John Coyne on Bloomberg TV

Brinker Capital Vice Chairman, John Coyne, sat down with Deirdre Bolton of Bloomberg TV to discuss the results of the 3Q13 Brinker Barometer Survey.

Click the image below to view his segment.

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Here is an infographic illustrating some of the key results from our Brinker Barometer that John discussed.

Financial Advisors Finally Confident in U.S. Economy, Q3 Brinker Barometer Finds

We have the results of our third quarter 2013 Brinker Barometer® survey, a gauge of financial advisor confidence and sentiment regarding the economy, retirement savings, investing and market performance.

For the full press release, please click here, but in the meantime check out the infographic below for some of the highlights:

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Behavioral Finance 101: Framing

DanielCrosbyDr. Daniel Crosby, Ph.D., IncBlot Behavioral Finance

As we’ve discussed in the first two parts of this series, economic decision makers are not the cold, detached, decision makers they have historically been painted to be by efficient market theorists. Quite the opposite, human behavior is marked by irrationalities and fuzzy logic based more closely on mental approximations than hard and fast rules. We have already touched upon the impact of heuristics and irrational behavior and today will turn our gaze to the third pillar of behavioral finance – framing.

7.10.13_Crosby_Framing_2Simply put, framing is an example of a cognitive bias in which people arrive at a different decision depending on how the question is framed. While homo economicus would weigh all decisions equally and disregard framing effects, actual behaviors indicate that the lens through which we view a decision has everything to do with the eventual outcome. Frames can take a number of shapes; it could be the physical place where we make a decision, whether a question is positively or negatively framed, and even the way we mentally account for the options from which we are selecting.

Consider a real-life framing example with a huge cost to the U.S. taxpayer. Twice in the past few years, the government has tried to stimulate the economy by offering tax rebates to the hardworking citizens of the U. S. of A. Both times, these efforts have met disappointing ends, and behavioral finance may just be able to tell us why.

Belsky and Gilovich lead us toward the answer in their excellent primer, “Why Smart People Make Big Money Mistakes.” They describe a study conducted at Harvard wherein 24 students were given $25 to spend in a lab store as part of their participation in a research. Any unspent money, they were told, would be returned to them shortly via check. But wait, there’s a rub (there always is when psychologists are involved)! Half of the students were told that the $25 was a “rebate” and the other half told that it was a “bonus.” Could such a minute difference in cognitive framing have a measurable impact on spending behavior? It turns out, it could.

7.10.13_Crosby_Framing_1For those whose earnings were framed as a bonus, 84% spent some money in the lab store, a behavior mimicked by only 21% of those whose money was framed as a “rebate.” Now consider the decision of the U.S. government to give “tax rebates” to help stimulate the economy—an action that ultimately failed, probably at least in part due to framing effects. Irrational decision makers that we are, we fail to grasp the fungible nature of dollars and account for them differently based upon how they are framed in our mind. As Nick Epley, the psychologist who conducted the Harvard study, said more forcibly, “Reimbursements send people on trips to the bank. Bonuses send people on trips to the Bahamas.”

One of the most profound forms of framing effect plays on our fear of loss in times of fear or risk, or the related fear of missing out in times of plenty. This tendency, demonstrated most powerfully by Daniel Kahneman and Amos Tversky is known as “loss aversion.”[1] The basic tenet of loss aversion is that people are more upset a loss than they are excited by an equivalent gain. Consider the comical demonstration of loss aversion that resulted from a survey conducted by Thomas Gilovich. Mr. Gilovich asked half of the respondents to a questionnaire whether or not they could save 20% of their income, to which only half said yes. The second half of the respondents was asked whether they could live on 80% of their income, to which 80% replied in the affirmative. To-may-to, to-mah-to, right? So why are the responses so different?

7.10.13_Crosby_Framing_3The first phrasing frames it as a 20% loss of spending power (there is a large body of research that indicates that saving is viewed as a loss. Silly people), whereas the second frames it more positively. Thus, equivalent financial realities are viewed through entirely different lenses that lead to decisions with profoundly different outcomes.

One of the benefits of behavioral finance is that it shines a light on the little peccadilloes that make us the flawed but lovable people we are. But irrational as we may be, we can turn the tide on ourselves and use these quirks to our personal advantage. Framing is only disadvantageous inasmuch as the frames we are applying to our money are reckless. Viewing money through the frame of a charitable contribution or a child’s college fund can impact your financial decision positively just as surely as framing it as disposable can have a negative impact. At Brinker Capital, our Personal Benchmark system accounts for the human tendency to mentally account for and frame dollars, and does so in a way that helps ensure an appropriate allocation of assets across a risk spectrum. As we hope you’re aware after taking part in this behavioral finance survey course, you are not as logical and dispassionate as you might have guessed. Whether or not you use that irrationality to your benefit or detriment is now up to you.


[1] Kahneman, D. and Tversky, A. (1984). “Choices, Values, and Frames”. American Psychologist 39 (4): 341–350.

Seeking a Greater Purpose in Investing

Dan WilliamsDan Williams, CFP, Investment Analyst

The “science” of investing is well known. The modern portfolio theory (MPT) of investments developed over the past 50 years, starting with Harry Markowitz, has become so ingrained into the investment management culture that the concept of portfolio diversification has become second nature to most people. This is of course due to the mathematical analysis showing that diversification improves investment portfolios’ risk and return characteristics. To say differently, it makes good math sense.

6.27.13_Williams_1Recently though, investment management research has begun to venture into the new field know as Behavioral Finance. At a high level, this theory points out that the owners of these investment portfolios are not emotionless robots that are attempting to optimize the expected value of portfolios for a given level of risk, but rather humans who have reactions to watching their portfolios change in value and who also have goals for the wealth created. Often times this theory’s task seems to be to point out our human flaws and biases so that we can move closer to MPT. This includes our confirmation bias (seeking out only information we agree with rather than information that challenges our thinking), overconfidence bias (believing we are above average in our skills), and loss aversion (finding that we will irrationally gamble to avoid a loss already sustained but unwilling to take a gamble that might result in a loss, even when the odds are in our favor). Still, this idea also points out what gets lost in the math of MPT. Specifically, that an investment portfolio has greater purpose than just the accumulation of money.

The meaning here can be shown in the following dream scenario. You take a trip to Vegas, you see a slot machine, you put a dollar into the machine for fun, pull the lever, and you hit the big jackpot. You are then told that you can either have the $10 million prize immediately, or a flip of a coin for the chance to win $25 million or lose it all. The vast majority of people would take the $10 million dollars. Consider instead the experience of the MPT optimizing robot. First, the robot would likely not put the $1 into the slot machine. Why put $1 in when the expected value is $0.95? Second, given the jackpot options the robot would likely gamble it all at the chance for $25 million as the expected value of $12.5 million is greater than the $10 million. The math is clear—the robot is optimizing and we are not. But that is not the whole story.

6.27.13_Williams_2First, most humans get utility from putting a dollar into a slot machine outside of the outcome of the gamble. As such, we may be rational to gamble if the utility of the $0.95 expected value and the experience of gambling together are greater than the utility of the $1 in our pocket. Second, given the jackpot options, outside of the fear of losing the $10 million, there is also a diminishing marginal utility to money. That is to say simply that an extra $1 million to you or me changes our lives a lot more than an extra $1 million to Warren Buffett. It is quite possible that the utility we tie to that first $10 million is greater than the utility to that next $15 million. As such, we could be rational in both the action to gamble and the decision to take $10 million.

While lottery dreams are nice, the practical meaning is that our investments allow us to do things. Said differently, our investment balance is not just a number, it represents our ability to meet goals. To some, that $10 million meant the ability to have the freedom to travel, to retire for others, a fleet of cars to those so inclined, and a chance to make the world a better place for still others.

NorthstarIn this line of thinking, the relatively newly developed bucket approach to investment management ties specific assets to specific goals. This simple concept turns a portfolio that is invested based on some risk profile that in an opaque manner will meet your goals into a portfolio of portfolios that represent directly your goals. Accordingly, rather than having portfolio performance measured against a generic market benchmark, the measure that matters is whether each of these portfolios is on track to meet their assigned goals. Accordingly, Brinker Capital’s recent offering in this area is appropriately named “Personal Benchmark.” A final point is that people draw utility not just from spending their investments to meet goals, but also from where and how they invest. Socially Responsible Investing, also known as ESG (Environmental, Social and Governance), allows people to allocate capital where they believe the welfare of those outside themselves is best considered. Outside of the fact that there is evidence that investing in industries and companies that have these positive attributes may also improve investment performance, the fact that we are able to encourage positive change in the world while we save for our goals is a powerful concept.

In aggregate, the recent changes to investment management are brilliant in their simplicity to give purpose back to investments. The more empowered we feel with meeting our goals with our investments, the more likely we are to meet, and even exceed, those goals.

Applying Behavioral Finance To Investment Process Crucial To Financial Advisors, Brinker Barometer Finds

Earlier this week, the results of our latest Brinker Barometer advisor survey were made public. Click here to read the full press release. This particular Barometer had a focus on aspects of behavioral finance and how advisors gauge progress towards meeting their clients’ financial goals.

Check out some of the most interesting survey results in the infographic below!

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Behavioral Finance 101: Irrationality

DanielCrosbyDr. Daniel Crosby, Ph.D., IncBlot Behavioral Finance

In part one of our three part series, we touched on “heuristics”, or the experiential rules of thumb that serve as decisional markers. Part two will discuss a second pillar of behavioral finance, irrationality. But before we can talk about irrationality in any meaningful way, we must define what it means to be irrational.

One of the hallmark difficulties of psychology as a science is that it requires “operationalization” of the subjective variables it hopes to measure. That is, it must provide sometimes-ethereal constructs such as happiness or rationality with a set of parameters that allow them to be measured and interpreted. When traditional economic models were constructed, they needed to account for things such as “utility” that had to be operationalized to be accounted for within the model.

Using the logic of the time, they put forth the seemingly straightforward maxim that a rational investor, homo economicus, would act to maximize utility at all times, with utility being defined as dollars and cents. Basically, economic decision makers would consistently act in such a way that their investment returns would be improved to the extent possible.

5.22.13_Crosby_Blog2This idea of rational investors working to maximize returns had two profound positives that served it well over the many years it enjoyed preeminence: 1. It had intuitive appeal 2. It was easily measured. After all, do not most of us engage in all manner of unpleasantness (e.g., staff meetings) to make a buck? And are not dollars more easily debited and credited than say, units of happiness or some other more vague notion of utility? Resting on these two foundational strengths, the idea of rational, wealth-maximizing investors persisted for decades…until the music stopped playing.

Four hundred years ago, in one of the first speculative bubbles on record, a Dutch commodity traded for 10 times the annual salary of a skilled laborer. In some cases, this commodity fetched as much as 12 acres of prime farmland and even single family dwellings.

The commodity of which I’m speaking is a single tulip bulb.

5.22.13_Crosby_BeFiBlog_2_pic2You see, it was thought that tulips were an investment that would always appreciate in value and were immune to the ups and downs of comparable tradable goods. Fast forward three hundred years to 1925 and you would have heard statements like this from the investment gurus of the day…”there is nothing that can be foreseen to prevent an unprecedented era of prosperity.” Sure there had been disastrous crashes in the past, but this time was different.

It’s comforting to think of New Era mindsets as a relic of the past, a trick of the mind that fooled investors less savvy than ourselves. But as recently as the Great Recession of the past five years and the tech bubble of the turn of the century, New Era Thinking has been more present than ever. In the wake of these most recent crises there has been a dramatic uptick in the acceptance of the fact that investors are simply not rational. Quite the contrary, we engage in a number of irrational behaviors that can thwart our best efforts at financial security. This danger is especially real inasmuch as we remain unaware of their impact.

In 1998, eToys.com, an internet upstart, had sales of $30M, profits of -$28.6M and a total market capitalization of $8 billion. Toy veteran Toy’s R Us on the other hand, had more than 40 times the sales but only ¾ of the total stock value. The advent of the internet was greeted by Wall Street with great enthusiasm, such great enthusiasm that people lost their minds. The thought that the web would revolutionize the way we do business was correct, but the notion that financial fundamentals no longer mattered was not.

5.22.13_Crosby_BeFiBlog_2_pic3Another example of investor irrationality is the belief that our mere involvement with an investment will make it more profitable. A recent study found that people were willing to pay a mere $1.96 for a lottery ticket with 1 in 50 odds if they were assigned a ticket randomly. However, if they were able to choose their number from among the 50, they were willing to pay $8.67 for the ticket. The odds remained at 2%, but the participants agreed to pay over four times more if they could become personally involved. After all, they felt their involvement spelled positive change. It goes without saying that paying four times as much for something with no measurable increase in the probability of success can hardly be called rational.

I could go on, but the point here is not to erode your confidence or create a lengthy list of your imperfections. The point is to heighten your awareness of the potential for irrationality to damage you financially in ways that have a real impact on you and your loved ones. After all, you can’t correct for what you don’t acknowledge. If there is any good to come out of the trillions of dollars in capital that vanished during the bubbles of the last 13 years, it may be that we have been permanently and irrevocably humbled and have a greater sense of the limits of our own rationality. Hopefully we’ve learned our lesson. Hopefully, this time really is different.

Behavioral Finance 101: Heuristics

DanielCrosbyDr. Daniel Crosby, Ph.D., IncBlot Behavioral Finance

While the field of behavioral finance has been around for 40 or so years (depending on who you ask), it truly came into its own in 2002 when Daniel Kahneman received the Nobel Memorial Prize in Economics for his work around uncertainty and decision-making. Although he claims never to have taken an economics class, Kahneman’s work shed new light on the ways in which actual people behave under real-life circumstances, as opposed to the idealized assumptions of efficient market hypothesis, the theretofore ascendant paradigm for understanding investment outcomes.

While one of the nagging critiques of behavioral finance is that it has no mutually-agreed-upon philosophical framework, most psychologists divide it into three pillars: heuristics, irrational behavior and framing. Over the next few weeks, we’ll take each of those three pillars and try and understand them a little more deeply. In so doing, we’ll also tackle the “so what” of behavioral finance for the average investor. Without any further adieu I give you Part One of our survey course on behavioral finance – Heuristics.

I’m not sure what time of day you’re reading this, but whenever it is I can be sure of one thing: you’ve already made a lot of decisions today. First of all, there was whether or not to hit the snooze button. Then, what to have for breakfast? Luffa with body wash or bar soap in the shower? Grey suit or navy suit? And so on and so forth. The point is, given the myriad decisions we all face every day, it’s no wonder that we end up relying on heuristics or experiential rules of thumb, when making even important decisions. To give you a little firsthand experience with heuristics, I’d like to ask you to do the following:

5.9.13_Crosby_BeFiBlog_1Quick! Name all the words you can that begin with the letter “K.” Go on, I’m not listening. (Insert Jeopardy theme song here). How many were you able to come up with? Now, name all of the words you can in which K is the third letter. How many could you name this time?

If you are like most people, you found it easier to generate a list of words that begin with K; the words probably came to you more quickly and were more plentiful in number. But, did you know that there are three times as many words in which K is the third letter than there are that start with K? If that’s the case, why is it so much easier to create a list of words that start with K?

5.9.13_Crosby_BeFiBlog_1_pic3It turns out that our mind’s retrieval process is far from perfect, and a number of biases play into our ability to retrieve data with which we’ll make a decision. Psychologists call this fallibility in your memory retrieval mechanism the “availability heuristic,” which simply means that we predict the likelihood of an event based on things we can easily call to mind. Unfortunately for us, the imperfections of the availability heuristic are hard at work as we attempt to gauge the riskiness of different decisions, including how to allocate our assets.

In addition to having a memory better suited to recall things at the beginning and the end of a list, we are also better able to envision things that are scary. I know this first hand. Roughly six years ago, I moved to the North Shore of Hawaii along with my wife for a six-month internship. Although our lodging was humble, we were thrilled to be together in paradise and eager to immerse ourselves in the local culture and all the natural beauty it had to offer. That is, until I watched “Shark Week.”

5.9.13_Crosby_BeFiBlog_1_pic5For the uninitiated, “Shark Week” is the Discovery Channel’s seven-day documentary programming binge featuring all things finned and scary. A typical program begins by detailing sharks’ predatory powers, refined over eons of evolution, as they are brought to bear on the lives of some unlucky surfers. As the show nears its end, the narrator typically makes the requisite plea for appreciating these noble beasts, a message that has inevitably been over-ridden by the previous 60 minutes of fear mongering.

For one week straight, I sat transfixed by the accounts of one-legged surfers undeterred by their ill fortune (“Gotta get back on the board, dude”) and waders who had narrowly escaped with their lives. Heretofore an excellent swimmer and ocean lover, I resolved at the end of that week that I would not set foot in Hawaiian waters. And indeed I did not. So traumatized was I by the availability of bad news that I found myself unable to muster the courage to snorkel, dive or do any of the other activities I had so looked forward to just a week ago.

In reality, the chance of a shark attacking me was virtually nonexistent. The odds of me getting away with murder (about 1 in 2), being made a Saint (about 1 in 20 million) and having my pajamas catch fire (about 1 in 30 million), were all exponentially greater than me being bitten by a shark (about 1 in 300 million). My perception of risk was warped wildly by my choice to watch a program that played on human fear for ratings and my actions played out accordingly. This, my friends, is heuristic decision making hard at work.

Hopefully by now the application to investment decision-making is becoming apparent. For so long, we have been sold an economic model that posited that we had perfect, uniform access to information and made decisions that weighed that information objectively. In reality, our storage and retrieval processes are imperfect, with recent and emotionally charged pieces of data looming larger than the rest.

5.9.13_Crosby_BeFiBlog_1_pic4Investors and financial services professionals that understand these imperfections are better positioned to understand the limitations of their knowledge and try to intervene accordingly. At times this may mean taking a more tentative position to circumvent undue risk. Other times this may mean digging a little deeper on what may initially appear to be a foolproof trade. Whatever the case, it is only after we free ourselves from the myth of homo-economicus, that we are able truly become our best investing selves. Making decisions based on subjective logic needn’t be your undoing as an investor, but assuming that you’re a perfectly logical decision maker just might.