Can Decision Fatigue Affect Your Investments?

Interview with Nyle Bayer

Douglas Goldstein interviews Nyle Bayer, founder of The Financial Time Traveler podcast. They talk about the importance of having a financial mentor and the key differences between men and women in investing.

Douglas Goldstein: I’m very excited to be talking with Nyle Bayer. Nyle is a good friend of mine who specializes in Retirement Plan Asset Management.

He’s the founder of The Financial Time Traveler podcast. Hi Nyle, how’s it going?

Nyle Bayer: Great. Thanks for having me, Doug.

Douglas Goldstein: I don’t know if you knew about me, but I know about you because I read your website. You are partners at work with your dad, Anton Bayer, right?

Nyle Bayer: That’s right. He’s my dad.

Douglas Goldstein: When I started in the business 25 years ago, I partnered with my mother, who was the Vice President at the major brokerage firm she and I worked at together. I guess that like me, you learned a lot from working with your dad.

Nyle Bayer: I did read your book, and I learned about you there. I thought it was a very cool point. It’s a rarity and to have that trust, in an environment that is very dynamic and changing, is quite something.

It’s hard to trust people, and to have a mentor that you can lean into is priceless. I feel we can relate outside of everything else because of that.

Doug’s Background As A Financial Advisor

Douglas Goldstein: It was cool working with my mother. Before she became a financial advisor, she had been a teacher. She has the heart of a teacher.

When I started in the business, she and I would have our client meetings together. I think what I learned from her the most was the importance of explaining to clients - in terms that they can understand - what’s going on with their money.

Because unlike other people in the office who are always trying to pitch something, “Buy this stock. It’s going to make a lot of money,” my mother was very humble.

She would say, “Listen, I don’t know what’s going to happen in the market. I’m not a prophet, but I’ll explain to you what’s going on and what the risks are. Then you’ll make an educated decision.”

Nyle Bayer: Correct me if I’m wrong, but your grandmother was also a pioneer on Wall Street?

Douglas Goldstein: Yes. My grandmother was one of the first women to be licensed as a stockbroker in America.

Nyle Bayer: You were born for this.

Douglas Goldstein: I was born with the Wall Street spoon in my mouth I guess.

One of the things that my mother and my grandmother always did was to point out how there were some people who were really bad stock pickers, and those people, many times, were very confident.

When I worked in New York, a lot of my clients were doctors. I love doctors; my dad was a doctor, and my sister is a doctor. They were the worst stock pickers, but they would say things with such conviction. Have you found that attitude?

The Confident Versus Competent Challenge

Nyle Bayer: I believe it’s a meta-cognition bias, where it shows that the more confident you are, the less competent you are in that field.

The more competent you are, the more likely you are to admit that you have less confidence. I think that is a very alarming bias that we see. It should be an instant red flag, when you are dealing with people who have a lot of confidence but have less expertise.

If you don’t know, it’s okay to admit that you don’t know and to assess the probabilities. You can see this in every area of our life, not just in finance. People buy cars that they’re very confident about, even though it has a terrible engine or a bad manufacturer. These decisions happen in all aspects of our lives, from our health to our finances.

Douglas Goldstein: There was a study done in Israel about this concept of decision fatigue.

It sounds like you’re tired, but there’s more to it than that. In this study, they looked at prisoners going for parole, in front of a parole board.

What they discovered is that if you were a prisoner who showed up at the beginning of the day to get parole, your odds of getting it were something like 70% or 80%. If you showed up at the end of the day, your odds were 10% of getting parole.

This study has been repeated in various ways, but the conclusion is that people get very tired of making decisions and after a while, they go for the easiest default.

In the case of a parole judge, this would be, don’t grant parole because you don’t want to let a criminal out. It’s easier not to grant parole. How do you think that might apply in investing?

Nyle Bayer: There’s a lot of analysis paralysis occurring, due to all the news that is out there. The computer today, or the phone in your pocket today, is much more powerful than the computer that we had at MIT in the 60s; a million times more powerful.

I realize that, as I talk to 401k plans and 401k participants that want to allocate their money in a retirement-sponsored plan, they don’t know where to go because they’ve been making all their decisions all day long. They have to learn a whole new discipline.

I often tell them that since they are making a long-term investment, it’s much easier for them in terms of weathering the volatility.

I think there was another study done on why Mark Zuckerberg and other CEOs wear the exact same clothes every single day. It’s because of decision fatigue. It’s aligned with the exact same study.

Douglas Goldstein: Talking about an overload of information, why is having too much information a problem for people in making big decisions?

Why Is Analysis Paralysis Such An Issue?

Nyle Bayer: There’s a lot to unpack there, but I think it impacts people who don’t have an expertise in the field. When you have an expertise in the field, you can quickly filter out what is good and bad information and know where to get good information.

For instance, when I’m looking at studies stating that we have a nine-year bull market happening on the overall market, and they’re just quoting the S&P 500, I can very quickly dismiss that article as an investment professional because I know they’re just looking at one index. They’re not comparing across the board. They’re not even looking at this 20% intraday drop that we had in 2011.

For someone else who might not have that expertise, they could see both my article debating that and the article that says it’s true and get confused.

They can end up feeling like they are unable to make a decision because they don’t know which one’s right. They also don’t have the expertise to evaluate it, so at the end of the day, they feel like they will be right back where they started.

That is just as frustrating. Having conviction can be eluding, but not knowing where to be convicted, can also cause a problem. That’s where having a trust and authenticity relationship with someone who does have expertise can be a tremendous help towards your greater success.

No One Can Predict The Market

Douglas Goldstein: What people need to know is that no one person can predict the market. No matter how much you think about it, or study, you can’t figure out the market.

Warren Buffett’s out there too, and he is reading 1,000 pages a day. Odds are that you won’t be able to compete at that level.

I like what you are saying, that you’ve got to find someone who is going to help you make the decision. Do people say to you, in your capacity as a financial advisor, “Hi Nyle, you must know better. Tell me where I should invest my money?”

Nyle Bayer: I get that question all the time and there is no one answer.

If you study Warren Buffett and all other renowned traders, you quickly find that they can remember what their biggest trade was. It’s always the trade where they lost a bunch of money, and it’s usually because they were 100% all in, on one trade.

Avoiding making that mistake is not going to have one answer. It’s not going to be one trade or one index fund, or even an ETF or a mutual fund.

There is no simple answer for a complex question. To be able to diversify out so that you don’t correlate your money with each and every growth aspect is what makes sense with how you’re aligned.

It shouldn’t be something that has constantly changed towards the market, but it should be changed with your lifestyle and what’s happening with your life, and then we diversify accordingly.

Does that make sense to you, Doug?

Douglas Goldstein: It is sensible to me. In my day job as a financial advisor, I spend a lot of time talking to people about who they are and what they want, in terms of their financial goals. It’s not always about what fund or stock or money manager or bond they should consider.

We spend a lot of time talking about risk and all sorts of hypotheticals. What would happen if your portfolio were to drop? I say, “What would happen if you lost $50,000 next month? What would you do?”

The Key Difference Between Men and Women In Investing

What is fascinating is the difference between what the husbands say and what the wives say. Oftentimes, the husbands are so confident in their decision. But because I’ve been doing this for 25 years now, I know that they don’t really understand what’s going on.

If they know the risks that are involved in investing, why are they still acting confident when it could turn out badly for them?

Nyle Bayer: It’s that cognitive dissonance that comes in, where they feel they have to be confident or else there’s no better decision to be able to make him move forward. I believe their ego has a part to play, too.

In a Berkeley study, the women beat out the men with their trading accounts, because they were more consistent and the men had to overtrade to feel confident. The women, however, stayed the course. That ended up playing out better for them.

Douglas Goldstein: It is funny because it is often said that there are a lot more men in the financial world than women.

I found this shocking because when I started with my business, my boss was a woman and my partner was a woman; my grandmother was a finance person. I guess that’s the reason they did so well in the investment industry.

Nyle, we’re just about out of time. How can people follow you and follow your work?

Nyle Bayer: You can reach me on almost any social media platform. Our Twitter handle is: @financialtimetraveler. It’s the same address on Facebook and Instagram. If you want to follow me and get a little less market commentary and a little more images with my kids, you can find me @nylebayer, on Twitter, Facebook, or Instagram. You can find me there.

Douglas Goldstein: And the podcast too, The Financial Time Traveler.

Nyle Bayer: Yeah, anywhere that podcasts are played.

Douglas Goldstein: That’s awesome. I really appreciate your spending time with us in the year 2017. Nyle Bayer, thanks so much for joining us. Take care.

Nyle Bayer: Thanks.