Standard Deviations with Dr. Daniel Crosby

How to Avoid Financial Scams Stephen Greenspan is a psychologist and author of the Annals of Gullibility: Why We Get Duped and How to Avoid It. Greenspan’s book outlines notable instances of gullibility including the Trojan Horse, the failure to locate weapons of mass destruction in Iraq and the bad science surrounding cold fusion. Most of the book focuses on anecdotes, but the final chapter sets forth the anatomy of being fooled and attributes it to some combination of the following factors: • Social pressures – Fraud is often committed within “affinity groups” such as people who hail from a similar religious background. • Cognition – At some level, being duped represents a lack of knowledge or clarity of thought (but not necessarily a lack of intelligence). • Personality – A propensity toward belief and difficulty saying “no” may lead people to be taken advantage of. • Emotion – The prospect of some emotional payday (e.g., the thrill of making easy money) often catalyzes questionable decision-making. In a field that is sorely understudied, Stephen Greenspan literally wrote the book on the topic. He is not just an expert on gullibility, he is the expert on gullibility. Which is why it may surprise you that he also lost 30% of his wealth to notorious fraudster Bernie Madoff. In a candid assessment of his own gullibility, Greenspan wrote in the Wall Street Journal: “In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case. The real mystery in the Madoff story is not how naive individual investors such as myself would think the investment safe, but how the risks and warning signs could have been ignored by so many financially knowledgeable people, including the highly compensated executives who ran the various feeder funds that kept the Madoff ship afloat. The partial answer is that Madoff's investment algorithm (along with other aspects of his organization) was a closely guarded secret that was difficult to penetrate, and it's also likely (as in all cases of gullibility) that strong affective and self-deception processes were at work. In other words, they had too good a thing going to entertain the idea that it might all be about to crumble.” Greenspan has excellent insight into his own decision-making and motivation. He admits that he was relying on a shortcut (“Let other people think about it”) that had worked in the past, without considering why it might not work this time around. Likewise, the professionals in the story had no interest in critically examining a system that was making them look like geniuses! As Francis Bacon said beautifully, “The human understanding when it once adopted an opinion draws all things else to support and agree with it. And though there be a great number and weight of instances to be found on the other side, yet these it either neglects and despises or else by some distinction sets aside and rejects; in order that by this great and pernicious predetermination the authority of its former conclusions may remain inviolate.” Just as Irvin Yalom found it difficult to entreat young lovers to think critically about the potential flaws in their relationship, it is nearly impossible to get someone who is making money to ask, “Why might I be wrong?”

There are three things that intelligent investors must understand if they are to truly inoculate themselves against the fear peddled by the profiteers of peril: corrections and bear markets are a common part of any investment lifetime, they represent a long-term buying opportunity and a systematic process is required to take advantage of them. A “correction” is defined as a 10% drop in stock prices, whereas a “bear market” is defined as a 20% drop. Both definitions are entirely arbitrary, but inasmuch as they are widely watched and impact the behaviour of other investors, they are worth considering. From 1900 to 2013, the US stock market experienced 123 corrections – an average of one per year! The more dramatic losses that are the hallmark of a bear market occur slightly less frequently, averaging one every 3.5 years. Although the media talks about 10% to 20% market losses as though they are the end of the world, they arrive as regularly as spring flowers and have not negated the tendency of markets to dramatically compound wealth over long periods of time. It is incredible to consider that over that 100 plus years, one could expect both double digit annualized returns with attendant double digit percentage losses. This being the case, please repeat after me: “Bear markets are a natural part of the economic cycle and I should expect 15 to 20 in my lifetime.”

We rely on the crowd to do everything from run our governments to help us select a place to eat, but does the wisdom of the crowd apply to the stock market? By examining the anatomy of a good decision set forth by Richard Thaler we arrive at the conclusion that crowds are wise in some respects but can lead us astray in others.

It has been said that "this time is different" is the most expensive phrase in investing but what can be said to be the most profitable words in investing? In this episode, we look at the three tests of an investable idea, providing a tri-part test for discovering enduring alpha.

Did you choose to listen to this podcast? The question seems so simple as to be laughable, but new research paints an increasingly complicated picture with respect to the limits of willpower and free will. In this episode, we tackle such questions as: Why do Audi drivers cheat on their spouses? and Would you have hidden Anne Frank in the attic?

Let's face it, life is complicated. That being the case, it tends to defy easy description and silly platitudes. But one phrase proves to be applicable to every market and life circumstance. Listen in to learn the phrase that can humble you in times of prosperity and give you solace in times of struggle.

We are a nation in love with the idea of trusting intuition, but does it actually help us to make effective decisions? In today's episode we examine some of the research in favor of - and against - this notion of trusting your gut. What emerges is a complex picture that shows intuition to have some real, almost metaphysical power, that is domain specific in the usefulness of its application.

Excessive ego is the enemy of both good living and good investing and yet it is simultaneously a big part of what gets us out of bed in the morning. In this podcast, you'll learn 5 practical ways to make better decisions by beginning to see the world more clearly.

Many of us have had the experience of bickering with friends and loved ones on social media about political, religious or ethical differences of opinion. But does any of it do any good? In this episode, we examine the persistence of belief, the difficulty in changing minds and the reasons why challenging someone with cold, hard facts may only make them MORE wed to their existing bad ideas.

We commonly speak of how "stressed out" we are today but as recently as a century ago, the idea of stress was viewed as unscientific. In this episode, we talk about the physical psychological impact of stress on investment decision-making and risk appetites. The takeaway? Good investing is so difficult partially because it is physically painful.

Stories are powerful means of transmitting information and making sense of our own lives, but do they serve us well as investors? In this episode, we will answer these and other questions by looking at the price of a sequined glove, the performance of initial public offerings and how stories can hijack our brain on the way to our hearts.

It's counterintuitive, but a growing body of research suggests that you just don't like cheap things. In this episode, we discuss how price as a proxy for quality can be in dangerous in investing and give clues as to how behavioral investors can sever this spurious connection.

Today's episode is a tongue-in-cheek examination of the ten best ways to ruin your investment future.

We love to fantasize about winning the lottery or buying a yacht, but have difficulty having sensible conversations about money with those we love. Dr. Crosby examines some of the religious, social and behavioral impediments to having conversations about money and issues a challenge to do better.

Our brains are designed to privilege safety and certainty over happiness and growth. Understanding this simple truth, we begin to realize that the time will never be perfect to do the thing we've always dreamed of and learn to press forward in spite of our fears.

Does everyone deserve a trophy? In today's episode we look at the research around self-esteem and examine how the need to feel special may have played in to the biggest Ponzi scheme in history.

What are the top 5 regrets of the terminally ill and how can they help you live a more fulfilled life?