Supported by Greenhaven Road Capital, finding value off the beaten path.
Dan Egan spoke with Ted Seides on Capital Allocators. I can’t get enough of these behavioral economics folks. From Richard Thaler to Rory Sutherland – if you have some favorites let me know.
There are lots red flags when evaluating people or businesses but one green flag is the humility to acknowledge the role of luck. Egan has that.
“I think I was incredibly lucky. Like surfing, I just happened to be at the right place at the right time and be lucky. Of course, you also have to do the swimming out bit.”
David Heinemeier Hansson had a good line about it:
“I retain the humility of knowing that just because I have hit a homer with Basecamp does not mean that I have some magic voodoo touch that’s going to turn everything else into gold.”
In school, Egan enjoyed economics or psychology – though he knew economics paid better.
“That inability to decide (on psychology or economics) about which one of those things I really wanted to focus on led me to being acceptably good at both of them.”
This is advice Leigh Drogen is giving to people who ask him: “I’m telling my interns from Wharton to go study quantitative and interpersonal skills, go study both and become the center of that.”
Scott Adams wrote a book largely about the idea of Venn diagram type skills.
Knowing doesn’t stop doing – but design might.
“At some level, you start to say, how can I build systems, habits, or patterns around myself so I minimize the harmful biases?”
Daryl Morey noticed this. Coaches, scouts, and executives tended to compare one player to another player of the same race. Morey built a system where comps had to be cross-race to circumvent this tendency.
Rory Sutherland says that the sequence we make decisions in matters quite a bit. Often it’s not what you want to eat, he says, but how you want to eat. How often do we choose quality over convenience? That’s our internal choice sequence.
Egan also likes to experiment. In one experiment, Egan showed users the tax consequences if they confirmed a buy/sell order. For four weeks one group saw the message and a control group did not. He tallied the results and found that 70% of people changed their behavior after seeing the message.
In another experiment, they tested email and push notifications. “Everyone hates draw downs except perma-bears and behavioral scientists because this is the point where I finally get to test whether stuff works.”
During the Greek crisis, they showed customers prepared warnings. It was a dud. “We learned that most people aren’t worried about the market.” Instead, people are thinking about meetings at work and grades at school.
Egan and his team made tweaks. During the next crisis, they alerted only people who logged in. “That pop-up notification reduced the bad behaviors by about fifteen percent and increased deposits by about ten percent. It didn’t solve the problem but it’s very easy to do and does have enough effect you can hang your hat on it.”
One small change for a medium-sized effect. That should be the gold standard. Silver bullets are for the movies. Small changes work, it’s “Poor Economics.”
This kind of stuff is “…hard to do, but it’s worth exploring,” says Egan.
Egan knows that it’s hard to divert people from performance chasing. Instead, they tried to direct investor’s attention elsewhere. “Taxes, costs, and investor behavior is what we tend to focus on rather than the investments themselves.” Switching attention can switch conclusions. This was something Sutherland marveled at to Shane Parrish:
“The pilot says something I’ve never heard before. Instead of saying, “I’m terribly sorry, we haven’t been able to get an air bridge, so you’ll be bused to the terminal. If you just wait while the bus draws up on the port side of the aircraft—”
No. Instead, he says, “I’ve got some bad news and I’ve got some good news. The bad news is we haven’t been able to get an air bridge because there’s a plane blocking our gate.
The good news is that the bus will take you right next to passport control, so you won’t have far to walk with your bags.’ Suddenly, I realized that actually that’s always true. When you get a bus, there’s an upside to the bus, which is you don’t have a long walk through a shopping center with your carry-on luggage in order to get to passport control and then the baggage carousel.
But because no one had brought our attention to it, we had no opportunity to derive the positive.”
Betterment has similar framings this says Egan. “We don’t show individual security returns, you can only ever see the returns of a diversified portfolio.” They also use color to show not past performance but future potentials.
Rapid fire takeaways (and one theory):
Focus on the MITs. “It’s easy to get stuck on the rebalancing methodology but the marginal gains are really low. As long as you think about the tax component and you’re not letting your asset allocation get crazy, you’re fine.” And the active and passive debate is “a distraction for the vast majority of people.” Instead, focus on more important things – like saving more.
Have people commit by naming. “Putting names on things actually makes it easier for people to spend money on it.” Goal-based based investing creates stability and ownership, two behavioral nuances that lead toward certain behaviors and away from others.
Hire the right customers. “We are not where you are going to trade. We are not that fun. There are apps out there that make it fun and interesting to trade single line stocks and market time. We are wonderfully boring. I hope that we are selecting for investors.” The right stakeholders reduce friction and reduced friction means more movement.
Don’t tell customers to shut up. “The worst thing you can do when someone is freaking out is say ‘Stop! Don’t do anything. Sit still.’ You have to take that anxiety and energy and redirect it to more positive things.” This echoed what Josh Brown said too, “If you’re just telling a client, ‘Shut up I got this,’ you’re not going to be the client’s advisor for a long period of time.”
Exciting things are bad investments. “If you’re excited about what you’re investing in you should worry. If you’re doing something boring or standard you’re going to stick with it.” That sounds like something Brent Beshore would say.
Arguing well is difficult. This may be the most honest articulation I’ve heard.
“I underestimated how difficult it would be to set up systems and process such that people who have very different perspectives feel engaged, feel like they were heard, and making sure that continues so you don’t end up with an echo chamber. Diversity of perspective is not fun. You’re going to be disagreeing with people you work closely with on a regular basis. It can make for a tense workplace, but that’s the crucible that the really strong stuff comes out of.”
A theory of live advisors. Why would Betterment, a technology company, bring in live financial advisors? It’s a great move and here’s why. This theory is from Rory Sutherland (again), writing in The Spectator.
“A case in point: ever since Uber cars became established in London, I barely drive into London at all (I live just outside the M25). Previously I did so once a week. This wasn’t by choice (after all, if I wished to recreate the experience of driving in London, I could sit in a stationary car at home while stabbing my head repeatedly with a fork).
No, before Uber, I was forced to take my car into London simply because if my event overran or if the trains went funny, or if it started raining and the black cabs were all taken, or if I was in that 90 per cent of the city where black cabs don’t go, then I was irredeemably stuffed.
My car wasn’t a form of transportation, it was a fallback position.”
With Uber, Sutherland had another possibility. Option A was the planned train trip. Option B to take Uber.
“In all those 50 non-car-journeys in the last year, I used an Uber to get home only once. The other 49 journeys took place as planned by train. But I made those 49 journeys by train largely because Uber now offered me an acceptable second-best alternative.”
What if this works for Betterment too? Maybe people just want the option to talk to a person? Does Betterment think this way? I asked:
Thanks for reading.
MOAR here –> http://eepurl.com/cYiwTP