Recent content on Daniel Egan
Shane Frederick’s Cognitive Reflection Test — one of the most widely used measures in behavioral science — poses three questions designed to see if you can override your gut with deliberate thinking. The third goes like this: In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for…
Sometimes it’s better to show someone how something works, than just tell them. In that vein, I’ve tried to make interactives you can explore with to figure things out yourself. Why Personal Returns don’t add up This interactive tool explores the difference between time-weighted returns (what the market did) and money-weighted returns (what you actually earned). And explains why…
Hi there! I am a behavioral scientist focused on improving the design & tech for personal finance and investing. I work at Betterment and PreThink. I love making new & useful FinTech tools, beautiful data visualiations, science fiction, dogs, and snowboarding. I studied economics and decision science, finishing my MSc in 2005. I've collaborated on a few academic papers, done a lot of public…
A few projects we loved contributing to. 📱 Prototype: financial health app An advisor-tech wanted to turn their in-house models for financial health into a web & mobile app. After 4 months of collaboration they had a working prototype web-app, a stronger conceptual model, a extentable design system, and began using it in pitches to prospect partners and grant funding. 😕 Self-service game changer…
Ideas Shovel ready ideas, but I don't have the shovel. Want to build one of them? Get in touch. Profyle Profyle gives you a single place to manage all your personal info, and get paid for it. Learn more Avalanche Avalanche is a robo-advisor for debt repayment strategies. Learn more FXP FXP is a pure financial advice, wellness and education app. Write-up coming.
My blog posts are released under a Creative Commons Attribution-ShareAlike 4.0 International License.
Reviewed articles Increasing tax salience reduces market timing Many investors make mistakes when it comes to taxes - they actively trade in taxable accounts compared to tax-advantaged accounts, and realize short-term capital gains when long-term treatment would be preferable. In a field experiment we show the effect of highlighting tax consequences of portfolio allocation changes before investors…
Services It's always dangerous to say what you do, in case people think you don't want to try new things. If you have an idea or request that isn't on here, feel free to get in touch.. The more novel, the better. Advisory work We've got decades of successes and failures we've learned from. If you have a new product or service and you want someone to help you avoid the mistakes they've already…
I occasionally speak on TV, podcasts, college classes, industry conferences and to regulators. If you want to invite me to speak, pop over here. 🔊 👂 Invest like the Best with Patrick O’Shaughnessy. This podcast is easily one of the best ones for investing. I got lucky that Patrick invited me early on, before his podcast became a big deal. The Long View with Christine Benz and Jeff Ptak We…
I blame Jack Bogle. His ‘cost matters’ message was honed so finely to a simple effective point that it dominated the fund industry for decades. Fund costs fell relentlessly. So we hit the logical conclusion: nothing is lower cost than ‘free’! We now have free trades, free index funds, and ‘free’ financial advice. Yet, ‘free’ can be a poison wrapped in chocolate. When something is ‘free’ the…
In early 2009 I had one of the most exciting weekends of my professional life. Over the course of the financial crisis I was granted access to the database of the UK’s largest self-directed brokerage. A kid in a candy store had nothing on me. Oh, the behavioral biases I would document, the negative alpha I would discover! I did find poorly constructed and undiversified portfolios. Some had just…
Sutemi-waza are a class of throws in jujitsu or aikido known as sacrifice throws. They are tricky, but very powerful: they work because of the opponent’s momentum. You don’t try to stop your opponent. You do not try to dodge them. You accept and use the momentum, but redirect it. Sutemi-waza are risky: Sacrifice throws require the thrower to move into a potentially disadvantageous position in…
There’s a game potential clients and advisors play, and I think everyone loses. Here’s how it usually goes: Person: What are your expected returns? Advisor A: About 7% annually. Person: Ah, ok, I’ll be in touch. ….. Person: What are your expected returns? Advisor B: About 14% a year. Person: Wow, great, where do I sign? This might seem fine, and it is quite common. I’d like to…
There’s a seduction in behavioral science: “here’s a bias, go be better by not being biased”. Spoiler alert: actually doing is hard. Really hard. Yes, all these biases are interesting. Yes, it means we might be making mistakes everyday. Yes, it seems like we should be able to do better by helping them. Yet… Just knowing about biases doesn’t fix them. You need to understand how and where they…
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First, pictures! Please reflect on these a moment. Each sign is well intentioned. Each sign is also unintentionally exacerbating the problem it’s trying to fix. I don’t believe the creators intended for them to be ineffective. But I’d also guess they weren’t being judged on how effective they were on changing behavior. More likely, they were being judged on if they’d ‘done anything’, or ‘told…
Yesterday I had the honor of opening up the Boulder conference on Consumer Financial Decision Making. Here is my presentation:
Imagine I offered you a way to instantly improve your decision making. Would you take it? Most wouldn’t. That’s because of how it improves hit rates. It doesn’t do it by winning against all odds. It doesn’t notice the detail no-one else noticed. It doesn’t make high-confidence, narrative based claims. We humans seem to be attracted to a bad process. To the unexpected, the unusual, the low…
Would Dumbo have been a good investor? For the uninitiated: Dumbo is an orphaned elephant with embarrassingly large ears. He is made to work with a quite unpleasant circus, where a Timothy (a clever mouse) tells Dumbo that he could be a star if he used his huge ears to fly. But Dumbo isn’t convince he couldn’t pull it off. So the mouse gives Dumbo a ‘magic feather’, which allows him to fly.
It’s 2am, and I’m curled up in a ball on my bathroom floor crying. I’m trying to do this without waking up my sleeping wife and daughter in the next room. And I’m pretty happy about that. True wealth is not money. It’s the option to buy what you truly need. If money can’t buy what you need, you’re on even footing with the poorest person out there. My daughter got the flu.
The Business of Emotion is a great song. It’s satire on the era of big data by the band Big Data: monetizing attention, addicting users and somehow creating loneliness in the biggest, most sociable crowd ever seen on earth. It’s dark, dystopian, dehumanizing. It’s about how faceless organizations use data to turn people’s attention into money. I love it. It might be my career’s…
One of the most powerful behavioral tools is… incentives. And how commercial incentives influence behavioral design deserves some more attention. Let’s quickly compare the incentives of brokers versus fiduciary advisors. Brokers generally make money when customers trade, either through commission (e.g. $7/trade) or routing trades to a liquidity provider who pays the broker for those trades.…
Self control is one of the biggest struggles most people have. Me included. I’m beset by the near-term desire to behave in many ways that I wish I didn’t. I snack too much, and drink too much. I spend too much time on twitter. There are a few approaches to to deal with this: rely on my willpower pre-emptively avoid tempting circumstances (hacking the akrasia horizon) create quick feedback loops…
In most areas of life putting in more effort means achieving a better outcome. The harder and more consistently you exercise, the fitter you get. The more hours you put in studying, the better your grades. Of course there are a few, very unusual areas where the opposite rule holds. Aldous Huxley’s called this “The Law of Reversed Effort”: the harder you try, the worse you do. Think of…
Investors usually understand returns. But risk… risk is more difficult. Risk involves communicating not just that many outcomes are possible, but how likely they are. So I’m in favor of anything that gives investors a better intuition of what risk really is. Andy Rachleff’s post on how the standard efficient frontier graph often misleads investors resonated with me. Investors do often have…
This post is a response to Corey Hoffstein’s question: “Do you believe that behavioral biases exhibited by investors can be explicitly addressed through portfolio design?” No investor is born perfect. The first step is admitting it, which isn’t easy. The second step is figuring out what you’re going to do about it. We need to be thoughtful about how we arrange our decision making. We should…
I’m often asked what I think people should read as an introduction to behavioral science. If you want the shortest, easiest introduction possible, go with The Little Book of Behavioral Investing. Beyond that, it depends on what are you looking to know about. By Tom Hermans For making yourself a better investor Little Book of Behavioral Investing Finance for Normal People Personal Benchmark For…
I got lucky: my interests lie at the intersection of two exciting trends which I never predicted would come together: a rapid improvement in understanding how our minds work; software being based on models akin to how our brain works. Perhaps unsurprisingly, this has lead me to have an unusual viewpoint: I think software and wetware (our brain and the ‘programs’ that run in them) are kinda…
First comes motivation. When a person becomes motivated to invest (rather than keep money in a savings account) they want to do a good job. But the learning curve can be steep… and thus expensive. The new investor may pay in time, trading commissions, high expense ratios and of course mental effort. But the price must be paid. My completely anecdotal, unscientific impression is that a…
I’m a big fan of the goal-based (or ‘liability driven’) approach to investing. A ‘goal’ really just means “something I think I might need to spend money on in the future”. From a planning perspective, it has a number of impressive strengths. It encourages you to think about the future, which helps you identify things you might have to spend money on, and think about how much they might cost. If…
⚠️ this post is idealistic. I believe, and would like to convince more people, that it’s more profitable to help people make better decisions, than to take advantage of how they mis-make decisions. Proving what everyone already knew Despite what some may say, traditional economics doesn’t say everyone is a perfectly rational consumer. It just says that in equilibrium (after learning and costs like…
I’m going to mainly focus on a career in the private sector, doing applied work. If you want to know about government work, ask Maya Shankar or Owain Service. If what I’ve written doesn’t answer your questions, ask me. Just have something specific and interesting to ask about! But first, some screeners: Is this a long-term interest? Is this something you want to dedicate at least a decade…
If you knew you could be happier and make better decisions by blinding yourself, would you do it? Ok, not complete blindness, but just to those factors you decided in advance were irrelevant. By Tingey Injury Law Firm In the short story “Liking what you see”, people can have a small, reversible operation which causes ‘calliagnosia’, or the inability to detect human beauty or ugliness. You can…
One of the concerns human financial advisors often express about using an automated advisor is that they make it too easy to change your allocation or trade. I don’t think that simply layering on frictions or completely prohibiting such things is a true solution though. By Steven Pahel Human advisors themselves don’t only make it hard for their customers to trade. They are a firebreak which…
When I heard Barry Ritholz and Bill McNabb, CEO of Vanguard recently discussing how much science fiction they read, it made me smile. Listen to it - they talk about covering the entire genre till only the obscure titles are left. Outside of topics related to my job, science fiction is the largest genre of books that I consume. Why? To open myself for the future. Not to predict it, but to be…
I beat the benchmark massively last week. I’ve started swimming again, which has meant regaining ground previously owned. This past week I set recent records in both (speed and distance), which was a huge improvement for me. By Christoffer Engström Let’s be clear: there is no chance I could beat Michael Phelps even if he had one arm tied behind his back. There are people in my pool who are faster…
The phrase “past performance is not an indicator of future performance” is unavoidable when investing. Funds that have out-performed historically aren’t any more likely to perform in the future than random. A recent market rally doesn’t mean things will keep going up. The phrase is everywhere. By Richard Horvath A normal person’s first reaction is likely to be “that doesn’t sound right. Isn’t past…
I’m a bit of an odd duck. I grew up in one of the most liberal neighborhoods in America, but then went on to study economics, a discipline which generally supports small-ish government. Perhaps that helps explain what I’m about to say. I pay a high marginal income tax rate. And I think that’s smart and good for me and society. The focus of tax policy is generally about funding services, ensuring…
Do the statement below make you feel good or bad? I’m smarter than the average person. There are patterns that make the stock market predictable. I can do better than just average returns. The country where I live is going to have the best returns. The companies whose products I enjoy are going to have above-average returns. These views and ideas are likely to make us feel good about ourselves.
That is the question posed in a new research article by myself, Christoph Merkle, and Greg Davies: We study investor happiness in a panel survey of brokerage clients at a UK bank. When investors formulate expectations about future happiness, they set their aspirations depending on own portfolio risk levels, used benchmarks, investment horizon, overconfidence, and other individual characteristics.…
A new paper gives strong indication that on average, individual investors are really poor investors. I mean, really bad. Enough that by the end of the day, they’d be better off sitting in cash than trading on their own. This dude gets it. By Photoholgic It treats them to the sort of analysis which we usually subject mutual fund managers to, and finds that they’re no better, i.e. worst…
One of the most provocative questions is what causes some people to end up with lots of money, and some with very little. Yawn! you say! How is that provocative? By Tyler Milligan It’s provocative causes lead to policy and private market solutions, if you want to treat problems. And the traditionally presumed causes are very different from the ones put forth by behavioral finance. So a…
Investor regret: The role of expectation in comparing what is to what might have been - Wen-Hsien Huang — Marcel Zeelenberg http://journal.sjdm.org/11/11303/jdm11303.pdf Investors, like any decision maker, feel regret when they compare the outcome of an investment with what the outcome would have been had they invested differently. We argue and show that this counterfactual comparison…
Diversification is always good. It’s just limited in how much good it can do. Diversification is achieved by adding assets into a portfolio which have correlations less than 1 with the portfolio. At its purest level, it reduce risk because not all assets will have the same gain or loss at the same time. By investing in different assets (which all have the same risk and return), we reduce the…
A while ago the great graphics gurus (sorry) at the NYTimes created a very cool graphic showing the annualized returns of the S&P500 over a long time period: This was one of the best graphics I’d seen in a while, but there are a number of things I thought could be improved, or used to illustrate another point. Red doesn’t mean loss. The light red in the picture means a return slightly…
I had the pleasure of meeting up with Abby Sussman of Princeton last night, who investigates the psychology of wealth - assets and liabilities. Her recent piece in Psychological Science sums it up well: We studied the perception of wealth as a function of varying levels of assets and debt. We found that with total gross wealth held constant, people with positive net worth feel and are seen as…
I believe unexpected utility is one of the most under-researched ideas in behavioral finance and economics. I, for one, experience it occasionally, and it is the best kind of utility. Photo by Richard Horvath. What, exactly is “unexpected utility”? It’s an experience, usually and hopefully positive, that you completely didn’t remotely see coming. The expectation is key…
Once we have picked an asset allocation model, how often, or why should we rebalance? I’ve seen multiple conflicting findings about the usefulness of rebalancing. Many such conflicts happen in time-series data because the sample you use can influence things quite strongly. I therefore wanted to see if there was a simple, purely statistical basis for rebalancing. To do this, I simulated some…
A problem I occasionally encounter when trying to improve behaviour in the real world is the fairness of control groups. Imagine you have a potential cure for a problem, but you have no proof that it actually works. A standard experiment would randomly allocate individuals to treatment and control conditions, run the experiment for a set period of time, and compare outcome variables. You’d then…