• Skip to primary navigation
  • Skip to main content

Behavior Gap

Simple sketches and a few hand-crafted words about money, creativity, happiness, and health.

  • The Society of Advice
  • Sketch Store
  • Behavior Gap Radio
  • 50 Fires

Risk

Pain of Loss > Pleasure of Gain… Does that make sense?

pain of loss > pleasure of gain does that make sense

We love to win, but not as much as we hate to lose.

For example, pretend that a few years ago, you hired an advisor and built a diversified, low-cost portfolio based on your values and goals. But you still have a dirty little secret—the stock your brother-in-law recommended years before that went down right after you bought it.

The bro-in-law stock clearly doesn’t fit in your plan. Every rational thought, every spreadsheet, and every calculator tells you it’s past time to get rid of it. But you don’t, because making the choice to sell means admitting that you’ve made a mistake and realizing a loss.

This is called Loss Aversion. The pain we feel when we lose outweighs the pleasure we feel when we win. We’re willing to leave a lot of money on the table to avoid the possibility of losing.

And that’s why you hang on to the brother-in-law stock long after it should be sold—because you just don’t want the pain. The way to deal with this is a little trick I call The Overnight Test.

Here’s how it works.

Imagine you went to bed and, overnight, someone sold that brother-in-law stock and replaced it with cash. The next morning, you have a choice: You can buy it back for the same price, or you can take that cash and add it to your well-designed portfolio. What would you do?

To date, no one has ever told me they would buy back the stock.

The Overnight Test is great because it changes your perspective from realizing a loss to (intelligently) investing cash. It gives you the emotional distance necessary to make the right decision. And sometimes, that’s all it takes.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The Magic Certainty Button

the magic certainty button

There’s no such thing as a Magic Certainty Button.

Sorry to burst your bubble.

There is no spreadsheet that can guarantee you will be fine. There is no amount of money that can guarantee you’ll always have enough. Uncertainty equals reality.

But that doesn’t mean we should live our lives petrified with fear.

Once we accept that the Magic Certainty Button doesn’t exist, we can stop looking or hoping for it. We can take all that wasted time and energy, and use it to do something more helpful—like repeating Reinhold Niebuhr’s Serenity Prayer over and over again.

God, grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference.

Not into prayers or mantras? Try this:

1. Make a list of all the things that matter that you can control.

2. Look at that list and put a big, fat check mark next to everything you’ve addressed to the best of your ability.

3. Whatever you didn’t check off, take some time to work on it.

4. Any time you start craving that Magic Certainty Button, just go back to that list and remind yourself that you have done everything you can (or if you haven’t, then do whatever you can).

5. Let go of the rest.

If you can do that—specifically, if you can make it all the way to step 5—you’ve got a touchstone for what can help you feel just a little more comfortable in an uncertain world.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Notes on Scary Markets and Free Mini-Course for Financial Advisors

Carl Richards Behavior Gap Scary Markets

I want to talk to you about scary markets. For the sake of this particular subject, I want to be blunt and a little bit in your face. So for the next few minutes, please, just think of me less as your friend and more as your Scary Markets Drill Sergeant. O.K.? Great. 

Now, you may be saying to yourself, “Why is he talking about this now? The markets aren’t even that scary.” That’s true. And it’s also true that I can’t predict when the next bad market is coming. 

But I can predict that another bad market will come again, eventually. And when it does, you’ll want to have a plan. That’s precisely why now is such a good time to hash this out. Because you don’t wait until your house is in flames to buy a fire extinguisher, right?

Preventing your clients from bailing out of a well-designed investment plan during a scary market is your single most important job as a real financial advisor. But here’s the problem: if your experience has been anything like mine, no one ever taught you how to do that! I got the best training in the industry, earned professional designations, attended conferences, and I can’t remember a single time where someone taught how to actually talk to people—let alone communicate when people are acting crazy!

And yet the success of all the work a real financial advisor does depends on your ability to talk to people. You can have the best financial plan in the world, design the best portfolio, pick the best investments… and if you can’t communicate in a way that gets people to behave when times are tough, all that work is gone.

I know this is a problem because I hear about it from readers. In fact, one conversation I had with a friend captures the problem perfectly. He has a lot of money with a very high-end wealth management firm. He shared that over this last weekend, his advisor sent an email that he thought would address the concerns he had about the impact of a recent global event.

It was two lines. Yeah, two lines. And here’s the kicker: one of them was “…Stay the course.” He was so mad!

He pays a ton of money every year to his advisor, and the last thing he wanted (or needed) was a two-line email telling him to stay the course. He told me that he knew that was the right thing to do, but the lack of empathy and the failure to recognize that what was going on in the markets was scary shocked him.

As he was venting to me about this experience, I decided to release two videos to help. Think of these videos as A Manual for Scary Markets. 

When the markets get scary, we’re often the only thing standing between them and our clients doing something foolish. But to be that release valve our clients need, we need to have an internal conversation with ourselves first. If you’re continually walking people in off the ledge, and you’re not taking care of yourself, it won’t be long until you’re the one out on the ledge. My goal with these videos is to help you understand your true value as a REAL financial advisor.

Watch my free mini-course about scary markets here.

Remember I said that no one ever taught me how to communicate as a financial advisor… once I realized how critical this skill was I decided to learn it myself. I read hundreds of books, talked to everyone I could, researched the best communicators, and asked thousands of clients how they wished their advisors would talk to them. I learned a ton in the process. And I packed as much of that as I could into these two videos.

One critical lesson I want to make sure you hear is when someone is feeling scared and tempted to do something that feels totally reasonable at the moment, but is clearly irrational long-term, they don’t want someone reasoning with them without first taking that time to empathize. Trying to reason with someone thinking irrationally doesn’t work. If you doubt that, try it with a teenager!

When you understand that, you start to see why the standard responses most advisors give (and the one I was guilty of as well) is so embarrassingly bad. What most of us do is we throw facts and figures at clients when they call scared because of the news of something like a recent global event. We give them data about the markets and the economy. During bear markets, we cite historical data about how long the average bear market lasts, and how deep they go—and of course how awesome the recovery always is!

This stuff can be important, but it is not what people want to hear when they are scared… the last thing they want to hear at that moment is historical data!  Instead, they want you to understand. They want you to listen. They want to know you hear them. That is a different skill set, and it is one I hope these two videos will help you develop.

The first one focuses on what we (advisors) need to do to be ready to deal with this, and the internal dialogue we need to have with ourselves before we talk to our clients. The second video walks you through how to talk to clients during scary markets. I even highlight specific tips and even include exact scripts I’ve used hundreds of times.

I hate to be annoying, but I really want to hammer this conversation home. It doesn’t make a lick of sense to sell a portfolio tailored for you when the market is low, and then buy it back when the market is higher. It makes infinitely more sense to simply keep your portfolio through the scary times and tough it out. Right, soldier?

You may already have this all figured out and know exactly what to say to clients. But if you’re struggling, A Manual for Scary Markets can help. I know you can do it, and I know your clients will appreciate it.

Think of scary markets as something of a lifeboat drill. This is meant to help you remember that when the ship goes down and you find yourself in the lifeboat scared and cold, you don’t throw common sense to the wind and jump in the icy water. Just stay in the rescue boat, tough it out through the turbulent times, and wait until the next big ship comes to pick you up to carry you safely to your destination.

Social Science vs Physical Science

Carl Richards Behavior Gap Outliers Matter

There is a long-standing debate over the difference between the social sciences and the physical sciences. It’s clear that economics is a social science. As such, many of the tools we use in the physical sciences will simply not work. One of the tools is the bell-shaped curve or normal distribution. 

Normal distribution is an appropriate way to measure a natural phenomenon. For instance, let’s say we put 50,000 adult, American males in a football stadium. Using normal distribution, it would be appropriate to say that the height of those adult males would be distributed around 70 inches with a standard deviation of plus or minus two. Weight and height would be normally distributed, too, among the males in the stadium. 

However, if we decided to measure wealth, and Bill Gates was in the stadium, it simply would not work to apply a normal distribution. It wouldn’t work to say he is an outlier. He would completely blow the distribution because he’s likely to have more wealth than everybody else in the stadium put together. So, normal distribution modeling or bell-shaped curves work for natural phenomenon. They do not work for economics, a man-made phenomenon and social science. It’s important to understand the distinction.

A Life Full of Experiences May Not Mean Less Financial Security

Carl Richards Behavior Gap Why Not

A couple of weeks ago, I wrote a column about the growing tribe of people who value experiences over security in their lives. But there is something that I didn’t say then that I want to emphasize: You don’t necessarily have to trade experience and financial security off against each other.

One of my main inspirations for writing this follow-up column was my friend, Brett Davidson. A few years ago, Brett and his wife, Debbie, lived in Britain. They were running the successful consulting firm FP Advance with the goal of helping financial advisors live the lives they so often help their clients achieve. Brett and his wife, who have no children, had a nice home with beautiful furniture, and everything was going about as well as anyone could hope for.

Except they weren’t exactly happy with the way they were living their lives. So they decided to visit a life coach, Kerri Richardson.

“The very first conversation I had with Kerri,” Brett recalled, “I had just read a book, and one of the key questions in the book was, ‘If you lived without fear, what would you do?’” Eventually, they chose to take a turn toward the unconventional.

Here’s a portion of my conversation with Brett after he and Debbie made their decision:

“We began with just taking more time off. However, about a year before we left London, we decided that working around a quarterly schedule for our face-to-face work would be O.K. for our clients and for us. At Kerri’s insistence, we started investigating what would be involved with renting our home out. We got an auctioneer around to see if we might sell our furniture via auction (as we’d decided that anything you ever put in storage never comes back out, so let’s bite the bullet and let it go). The auctioneer guy turns up in late April or early May and says, ‘I love your stuff, but I need it now so we can photograph it and get it in our catalog for June.’ We looked at each other and said, ‘Take it.’ That forced our hand. Two days later, we had no furniture, and so we got serious about renting our place out. Four weeks later, we’d found tenants who moved in, and we left.Since leaving the comfort and security of their ordinary existence in London, the Davidsons now have a pretty nice life. Their itinerary over the last year has included time in Amsterdam, Iceland, Canada, and Spain, with intermittent trips back to Britain for work. They’ve made time for a ski instructor course and a yoga retreat.

The point is not to make you jealous. Instead, ask yourself the same question that Brett and Debbie have asked themselves: “Why not?” What if you really did follow the advice of Henry David Thoreau and “live the life you’ve imagined?” Given all the tools and opportunities we have to work remotely (especially if you’re part of free agent nation), I’m beginning to suspect that this is more a problem of imagination than actual constraints.

Even if you don’t own your own company, the opportunities exist. According to Flex Jobs, an online service devoted to helping people find positions that allow for remote work, there was a 36 percent increase from 2014 to 2015 in listings for such jobs, including some for writers, engineers, healthcare consultants, and marketing professionals. Companies like Amazon, American Express, Apple, and General Electric were included in the listings.

Worried about flexibility? The Davidsons are financially successful. Not having children makes a big difference, too (though not as big as you may think, which is something I’ll address in a future column).

Worried about money? The Davidsons are not spending significantly more money to live this way. Between the money they earn renting out their home in London and being smart about airline miles or buying cheap flights, they are close to breaking even compared with their previous life.

So it’s not a change in expenses that has allowed the Davidsons to make this shift. They are able to live in this remarkable way because they restructured their lives in a way that would allow it. It’s simply because they had the courage to ask, “Why not?”

And if you’re wondering how this radical shift affected their income, here’s what the Davidsons have to say: “Since we’ve left home, we believe we’ve become more creative in our business and are doing some of the best work we’ve ever done. We’re thinking bigger, but also eliminating the ‘fake busy’ stuff and only doing things that will really make a difference. We didn’t know any of this would happen before we left.”

Consider that for a moment. Not only are Brett and Debbie living closer to their dream, they also say they are doing better work professionally. Experience? Check. Security? Check. Winning? Checkmate.

Experiences and security don’t have to be mutually exclusive. And the surprising fact that the Davidsons’ business has improved with this radical shift, even though that wasn’t their main intention, has at least made me wonder something. What if experience and security might be connected in a way that goes against the grain of the story society typically likes to tell? What if putting experience first makes us happier, more fulfilled, more creative, and more memorable people? There’s a lot of research to suggest that this might be the case.

None of this is to suggest you drop everything and live like the Davidsons. Maybe you don’t want to travel. Maybe your dream is to work at home in your pajamas and walk the dog an extra two miles each day with the time you’ve saved from your old commute. That’s great.

It doesn’t matter what your dream is, in particular. What does matter is that whatever you want to do, you start asking yourself a simple question: “Why not?”

This column, titled A Life Full of Experiences May Not Mean Less Financial Security, originally appeared in The New York Times on May 24, 2016.

Behavior Gap
  • About
  • Articles
  • Speaking
  • Privacy Policy