HEN IT COMES TO INVESTING, your behavior can matter more than your income. Take Neal Gabler and Ronald Read for instance. Gabler has written five books, hundreds of articles and some scripts for TV. He also teaches a college class. These activities have netted what Gabler described as a “solid middle- or even, at times, upper middle class income.” Despite that, Gabler admitted in a cover story last year that, like 46% of the U.S. population, he does not have $400 handy for an emergency.
Read, on the other hand, was the gas station attendant at a Windham County, Vermont, service station and made about $12 per hour. And yet, when Read died in in 2015, he left behind an $8 million fortune. Did he inherit the money? No. Win the lottery? Not even close. It all came down to his investing behavior. Read merely socked away the proceeds of his modest income into simple, vanilla stock investments. He reinvested any growth and over the decades, his money grew as it compounded.
As the experience of those two men illustrate, successful investing can be less about high income or knowledge, and more about behavior, like living beneath one’s means. And technology is making it easier to be a well behaved investor. Just like the recent data-driven breakthroughs that help us better understand how behavior impacts fitness and diet, new technology is now helping us master the compulsive behaviors and habits that lead to better financial planning and investing.
The bad news? Old habits die hard. But as the data we generate allows us to gain a deeper understanding of how we think and behave around money, new behavior-hacking technology is creating an innovative path to better investments – and decision-making in general.
First, a little more bad news: Research has shown that like other behaviors, investing is at least partially driven by genetics. Stephan Siegel, an associate professor at the University of Washington, has used data from the Swedish Twin Registry — the world’s largest such database — and matched it with data on the twins’ investment behaviors. The study showed that genetics account for up to 45% of investment behavior.
Siegal said that doesn’t mean that investing ability is genetic, but that, like most human traits, including IQ, aggressiveness and impulsivity, it is heritable. In particular, traits like risk-taking and patience correlate well to investing acumen. “Human behavior originates in the brain, and how the brain responds to inputs is partly determined by its genetic makeup as well as, of course, past experiences and a large number of other environmental influences,” Siegal said.
Siegal’s not the first to suspect that investing has a genetic component. More than 100 years ago, economist Alfred Marshall mused that, “Economics is a branch of biology broadly interpreted.”
The idea that some people have a genetic predisposition for an investing mindset is also common sense. “Some people enjoy sitting around with an Excel spreadsheet figuring out their finances and to other people that’s worse than going to the dentist,” said Dan Egan, director of behavioral finance and investing for the automated investing startup Betterment.
Now, the good news: The latest research into psychology and behavior has found that the brain is not an immutable machine, but a malleable instrument that is more like a lump of clay. Siegal, for one, believes that investing acumen is similarly malleable and correctable, like eyesight, which is almost completely correctable with eyeglasses.
He extended the metaphor to investing: “It is easy to realize when your vision is poor and equally easy to evaluate the quality of lenses. In addition, we have regulations in place to make sure consumers are provided with knowledgeable opticians.”
The Secret to Change May Be Hidden In Our Data
You’ve probably seen those dynamic speed displays on the roads. Research shows that such signs — which display your actual speed in real time — prompt drivers to slow down an average of 10%. The theory behind the signs is that the human brain responds better to corrective information if it has the ability to do something about it. If you slow down, a dynamic speed display will show it in real time. Feedback loops are used in machinery and sports training. They work because people feel like they have control and information that will lead them towards a goal.
Investing and savings are different, though. The goal can seem far off and in the near term there’s a lot of pain. “It’s really tough for some people to get over an initial hump,” said Egan. “First they have to get over a budget and you know that means you’re going to spend less money, so it’s this double-whammy of unpleasantness because you’re going to spend some free time working with numbers and figuring out how to spend less on weekends.”
The corrective measure for such procrastination is what is known as “feed-forward,” which lets people know the consequences of their actions in the future. “Your standard investment interface tells you a lot about the past,” said Egan. By contrast, Egan compared Betterment’s design to a GPS navigator. “It tells you where you need to drive to get to where you want to go,” he said. Egan said designers have to be careful about using signals that might evoke emotions related to past behaviors. “Conversely, if you create it about things they can control, you actually can drive good behavior using those same reactions.”
The Future: Where Financial Advisors Use AI to Help Improve Our Behaviors
AI learns principles from data independent of humans and modifies its outputs based on those learnings. While that’s true, AI can also be used to personalize products and services to a previously unimaginable degree.
“Things like trading and following an index are just going to be something a computer does so boringly well,” said Egan. “A lot of of the sexiness and intrigue around investing is going to shift away from the public trading stuff and we’re going to start focusing on how does this affect each individual and how could they be treated differently.” Our genetics, upbringing and the culture we grow up in all make our investing impulses a mark of individuality, like an eyeball, Egan said.
The promise of AI is that it can analyze behaviors and circumstances on a deeper level so that instead of four or five broad categories, there might be tens of thousands. Tools like personal digital assistants can then adapt their approach based on what works best for each individual personality.
“In this day and age there’s so much more data available about individuals,” said Alex Benke, Vice President of Advice and Investing at Betterment. “We are more and more able to leverage data to further personalize a financial plan.” For instance, Benke said that data sources like social network activity “say a lot about the kind of person you are” and this could be fed into models that better predict your level of risk tolerance. You could try to get the same data by asking that person 50 questions, but Benke said most people won’t answer 50 questions, or their answers might be temporal or not truthful. The data doesn’t lie as easily.