At The Money: Our Complicated Relationship With Cash

At The Money: Our Complicated Relationship With Cash with Dr. Daniel Crosby (October 16, 2024)

How can we improve our relationship with money and earning, investing and spending?

Full transcript below.

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About this week’s guest:

Dr. Daniel Crosby is the Chief Behavioral Officer at Orion Advisor Solutions, where he helps financial advisors apply behavioral science in their practice. He is the author of “The Laws of Wealth: Psychology and the Secret to Investing Success.”

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Dan Crosby Transcript

[Intro: What we gon’ do? Don’t make this complicated (complicated no, no, no, no, no)]

Barry Ritholtz: We all have a complicated relationship with money. We think we understand what it is and why we want it, but very often we have little idea about what money truly represents. This can lead to disappointment. When we think about how much money we need to be happy, capital is a tool. And if we want to get the most out of it, we need to understand what it can and cannot do for us.

I’m Barry Ritholtz, and on today’s edition of at the money, we’re going to discuss how to improve our relationship with money, how to have better outcomes when it comes to earning, investing, and spending our cash.

To help us unpack all of this and what it means for your portfolio, let’s bring in Dr.  Daniel Crosby. He is the chief behavioral officer at Orion, where he develops tools, training, and technology to help financial advisors apply behavioral science in their practice. His new book, “The Soul of Wealth, 50 Reflections on Money and Meaning” is out this month. It challenges readers to think about money in new ways and to develop a better relationship with their finance.

So to develop a better relationship with their finances. So Daniel, let’s start with a simple question. What is true wealth? How should we consider things like friends, family, health, time, in terms of our overall wealth versus simply financial success?

Dr. Daniel Crosby: Well, very great to be here. When we look at what true wealth is and what it isn’t, it’s what it is, is a little harder to answer. What it isn’t is just a number.

And if we look at, you know, the positive psychology literature that came out beginning in the mid-nineties, there’s really like five things that are the staples of a life well lived. Martin Seligman did this in seminal research, but it’s, it’s positive experiences. So this is sort of leisure Like, are you having enough fun? It’s engagement, which is deep, meaningful work that helps you sort of lose track of time. It’s relationships. This is the thing that’s most predictive of true wealth. It’s meaning working for something bigger than you, bigger than your net worth. It’s advancement, which is getting better, you know, being better today than you were yesterday, growing, learning, changing.

When most of us think about and talk about wealth, we do it in a very one-dimensional way. And even when you look at, you know, how people prepare for something like retirement, mostly we’re trying to hit a number that would help us have lots of that leisure. We’re going to spend it at the shore or at the golf course, but we don’t always account for the relational piece or the meaning or the advancement or the growth or the work, and all of these are very much a part of human flourishing.

Soulful wealth encompasses far more than just numbers on a spreadsheet.

Barry Ritholtz: In the book, you address four common behavioral errors that are endemic to finance.  ego, emotion, attention, and conservatism. Explain those if you would.

Dr. Daniel Crosby: Absolutely. So, you know, there’s, there’s well over 200 different psychological biases now that impact our money.

But in my research, I really said, look, uh, they’re, they’re not all equally meaningful. And a couple of them are sort of these meta biases.  Ego is the different flavors of overconfidence, thinking we’re better than we are, luckier, better, smarter, more knowledgeable about the future.  Emotion is exactly what it sounds like, sort of confusing the heart with the head, which is easy to do with something as visceral as money.

Uh, attention is where the media comes in, you know, the media diet that we have ourselves on. It’s confusing things that are loud, uh, in the media with things that are likely or, or high probability. And conservatism is the, the various ways in which we’re sort of small minded and provincial. Uh, we’re, we’re risk averse.

We’re status quo prone. We confuse things that we know with things that are good. And all of these things can, can kind of land us in trouble.

Barry Ritholtz: Money can indeed buy happiness if spent on meaningful experiences and values. Let’s discuss that cause it, it flies so counter to what we’re so often told.

Dr. Daniel Crosby: The money and happiness literature is, has changed even in the last 10 to 15 years. And there’s just like a few things that we know first is that it matters how you measure happiness, right? Some ways to measure happiness sort of moment to moment, right? They have a beeper and they, you know, they, they beep you at various points in the day and they say, Hey, how are you doing?

When you’re measuring sort of like, how are you doing moment to moment, hap uh, happiness plateaus rather quickly with respect to money. But when you ask people about their self-appraisal of their life, like, hey Barry, how you livin’, man? Like, how how are things?  Greater wealth tends to correspond with greater sort of qualitative descriptors of, of being self satisfied and happy up to even like half a million dollars a year. We’re, we’re introducing some more nuance into the money and happiness conversation.

The other thing we’re finding is that certain ways of spending money really do buy happiness. Like getting out of stuff you hate buys happiness. I will never mow my yard again because I hate it; I live in the deep South, it’s too nasty. There’s too many bugs. I hate it. And the money that I spend to let some high school kid cut my yard is some of the best money I ever spent.

Barry Ritholtz: Let’s talk about the flip side of spending and instead focus on the importance of delaying gratification as a form of wealth building to discuss, uh, why sometimes we should not engage in immediate gratification.

Dr. Daniel Crosby: This is one of those things that’s just kind of a lesson for life, you know, delayed gratification will get you far across a variety of contexts. If you look at the ways that people screw up their lives – whether  it’s an affair or an addiction or whatever – it usually has immediate gratification at its core. And if you look at the way that people get the, the bank, the bank account or the body or whatever that they want, it usually has delayed gratification at its core.

We are wired profoundly for the here and now. I think one of the ways that we have to really work for this is by casting a vivid, visceral vision of the future and that future enjoyment and that future state. That’s why I harp on purpose so much and meaning because without that, without that thing to look forward to, the, the pull of the here and now just becomes far too powerful.

Barry Ritholtz: Does this relationship to immediate gratification change as we age? How does this evolve as we all get older.

Dr. Daniel Crosby: We get a lot nicer as we get older. So a lot of the rough psychological edges tend to be sanded off through much of adulthood. It’s really kind of fun to watch. The sharp edges get sanded off. People get better at delaying gratification. They get kinder. They get better with people. And then of course, in later age, we start to deteriorate.

I think that is an under discussed and under-appreciated benefit of middle age, easy for two middle age dudes to say, but, you know, I think that is an under-appreciated privilege of middle, middle age, is that you just tend to calm down a little bit.

And it’s quite nice and I’m, I’m living it, Barry. I’m living it and I’m loving it.

Barry Ritholtz: You know, one of the interesting things we’ve discovered in the office is that getting people to pivot from being savers and investors when they hit a certain age to being spenders and donators – It’s a very challenging psychological turn to make.

Hey, you spend 20, 30, 40 years working in saving and working and investing to tell people, Hey, you have a ton of money. Go on that trip, buy that beach house, spend time with your grandkids. There are a lot of psychological obstacles to effectively embracing that. Discuss that if you would.

Dr. Daniel Crosby: So first of all, I’ll just commiserate. I recently for a project we were doing at Orion, I interviewed over 400 couples and we basically asked them what they fight about when they fight about money as a way to sort of ascertain what are some of these fundamental personality dimensions of, of the way that people view wealth. And the number one source of disagreement was whether money is better used to enjoy today or to secure tomorrow.

There are two very pronounced camps there – the YOLO camp and the like save for tomorrow camp – and never the twain shall meet. They are very in there they’re deeply embedded like the people who see themselves in the best use of cash as as fun and seizing the day have a very high opinion of themselves. And the same is same is true of people who are so diligent at saving and putting off for tomorrow. I don’t know that there’s a trickier problem in all of finance than, than the one you’re talking about.

The only thing that I have seen work again is purpose. You know, Covey talks about in his book. You have to have to have a YES burning inside of you that’s bigger than the NO.

There’s this “NO”, I don’t want to see the number go down or like, no, I’ve been in saver mode for decades. And like, I don’t want to see that number go down.

I think the only way that we overcome that very fundamental psychological tendency. is to introduce a love or a passion or a purpose that is bigger than that fear. Maybe that’s the grandkids. Maybe that’s the philanthropic gift of choice. Maybe that’s time with the family in, in, uh, at a time when time is increasingly short. I think that’s the only weapon we have in that fight though.

Barry Ritholtz: Our final question, how important is a good financial plan and what are the key elements that go into creating one?

Dr. Daniel Crosby: The blocking and tackling of a financial plan, there’s, there’s all the usual suspects, but I’ll talk about one of the things that, again, I think we, we get wrong the most. And Carl, who was previously mentioned, has done really interesting work with Michael Kitces on this.

We’re really prone to mimesis, right? Like as a human family, we’re really prone to imitation and doing what other people do. And people are both highly mimetic and don’t have a great sense of what they want and and they contend to kind of Just want what their neighbor has, you know, like, you know, what’s your financial goal?

Like well to have a boat like my neighbor to have a house like my brother-in-law And so getting it right in a financial plan means going a lot deeper with someone on what they value and their vision of the good life and their vision of a dream existence. It means going a lot deeper than we usually do.

I think we typically as a profession ask very shallow questions. And get very shallow answers and then come up with financial plans that lack some efficacy because they’re serving a very sort of weak sauce copy of a copy of someone’s dream. I think the first step is getting laser-focused on that vision for the future, that purpose, that why, and until we have something that’s emotionally laden and visceral and powerful, I don’t think any of the blocking and tackling and the Monte Carlo simulations matters much at all. It’s always going to kind of fall flat.

Barry Ritholtz: So to wrap up. Yes, we have a complicated relationship with money, and we often fail to understand what it can and cannot do for us. But if we’re thoughtful in our spending and try and create memories and experiences and use our money in a way that’s purposeful, it leads very good outcome.

I’m Barry Ritholtz and you’re listening to Bloomberg’s At the Money

[Intro: What we gon’ do? Don’t make this complicated (complicated no, no, no, no, no)]