Wealthcasts

Daniel Crosby on Behavioral Finance and the Psychology of Bitcoin

In this Elite Advisor Blueprint podcast, the emotional factors that power our financial decisions.

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As Bitcoin mania spreads like wildfire, financial planners the world over are being bombarded with questions from clients. I thought everyone’s favorite cryptocurrency would make for the perfect topic of discussion with Daniel Crosby, an asset manager, who also happens to be a psychologist. In doing so, I hope to uncover more about the emotional drivers behind Bitcoin.

Crosby is a behavioral finance researcher and trained psychotherapist. He’s combined these dual areas of expertise to make the study of market psychology his main focus.   

On this episode, we talked about Bitcoin, in addition to Crosby's new book, Laws of Wealth, that’s focused on the principles of behavioral finance.

Like many people, Crosby’s first reaction to Bitcoin was skepticism:

“My first reaction, frankly was: ‘This is stupid,’” Crosby said. “I mean, when I first heard about it I was like, ‘Ah this is a bubble. This is ridiculous.’ But then price action has a way of making you a believer.”

As he watched Bitcoin go from 700 to 17,000, though, Crosby says it was hard not to sit up and take notice.

Hear Daniel and I discuss more on the psychology of Bitcoin mania

If You’re Excited, It’s a Bad Idea.

Despite Bitcoin’s meteoric rise, Crosby was quick to point out how it’s also fallen 75 to 80 percent on five separate occasions. This, he says, serves as a reminder: Whenever you’re feeling too excited about an investment, it’s always worth taking a step back to consider the potential downsides.  

“There have been some real millionaires minted from Bitcoin, but there have also been some people who have lost dramatic money—and if you are excited, it’s probably a bad idea,” he said. “I think [that’s] a good, sound principle for [those] of us who don’t have millions to play the cryptocurrency market with.”

As George Soros, one of the world’s most successful investors, once said: “If investing is entertaining ... if you’re having fun, you’re probably not making any money. Good investing is boring.”

When it comes to investing, our emotions are driven by the news we read every day. We’re inundated with stories about initial public offerings or about some lucky soul who made a killing by beating the markets. We hear these stories and think that that should have been us, if only we were brave enough to take the chance. 

The same phenomenon is now happening with Bitcoin, whereby individual investors are seduced by what are oftentimes rare success stories. As with public equities, we should keep a level head and think about risk. As Crosby reminds us: The average IPO underperforms the S&P by 21 percent three years on.

How Crosby Protects His Assets from His Emotions

Emotionally charged investing doesn’t spare anyone, even those with a strong financial education. Crosby says that asset managers are just as susceptible as average investors to “buying high and selling low.” It’s clear, then, that we could all use practice in investing with our head, not our heart.

This fact, however, does not devalue professional financial advice—far from it. As a psychologist, Crosby understands how our emotions permeate everything we do, including our financial decisions. This goes some way toward explaining why he pays a financial advisor for advice—despite the fact Crosby himself is a trained asset manager.

“I choose not to run my own money because I know I’m subject to all of the same inconsistencies, and foibles, and greed, and fear, as the next person,” he said. “And understanding your limits, and understanding that the true drivers of returns are far more about investor behavior than about generating outsized returns, you begin to see how important this is.”

Crosby shared with me a Vanguard study, indicating that people who receive financial advice see a 3 percent higher performance in their portfolios, compared to those who don’t. About half of that comes from behavioral coaching from an asset manager.

My interview with Crosby was fascinating. This article only touches on a couple of his principles of asset management—to go deeper and get all 10 of the Laws of Wealth, check out the show notes or listen to the full interview at BradleyJohnson.com.

 

Brad Johnson, vice president of advisor development for Advisors Excel, mentors a small group of the country’s most elite financial advisors. Find more episodes of The Elite Advisor Blueprint podcast at www.bradleyjohnson.com/podcast.

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