to our happiness.

And then the final thing is we need to be becoming. We need a vision of the kind of person that we want to be. We need a vision of who we are going to be. What are our goals, what are our drivers, where are we headed? When you have those three things; when you have a belief system, when you have a tribe, and when you have a vision for where you want to go that you’re striving for, I think life is very good, and that’s about the best it can be. But I absolutely agree with you.

And candidly, I probably used happiness sloppily in the book at times where I may have meant joy, or fulfillment, or something bigger. I think that’s pretty common to do, and I’m sure I did it at times in the book. But those are my three. You know, those are my three believing, belonging, and becoming.

[00:53:31] Kevin

Well, I think that’s a great framing, and I think that’s a good place for us to wrap up in the sense that we could think about maybe wealth serving those three goals. You’re trying to build wealth to kind of help yourself work toward all three of those things. That’s my opinion, not necessarily Daniel’s.

But, Daniel, this has been a really fun and interesting conversation. I really appreciate you taking the time to come on and chat with us today.

[00:54:03] Daniel

Now, it’s my pleasure. Thank you for sharing your platform with me.

[00:54:07] Kevin

Okay, everyone, Daniel’s book again is called The Soul of Wealth. And as I said, it’s a fun read. It’s a practical read. I think there’s lessons for professionals and everyday investors in there.

So please make sure to get a copy of it and follow Daniel’s work because I think you can tell from today’s conversation some of these ideas are not discussed enough on mainstream media. For all of us here at Top Traders Unplugged, thanks for listening and we’ll see you soon.

[00:54:36] Ending

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