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At the Money: Investing Is Hard



 Investing Is Hard with Brian Portnoy (July 10, 2024)

Why is investing so hard? It’s because our brains have been trained, over thousands of years, to trust our fear instincts. In this episode, I speak with Brian Portnoy sits down with Barry Ritholtz to explain why humans aren’t built to be good investors. Portnoy has held senior investment roles throughout the hedge fund and mutual fund industries.

Full transcript below.


About this week’s guest:

Brian Portnoy is founder and CEO of Shaping Wealth, which helps advisors and their clients to achieve “funded contentment,” and operates as an outsourced Chief Behavioral Officer. Portnoy has held senior investment roles throughout the hedge fund and mutual fund industries.

For more info, see:

Shaping Wealth Bio





Find all of the previous At the Money episodes in the MiB feed on Apple PodcastsYouTubeSpotify, and Bloomberg.






Barry Ritholtz:  Have you ever wondered why investing is so hard? Why is it that your instincts always lead you astray? Why are stories so compelling but probabilities  Why do you join the crowd buying in at the top and then panic sell at the bottom?

As it turns out, you’re just not built for this. I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss evolutionary psychology and what it means for your portfolios. To help us unpack all of this, Let’s bring in Brian Portnoy. His firm, Shaping Wealth, helps financial professionals with both money and meaning.

So, Brian, welcome to At The Money. It turns out that investing is hard for a reason. Tell us about that.

Brian Portnoy: Thanks, Barry. We weren’t wired for this. The brain between our ears is more than 100,000 years old. All right, so we’re working with pretty old machinery, money, which we probably take for granted is a relatively new invention.

Let’s just call it to make it easy, 3000 years old.  The brain’s 100, 000 years old. Money’s 3000 years old. The way we evolved was not to spend and save wisely or to invest using modern portfolio theory. No, we are wired to survive in a wild and dangerous environment. We’re money was not even a thing. So money and brains tend not to work very well together.

Barry Ritholtz: So let’s take some examples. Where does this evolutionary baggage that we’re all stuck with? How does it lead us astray? Give us some examples. 

Brian Portnoy: Well, let’s talk about time now versus later. So we are as humans.

We’ve got the future. We’ve got the past. We’ve got the present. And, you know, we were raised, we grew up as a species in an immediate return environment. So there was a distant future, but When you’re out on the savannah and you’re trying to kill that animal and you’re trying not to be eaten, you’re really focused on the here and now. Well, if someone says, Hey, you know, you’re 35 or 40 years old and we’re going to put together a 30 year portfolio for you, that literally doesn’t make any sense to who we are as a human species.

Barry Ritholtz: So let’s talk a little bit about.  and numbers. Why is it that we love a great story, but when we start thinking about probabilities and odds and numbers, our brains turn to mush?

Brian Portnoy:  Yeah, it’s just true that we were born as storytellers and not as calculators. We’re not. particularly numerative. I say two plus two. You don’t calculate that. You just know it’s four. But if I give you something even slightly more complicated, we begin to, you know, stammer over, well, what would the answer be versus the way that we as a tribal, species developed many, many years ago, thousands of years ago, which was sharing stories. So the brain has evolved to love and cherish stories. It’s the way that we live our lives.

In fact, as we listen to new information, we watch TV or read the internet. We are processing. Enormous amounts of information and picking and choosing the bits that map to the stories that we already believe some psychologists might call this confirmation bias

Numbers, they don’t really compute literally and figuratively.

Barry Ritholtz: So you, you talked about telling stories as a group. Let’s talk a little bit about humans as social primates and the tendency to do what the crowd does. Why is that a problem when it comes to stocks and bonds?

Brian Portnoy:  Well, there’s a word for that. It’s called herding. But why do we herd to begin with? Well, you know, you asked me at the start, you know, what happened to get us going in this direction? Well, one was a focus on the here and now. Another was the focus on your local tribe, meaning that was a source of safety. First and foremost, but it also became a source of meaning and identity and community.

So, humans, you know, we might think of ourselves as sovereign individuals, but in some ways before we become sovereign individuals, we were, we are born into tribal societies, tribal cultures, our identities are formed through those affiliations. And as a result, we want to be with everybody else. It’s really uncomfortable to go against the grain.

So fast forward a few thousand years to 24/7 fast moving capital markets. When you see people running for the door or running into this room where something interesting is taking place, you’re going to be like, Huh! Maybe I should go with them because there is safety in numbers, at least from a genetic wiring point of view.

Barry Ritholtz: It’s so funny to say that as a kid, I grew up watching Mutual of Omaha’s Wild kingdom. Yeah. And the aerial shot of the savannah and just thousands of wildebeest and they would always zoom in on that one limping wildebeest on the edge of the herd and you just knew that guy was about to get separated from the crowd and it wasn’t going to be good for him.

Brian Portnoy:  It was not. He was going to lose the race. I mean, we are wired for a dynamic that I simply called survive and thrive. Job number one every day is to stay alive. You don’t necessarily need to thrive every day. You don’t need to hit the jackpot every day. But you certainly need to stay alive. Because you get one, you got a one punch ticket.

And, you got to stick around. So veering from the crowd, from a historical, from an evolutionary, from a psychological point of view, feels uncomfortable for a reason. Because our ancestors who did veer from the crowd, they’re not really around to pass on their genes to us.

Barry Ritholtz: The ones that the lions culled from the herd, that genetic line ends there.

Brian Portnoy:  That’s the way evolution works. We are an adaptive species. So there are certain genes and instincts that are more by luck than by design. They land well in the world. And those are the ones that get replicated. Those are the genes that profligate through our system, our biological systems.

And as a result, we, the human condition is what it is.

Barry Ritholtz: So let’s talk a bit about. emotion. I’m a big fan of Danny Kahneman’s book, Thinking Fast and Slow. Why is it that our instinctual first reaction is this often over the top emotional reaction that gets our heart pumping or our breath quick? We begin to sweat. Why do we react that way?

Brian Portnoy:  I mean, it comes back to this survival instinct, Barry. It’s this hard wiring that, um, we need to survive. We are so good, if you think about it, so good at sensing danger. If you walk into a room, could be in your home or in the office, or if you’re socializing with friends, if there’s something in that environment that feels slightly off, you are so finely attuned to it, you are going to react. It’s just who we are.

And so when you talk about Danny Kahneman, one of my all time heroes, writer of Thinking Fast and Slow, inventor of behavioral finance with Amos Tversky. You absolutely have that quickening heart rate, the pulse is going up, you’re sweating a little bit, because that is a natural biological reaction to a threatening environment.

And the thing is a lion on the savannah and a red line on a stock chart actually trigger us in the exact same way in at some level. Danger is danger is danger.

Barry Ritholtz: So when we look at how humans have evolved and adapted, it seems life on the savannah was hard and our emotions get us excited, and that leads us to a fight or flight response, and that affects us in the modern xapital markets, tell us what this means for us today.

Brian Portnoy:  One thing I’d want to stress is that you sometimes hear, well, let’s take the emotions out of investing. Well, it’s sort of like saying, let’s take gravity out of space. There, there, there’s no way to get around it. We are emotional creatures. Emotions are actually sources of information so that we can navigate the world better.

So there’s nothing wrong with having an emotional reaction. Hey, my portfolio is declining in value. Am I still going to be able to retire comfortably? Those are totally natural, normal reactions. But what I’d stress is that we get away from thinking of ourselves as irrational. By the way, irrational is an economist word for stupid.

We’re not stupid. Richard Thaler, one of the other pioneers in behavioral finance, has said that people aren’t dumb, the world is hard. The world is very hard. We’re processing a lot of information. It is complicated times. So let’s not think of ourselves as irrational. Let’s think of emotions as a source of information and strength, and think, well, we are normal, we are adaptive for a reason.

It might land us in a difficult spot, but we can pull back from that, and with a little bit of self awareness, make better decisions.

Barry Ritholtz: Let me bring up something that Danny Kahneman said that I found so fascinating. He said, “Even I fall prey to my own cognitive biases and emotional reactions.” If someone as knowledgeable and just a pioneer in the space as Danny Kahneman is susceptible to emotions leading him astray, what hope do the rest of us have?

Brian Portnoy:  We have a ton of hope, Barry. A ton of hope because we’re not supposed to be automatons. It’s an awesome thing that we are emotional. It makes life rich and colorful. It’s just that we want to make sure that we appreciate that emotion is a language of with vocabulary and as we navigate markets, as we navigate our financial lives, these feelings of greed, joy, fear, envy, anger.

One, they are normal, and two, we can use those as a jumping off spot to understanding how we want to approach a situation and make things better.  When Danny Kahneman says, hey, I can’t get rid of my biases, he’s opening actually a really fantastic door for all of us to appreciate that this is just the way that we are.

So the job here is not to change human nature. It’s to understand human nature in ways that help us make better decisions in a very complicated world.

Barry Ritholtz: So I love, I love the way you’re framing that. So, so let’s take what’s probably, one of the two most damaging emotions in, in finance, which is fear.

We’re recording this, markets have been a little wobbly the past couple of weeks, after a good run from the lows in 2022, things have kind of stumbled a bit. And the genuine risk for investors is after this goes on for a few weeks or even months, they just throw their hands up and say, “I’m not sleeping! I’m not comfortable! Get me out!” Everybody who works with clients has heard that phrase. “I can’t take it anymore. Get me out!” Usually it’s a great buying signal. Why is it that at, at lows, our panic reaches a crescendo?

Brian Portnoy: Well, it gets back to the fear instinct. The reason we feel fear is that we sense danger. We sense a threat to our security. It might not be our physical lives, way back in the day, but our financial lives, if they are under threat, well, maybe we can’t afford to eat. Maybe we can’t afford our mortgage. These feel very uncomfortable. They are legitimate emotions.

One thing I’d add, though, is that if we think of investing broadly, less as a game or a casino, something to be won, but as a tool in reaching our goals, we actually dampen down some of those harsher emotions that we might feel because we no longer are asking the question, Am I, you know, am I holding the right investments?

How much money am I losing? We pivot to a more constructive question of, am I closer to or further away from my goals? And the goals actually serve as a really fantastic bridge from a cognitive point of view, from an emotional point of view, where you can really have a better conversation in your own mind. with your partner, with your financial advisor. It provides a context so that you’re not being whipsawed by the daily machinations of the market. If you’re paying too close attention to that, you’re probably not playing the game that you should be in terms of long term financial well being.

Barry Ritholtz: Hmm. Really, really intriguing.

So, so if I get this right, Emotions are natural. It doesn’t mean we’re dumb or stupid. It’s part of who we are, but allowing your emotions to affect your thought process to lead to bad decisions, uh, that could cause bad investments, bad timing, and bad behavior, and that leads to bad results.

But at the very least, if you’re aware of your emotions and put them into some context and don’t allow them to overly affect your decision making process, hey, you’re, you’re halfway there to a successful financial result. The bottom line Don’t allow your emotions to get the better of you. That’s just your wetware.

That’s just how you’re built.

You can listen to at the money every week. Find it in our Masters in Business feed at Bloomberg. com, Apple podcasts and Spotify. Each week we’ll be here to discuss the issues that matter most to you as an infestor. I’m Barry Ritholtz. You’ve been listening to at the money on Bloomberg radio.





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