To My Friends

The Psychology of Complexity

There is this inevitable moment that happens after years of working in finance. Your friends, who usually have no interest whatsoever in your day job, now find you credible enough to ask for investment advice. Every advisor in history has reached this milestone in their career. They’re making small talk with someone they know, and the person asks, “hey, you work in finance, what stocks should I buy?” Obviously, this person is expecting you to impart some sort of hail mary wisdom, so they can log into E*TRADE at the bar, dump some tiny dollar amount into a Malaysian tech IPO, and tell their boss to take this job and shove it because they have Kardashian money now. I have lived this nightmare conversation in bars, at barbecues, on airplanes, and in restrooms. The worst part is, I almost feel bad giving them a sound answer. You tell someone to focus on diversification, cost, risk tolerance, and goals, and they will look at you like you just ran over their cat. To them, it is as if you have the golden answer, but are withholding the good stuff. The need for instant gratification is rampant in our DNA. It is the mindset that keeps casinos packed, and hedge funds charging 2 and 20. It is why no one can decipher the similarities between aspiring to be an influencer and buying a lotto ticket. If the payoff requires discipline or time, the payoff no longer seems worth it.

Advising on the actual investment of assets is relatively straight forward unfortunately. I will be the first to tell you what we have under the hood, and it looks more like a Camry with a bulletproof transmission than a Ferrari. It is by no means “set it and forget it,” but a good advisor is much more interested in boring things like tax efficiency, cost, and long-term goals, than they are in picking the next Apple or Microsoft. If your advisor is selling you speculative pots of gold, it may be a good time to get a second opinion. This leads me to the single most important part of my job. Saving clients from their own behavioral biases. Essentially saving them from themselves. Behavioral bias effects all of us, no matter how smart you think you are. From the recency bias that inspires people to dump money into hot stocks at the top of the market, to those who sell their entire portfolios at the bottom because their neighbor told them the apocalypse was coming. Of course, there is so much more that goes into being a good wealth manager, but the most effective part of our jobs, is the piece that we will never get thanked for. This piece allows people to see past their behavioral blind spots and hold on for the ride they signed up for. Discipline pays dividends.

Bias is not something you can get rid of. Your emotions guide much of your decision making no matter how disciplined you think you are. You can focus on your diet, and end up with a mouth full of Big Mac. You can envision a plan to save money and end up with larger expenses than you had last month. I read a quote recently from Richard Thaler, one of the most famous behavioral psychologists of all time. When asked if his 50 years of research into the psychology of human behavior has allowed him to overcome his own bias, he said, and I am paraphrasing, “hard no.” If the guy that literally wrote the book on decision making bias can’t overcome it, do you think you can? I am going to go out on the limb here and say chances are pretty dismal. Our brains crave complexity, and we will pay double for a taste of it. My own father has worked in financial services for longer than I have been alive, and he still touts his high beta stock picks in startups and Beijing hotel companies like he’s a scratch race horse better. I don’t have the heart to tell him that the last ten years have statistically been the easiest time to be a do it yourself stock picker in history. If you lost money during this period of time, you must have really been trying. This fact alone makes it much more challenging to advise someone on investing in a portfolio that spreads risk across multiple asset classes and suits their income and retirement needs. If you’ve won, there’s no way you can lose right?

They say tragedy plus time equals comedy. If you can overcome the tragedy of volatility, and give your investments enough time to participate in the glory of the free market, you will be laughing all the way to the bank. Skip the media hype, the glorification of the next hot IPO, and stick to what you can control. Invest in a way that suits your life, stay the course, and remember that complexity is just a way to charge absurd fees and keep you in the dark. I dream that one day when I am asked the question “what stocks should I buy” at some barbecue I don’t want to be at, my answer resonates as exciting. Chances are low, and probably why I have a job in the first place.