Daniel Crosby is a psychologist and behavioral finance expert who applies his study of market psychology to many aspects of financial services. Earlier this year, he joined Berwyn, PA-based Brinker Capital as Chief Behavioral Officer to run the investment firm’s new Behavioral Innovation Lab, an incubator designed to bring tools, training, and technology to financial advisors. Dr. Crosby is the author of “The Behavioral Investor”, which was published last year, and other books that explore the intersection of behavior and finance.
He recently sat down with the Novantas Review to talk about how behavior influences financial decisions.
Q: What can banks learn from behavioral economics?
A: The study of behavioral economics is not how things should be, but how things actually are. In economics and finance there are a lot of assumptions that are optimized for modeling purposes, but given the quirkiness of human behavior, that is not how things always play out. Bankers can learn more about what their customers are thinking, feeling and doing.
Q: What is the mission of Brinker’s Behavioral Innovation Lab?
A: We are creating training tools and technology that improve investor outcomes. We believe there is not only a lot of financial good that can come from our initiatives, but there is also a lot of well-being. People who work with a financial professional are three times as happy as those who don’t and have two times the level of preparedness. We have an advisor education arm where we train financial advisors in the dark arts of learning what their clients are thinking, how they behave, the types of decision errors that are made and how they can give advice that sticks. About 40% of Americans are receiving financial advice, but only about half of those are sticking with the plan. Lots of times, advice is delivered in a way that isn’t sticky. We are using machine-learning technology that tries to anticipate when a client will make a mistake with their money before they make it. We put clients through a simulated market exercise where they have access to news and can make decisions about portfolio. We then monitor what they do over time to see if they are fearful or greedy or emotional or chase returns. We can then give the FA an alert that Mr. Jones tends to panic when the market does “this” so we can give him a nudge.
Q: Why should a bank hire a Chief Behavioral Officer?
A: A Chief Behavioral Officer is a chief scientist who can lend some scientific rigor and measure what works. Part of what I bring to the organization is the scientific training, but a Chief Behavioral Officer can also bring a strong element of creativity and innovation. A lot of innovation on the product side has ignored the human element. Behavior is immutable — it’s not going anywhere. The truths and the tendencies that a Chief Behavioral Officer is unearthing will be around forever.
Q: Do financial-services companies spend enough time studying customer psychology and behavior?
A: We are trending in a good direction, but my observation is that we have moved from the not-thinking-about-it phase to the talking-about-it. But we’re not doing much about it. Maybe now we will start to apply it.
Q: Studies have repeatedly shown that Americans are terrible at saving — whether a rainy-day fund for emergency car repairs or retirement. How can banks play a role in changing this dynamic? Or even before that, should they?
A: Banks are playing a role. One of the things you learn about human behavior is the way that you frame a choice or structure a website — every one of these design elements — has an impact on human behavior. It’s not a matter of whether you are influencing savings behavior, but it is a matter of how. Humans are lazy and prone to the status quo. When we make a decision, we tend to stick with it. If the decision is to not save, we persist in not saving. If the default is to save, we stick with that too. Setting the right defaults is a powerful first step. In one study, people who looked at a picture of their children before making a financial decision saved over 200% more than those who did not. Banks can use positive emotion, to use our “why” and our values and the things we care about.
Q: Banks certainly have a mixed history when it comes to trust. What can they do to win the trust of customers?
A: There is some mistrust implicit in getting financial education from a provider of financial services. Trust has three elements: care, competence and character. You need to keep my money safe. You need to be ethically sound and I want to feel cared for. A bank needs to hang a sign over its head and say, “look what we did wrong and we are trying to change.” We live in an era of mealy-mouthed half-apologies. You have to really have an honest mea culpa and you have to be specific about how you are trying to change and how you will measure it.
Q: Novantas research has shown that bank customers want to have branches near them even if they rarely actually go into one. What is the behavioral explanation behind this?
A: There’s something called the “mere exposure” effect. It says that one of the primary determinants of someone doing something is having heard of it, whether it is a purchasing choice or a voting choice. Driving by a branch every day is a big feel-good for people. There are people who are scared of stock market, but want to invest in real estate. People think something that is real if they can see it and touch it.
Q: How can behavioral psychology and behavioral economics play a role in product design in the banking industry?
A: You have to observe and understand customer behavior. Once you understand them, you have to amplify the benefits and help people understand how these things impact them. Research on savings behavior shows that it is perceived as a loss because it is money that is in a retirement account and now the person can’t buy a car or shoes. But technology can be used to highlight the benefits and progress of the goal. If there is one thing that induces people to do something, it is something that is easy. Making it easy has not been the hallmark of my banking experience.
Q: Speaking of your banking experience, tell me a little bit about your personal banking behavior.
A: I haven’t been in a bank for years. I do everything electronically. I bank with a small regional bank that I candidly kind of hate. It’s total inertia on my part because all of my billpay is set up and the trains run on time. Their technology is old, but it does what it needs to do. I do everything from my phone. My banking needs are minimal. I put everything on a credit card and pay it off monthly just to get travel points. I just sent my family to Australia with points. I was well into adulthood before I ever got a credit card. I grew up in a house where my dad was a very religious guy and I never heard him swear. He said debt was another four-letter word.
Director, New York