Four Behavioral Risks Overview

#671: Welcome to Greatest Hits Week — five days, five episodes from our vault, spelling out F-I-I-R-E.

Today's letter F stands for Financial Psychology. And we're diving deep with a conversation that changed how thousands of our listeners think about money.

This episode originally aired in November 2022, but the insights feel more relevant than ever. Dr. Daniel Crosby reveals why your brain is your portfolio's worst enemy — and what you can do about it.

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Money is the number one stressor in American lives. Every single year. Without exception.

That's what Dr. Daniel Crosby discovered when he looked at decades of research from the American Psychological Association.

In this rerun episode from our Greatest Hits Vault, Crosby joins us to reveal why your brain sabotages your investment decisions. He's both a clinical psychologist and behavioral finance expert. His findings will change how you think about money.

Your body hijacks your financial judgment in strange ways. For example:

People who need to pee become more risk-averse investors. It's called inhibitory spillover. When you're controlling your bladder, you also restrict your financial decisions.

Here's another one: judges give harsher sentences when they're hungry. Thousands of court decisions prove it. The best predictor of whether you get jail time? When the judge last ate.

We explore four behavioral risks that destroy wealth: ego, conservatism, attention, and emotion.

Crosby shares data that stock pickers rarely hear: 74 percent of individual stocks have a lifetime expected return of zero. Three out of four companies eventually go bankrupt. Yet people keep betting on single stocks, dreaming they'll find the next Apple.

Value investors suffer from depression and social isolation. Why? Because contrarian investing fights our deepest evolutionary wiring. Humans survived through cooperation. It's literally our only advantage over other animals. Bears have claws. Turtles have shells. We have teamwork.

Crosby shares the Ash experiment, which shows how peer pressure warps reality. When nine people give the wrong answer about line lengths, three-quarters of participants follow along. New brain scans reveal something darker: social pressure physically changes how people see the lines. Their perception actually shifts.

We discuss solutions through Crosby's "three E's": education, environment, and encouragement. Reading about biases won't fix them. You need systems and people.

One powerful study: people who saw their children's photo for five seconds before banking saved twice as much money.

The conversation reveals that money problems don't disappear with wealth. They just change form.

Timestamps:

Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths.

(00:00) Finance as America's top stressor

(02:33) Psychology moving from brokenness to wellness

(04:33) Money touches every part of life

(07:33) Income plateaus and happiness

(10:13) How hunger affects financial decisions

(13:38) We're wired wrong for investing

(17:28) Laziness and cognitive shortcuts

(23:43) Cooperation as human survival trait

(26:43) Four behavioral risks

(32:13) Ego and overconfidence

(37:48) Conservatism and familiarity bias

(46:38) Three E's of behavior change

(50:23) Attention risk and probability

(54:48) Emotion derails decisions

(58:28) When fear helps versus hurts

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