RT27: Why Emotion overrides cognition...dramatically ft. Daniel Crosby – 2of2 - a podcast by Niels Kaastrup-Larsen

“Emotion overrides cognition pretty dramatically” - Daniel Crosby (Tweet)
Welcome to Top Traders Round Table, a podcast series on managed futures brought to you by CME Group. On today's episode, host Niels Kaastrup-Larsen continues his conversation with Dr. Daniel Crosby, Chief Behavior Officer of Brinker Capital, and the host of The Standard Deviation Podcast. Niels and Daniel discuss how emotion affects investment decision-making, the problem with financial media, and what investors can do to correct their bad investment behavior.

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In This Episode, You'll Learn:

The key points of dealing with emotion as an investor
Why rules are better than goals
Daniel’s Four “C”s of investing
The importance of rule-following for investment managers
What is the role of clarity in investing

“More than anything, overcoming emotion is just about automating.” - Daniel Crosby (Tweet)

Why an overabundance of data can be detrimental to decision-making
The role of courageousness in investments
Why process over outcome is important
Why volatility is not the same as risk

This episode was sponsored by:



Connect with our guests:
Learn more about Daniel Crosby and Brinker Capital
“There has never been a better time in the history of the world to be an investor.” - Daniel Crosby (Tweet)
Full Transcript
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Niels
Welcome back to Top Traders Round Table a podcast series on managed futures, brought to you by CME Group, where I continue my conversation with Dr. Daniel Crosby who is the Chief Behavioral Officer at Brinker Capital, as well as the author of a number of highly recommended books (including the book titled The Behavioral Investor), and host of the Standard Deviation Podcast.
The fourth one that you cite, which I often think as being the biggest one, or maybe the one (at least in our industry) we talk the most about when we talk about why it makes sense to consider managed futures or trend following, and that's emotion. It's such a big. Maybe you can talk a little bit more about it. I also spoke with Andrew Lo, on the podcast, and he has also talked about the challenges with emotion. I'd love to hear your thoughts about this area as well, and what you found to be the key points when it comes to dealing with emotions, as an investor, I guess.
Daniel
Yeah, the Andrew Lo episode was great. I listened to that, and I'm a big fan of his work. So, emotion is interesting because emotion overrides cognition pretty dramatically. So, when you look at studies of investors who are under duress, like investors who are under stress, we find that they lose 13% of their cognitive capacity. So, effectively, 13% of your I.Q., and you got to think that some of us don't have 13% to give. We need every last shred of brainpower that we've got.
So, emotion overrides that thinking, and it causes us to make poor decisions. There are a couple of things we can do around emotion. The first is to be a Quant: to, basically, automate doing the right thing and set in place the stopgaps that we talked about earlier. I think learning about emotion, and learning to handle it (because I think things like trend and momentum, and other things actually ride with human emotion), you can use human emotion in your favor. I think there are some examples of even ways that we can do that from an investment standpoint and in saving and planning for our financial lives.
I cite a study, in my first book, that talked about low-income savers, who looked at a picture of their children before making a financial decision, save two and a half times as much as those in a control group. So,

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