in: Career & Wealth, Podcast, Wealth

• Last updated: September 29, 2021

Podcast #222: The Laws of Wealth

To the layman, financial investing can look extremely complicated. And while financial markets are certainly complex, the rules governing sound investment are actually pretty simple. The problem most people have is following those rules. It’s all about behavior. 

My guest today is a behavioral finance expert who has recently published a book crammed with practical advice to help investors from all walks of life have better investing behavior. His name is Daniel Crosby and his book is The Laws of Wealth: Psychology and the Secret to Investing Success. Today on the show, we discuss the psychological biases we have that cause us to make stupid investing mistakes and what we can do to overcome them, why index funds aren’t exactly “passive investments,” as well as how behavioral finance principles can help you live a happier and more flourishing life. 

Show Highlights

  • What behavioral finance is
  • Why you’re not that great
  • Why the self-esteem movement made us miserable
  • Why special people are quitters
  • Why special people are cheaters
  • The hard way to genuine self-esteem
  • Why the key to investment success is behavior management
  • The psychological biases that cause us to make poor investing decisions
  • What “Goals Based Investing” is
  • Why index funds aren’t exactly a completely passive form of investment
  • Why even toddlers need to memento mori

Show Resources/Links

Laws of wealth book cover, by daniel crosby.

If you’re looking to learn more about investing, but don’t know where to start, pick up a copy of Daniel’s book The Laws of WealthHe not only lays out simple, easy-to-follow rules to ensure that you manage your investing behavior wisely, he also gets into the nitty-gritty of investing. For more information about Daniel’s investment philosophy and services, check out 

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Read the Transcript

Brett McKay: Welcome to another edition of the Art of Manliness podcast. Now to the layman, financial investing can look extremely complicated, and while financial markets are certainly complex, the rules governing sound investment are actually pretty simple. The problem most people have is following those rules, it’s all about behavior.

My guest today is a behavioral finance expert that has recently published a book crammed with practical advice to help investors from all walks of life have better investing behavior. His name is Daniel Crosby and his book is “The Laws of Wealth: Psychology and its secret to investing success.” Today on the show, we discuss the psychological biases we have that cause us to make stupid investing mistakes, what we can do to overcome them, why index funds aren’t exactly passive investments; we also explore how behavioral finance principles can help us live a happier, more flourishing life.

Talk about why the self esteem movement was terrible for you, what you can do to avoid resentment, and then we’re also going to talk about another book he wrote. It’s called, “Everyone You Know Will Die.” It’s for kids. It sounds morbid, but had a good purpose, we’ll talk about that. After the show, make sure to check to check out the show notes at, starts with a C, and you’ll find links to resources mentioned throughout the show. Without further ado, Daniel Crosby and “The Laws of Wealth.”

Daniel Crosby, welcome to the show.

Daniel Crosby: Awesome to be here.

Brett McKay: You’re a behavioral finance expert. What is that, and how did you get involved with it?

Daniel Crosby: Yeah, so behavioral finance simply sits at the intersection of psychology and investment management, and so my path there is pretty circuitous, and that’s pretty typical of the two handfuls of people who work in this field. I started school as a business major with an eye to going into investment management, which is what my dad does. Then I went on a mission for my church for two years, and spent two years in the Philippines, and in that time got a bigger heart, enjoyed working with people, and came back and said, “You know what? I want to do something that matters, I want to be a psychologist.”

Got about halfway through a PhD in Psychology before I said, “This is bringing me down. Talking to sad people all the time is making me sad, and I want to think deeply about why people do the things that they do, but I can’t do it in this context and still lead the life that I want to live.” It was lucky to stumble onto this unique business application of psychology. That takes two forms; part of it is helping people make better decisions, and then part of it is, can we actually manage funds in a way that takes advantage of the irrational behavior of other market participants?

Brett McKay: You’ve got a new book out about using insights from behavioral psychology to be a better investor, but before we get to that, I’d like to talk about your previous book, “You’re Not So Great,” where you take insights from behavioral psychology to help folks live a good life. Let’s talk about the title of that book, “You’re Not So Great,” so my mom and elementary school teachers were lying to me. Why are we not so great? How did this word “Greatness” get spread too thin?

Daniel Crosby: Yeah, “You’re Not That Great” is built on the paradox that your ability to be great, which I want for myself and everyone else, but your ability to be great is predicated on not thinking that greatness is your birthright. I’m not sure quite how old you are, I think we’re roughly the same age, but you know I grew up in the ’80s, at the height of the self esteem movement, where the thought was that self esteem was the cure for all ills, and thought that self esteem was given and not earned, and that took the form of lots of gold stars, everyone’s a winner, participation trophies, things like that.

The science bears out that’s not the case at all. I talk about a few things, but I’ll focus on two in specific; one, “You’re Not That Great” talks about how special people are quitters. I mean, make no mistake about it, I wrote this book, it was a TED Talk that I turned into a book, but I wrote this book for myself, because I was a kid who grew up, many things, especially academically came easily for me, I was praised for being special, intelligent, whatever, and then I just fell apart the first time I came upon any sort of bump in the road or any sort of obstacle, I just fell apart.

I cite the work of Carol Dweck quite a bit in the book, and she just talks about working with kids, and event yourself, to focus on process over outcomes. I think early in my educational life my outcomes were good because I was just bright, and it came easy to me, but you can only coast on that for so long, and then you fall apart. Found pretty consistently in the book, cases where people who just are leaning back on being special don’t get very far because they quit.

Then the second thing I found at citing the example of Bernie Madoff, special people are cheaters. In the book I talk about research done by Dr. Carol Dweck, who worked in the New York City Public School System, and she divided kids into two groups. One she praised for being special and gift, and the other she praised for being hard working and following the rules. Then she asked the kid to write a letter to what turns out to be a fictional pen pal, and in this letter to the this pen pal, they’re supposed to tell a little bit about the things they like to do, their hobbies, and then they’re supposed to transcribe their report card.

Well, of the group that were praised for being hard working and following the rules, nobody fudged the grades on the report card. Of the group praised for being special and gifted, nearly half of the kids gave themselves better grades than they had actually received, so they effectively lied when writing to their pen pal.

We see this also in the case of Bernie Madoff. A lot of people don’t understand that Bernie Madoff was already enormously wealthy and successful before he started defrauding holocaust systems. He had already invented a market making technology that serves as what we now know as NASDAQ. He had made all this money, tens of millions of dollars, but he said he never felt special. He never felt special; he says in his deposition, he felt like a picked on little Jewish kid from Brooklyn. Again, he needed to be special, never got there in his mind, and you see that in both cases it led to cheating. That’s the second reason, is that special people are cheaters.

Brett McKay: Yeah, and I think that ties in with research I’ve seen about kids who think of themselves as Straight A students or gifted students, is they’re the ones who are more likely to cheat. I even saw this anecdotally in my own life; the friends I were with that had the pressure of being the smart kid, they cheated all the time, like on tests, or they would look at someone’s homework, because they didn’t have time to do the homework the night before, so they would ask for their friend, they would copy their answers. Very rampant, and it was because they had this pressure to maintain that image.

Daniel Crosby: Absolutely, I saw that in my own life. Frankly, everyone writes a book to themselves I think is the case, and this was absolutely written for me. I was early on labelled gifted, and a smart kid, I didn’t have to work very hard for it. I learned bad skills, and I learned to coast on my natural gifts, and then ended up being a very horrible student for a lot of years, and a very lazy cheater, frankly, and had to reteach myself later in life how to function, because I had given bad messages and hadn’t taken personal responsibility.

Brett McKay: What did you have to do? I mean, how did you reprogram yourself?

Daniel Crosby: Well, I was a horrible student all through middle school and high school, had to go to a junior college because my grades were so poor. It was at that point that it dawned on me that I was going to live in a van down by the river if I didn’t get things together, and so at that point I really started to work hard, got great grades my first year of junior college, went on a mission for my church where I grew up quite a bit, and then after that, I was on a better path.

Brett McKay: You talk about contingent self esteem, and the two responses that humans take towards it. What is contingent self esteem, and what are our typical responses towards it?

Daniel Crosby: Contingent self esteem is self esteem that’s basically predicated on, your self esteem is predicated on someone else’s lack of self esteem, so the two thing that we tend to do are either, we build ourselves up to this unrealistic level of overconfidence, or else we feel like we have to put others down. In study after study, it’s been shown that people would rather make less money if it means more money than their neighbors, right? You’d rather be poor in a neighborhood where you’re slightly richer than your neighbors, than to be more objectively wealthy. We really think about wealth and success and all these things in relative terms, and it’s contingent on the people around us.

Brett McKay: Got you. How do you overcome that?

Daniel Crosby: You know, I think the answers I give in the book are just really old fashioned, and simple, but not easy. I mean, I think you have to learn to develop a personal benchmark for greatness to compare yourself today to the man you were yesterday, and not to your neighbor. The second thing that’s just unequivocal in the research on self esteem is that there’s no shortcut to self esteem, and the only way that you can get genuine self esteem is by doing hard things, and persisting in doing hard things until you’ve achieved something noteworthy.

People have a really strong BS meter, and so if you’re telling someone, “Hey, well I’m so proud of you, you did so great,” when they didn’t really work for it, it doesn’t stick. It’s only when we do hard stuff and learn to do it well that that gets internalized.

Brett McKay: Got you. Let’s talk about your latest book, “The Laws of Wealth,” where you take a look at the research coming out of behavioral psychology on how people can invest their money better. I think for a lot of just average joes, investing money in the stock market is just super intimidating. I mean, I invest, and I feel like I’m a pretty smart guy, but I’ll look at the stock market and like, “I don’t understand how this crazy thing works.”

In the book, you make the case that most investing comes down to behavioral management. It’s not so much what you put in your portfolio, that is important, but more importantly is how you manage your behavior when you invest. What are the biggest behavioral or psychological ticks that get in the way of us making wise investing decisions?

Daniel Crosby: Yes, so the first thing you mentioned there is one of the most powerful, it’s just not realizing how empowered we are. You know, Ben Graham who taught Warren Buffet everything he knows, Buffet would say, “The investor’s chief problem is himself,” and that is absolutely again what the research bears out. There’s research by a company called Dalbar that talks about the gap between what the market return has been, and what the average mutual fund investor has gotten.

In over the last thirty years, the market has given you about eight and a quarter percent, but the average investor in the market has only kept about half of that because they get in and they get out at the wrong times. The first law of wealth, if you will, is just realizing that your behavior matters so much, and so financial professionals get this.

A recent study read said that eighty three percent of financial advisors, the biggest thing that they do for their clients and keep them from freaking out, but only six percent of the end clients thought that was the case. There’s this real disconnect where clients are looking for this sort of expert investment management, which is in a lot of cases, an effort in futility, whereas the real value is delivered by keeping you from making a handful of stupid decisions over a lifetime.

Brett McKay: Got you, so more of a coach?

Daniel Crosby: Yeah, more of a coach, and people don’t want to see them that way. People want them stock picking and doing the sexy stuff, and really, they’re saving you from yourself if they’re doing it right.

Brett McKay: Got you. You list in the book several biases that we have that cause us to make poor decisions. You mentioned earlier like the … we get out whenever things are tanking, and then we get in when things are awesome. What bias is going on there that causes us to sell low, buy high, is I guess what is people are doing.

Daniel Crosby: Right, there’s a number of things at play there, but one of the things that’s at play is something called the affect heuristic, which is just a fancy way of saying that your emotions cover your perception of risk, and there’s been studies about emergency room admissions on days that the market is down, and emergency room admissions dramatically skyrocket whenever the market crashes.

We are just so immersed in this, and it’s such a big part of our lives, it has a big impact on our mood. If you’re in a bad mood, you tend to see risk everywhere. If you’re in a great mood, you tend not to be be very tuned into risk, and there’s interesting research on this with respect to the spread of sexually transmitted disease as well. It’s like when people are in a cold emotional state, they know exactly what they’re supposed to do to have safe sex, and then when people are feeling amorous, it’s kind of all out the door.

Yeah, it’s just managing those emotions, and this is why I wrote a book on what I call rule based behavioral investing, just trying to set forth a couple of simple rules so you can kind of put this process on auto pilot and really not think about it, because your thinking is colored by your emotions.

Brett McKay: Yeah, that’s really interesting. How do most people invest their money? You promote this thing called goals-based investing; how’s that different from the way most people go about investing their money?

Daniel Crosby: The traditional model of finance has talked about mean variants optimization, which we totally won’t get into, but it’s basically trying to get the most return for every extra bit of risk you take on. In this paradigm, your goal is to try and beat the benchmark, let’s say. You want your portfolio to do better than whatever your measuring it against, so let’s just say for stocks, you want your portfolio to beat the S&P 500, okay? That’s intuitive enough.

What I’m say is, you want the best anxiety adjusted returns, because we’re all different, we all have goals, we all have different wants and needs, we all want meanings of wealth and expectations about how we want to live, and so all you need is the returns; you want to maximize the probability that you get the returns that you want to live the life that you want to live, and that looks very different for different people, and that requires a deep consideration of what matters to you from sort of a meaning and purpose standpoint, and that requires a deep consideration of your personal risk tolerance, and traditional modes of finance have kept that static across all market participants and assumed similar goals and similar risk appetites. Obviously, that’s not the case.


Brett McKay: With goals-based investing, the goal isn’t to beat the market, it’s just-

Daniel Crosby: Oh yeah, yeah. One of the studies on goals-based investing that I love is, they were working with low income savers like people who are just barely scraping by, and they’re rightly having a hard time setting aside money. They tried carrots and sticks, you know rewards and punishments, and then finally they said, “You know what, we’re going to try this, we’re going to prime these people with a picture of their children before they make a financial decision; we’re going to flash up a picture of their children before they make a decision to spend or save, and we’ll see how that impacts it.”

With these low income folks, it helped them set aside more than two hundred percent money than they had been before, just when they were thinking about that meaning and purpose before making a financial decision. Goals-based investing simply tries to reconnect money with the life that it serves.

Brett McKay: This was interesting, you had a whole section about index fund investing. I’m a big index fund guy, that’s what I do, but you highlight in the book the reasons why index funds are so appealing is that actively managed funds, where there’s a guy in charge, he’s selling and rearranging the fund in order to get the best return, those don’t do very well compared to the S&P 500; in fact, most of them don’t even meet their benchmark. You still make the case that actively managed funds might be better than indexed funds. I’m curious, why is that?

Daniel Crosby: This is a conversation that takes a lot of nuance, so I’m going to draw on the words of a guy that I love his stuff, Nassim Taleb. He says, “Never ask a man his opinion, only ask to see his portfolio.” I’ll tell you that when I was recently putting together my will, and putting together this for my wife who isn’t as interested in investing as I am, I said, “If I get hit by a truck tomorrow, here are the allocations and put it all in Vanguard,” which is a great way to go, it’s hard to beat index investing.

That said, I think that people who care enough to give it a little time and attention, can do better than indexing over long periods of time for a couple of reasons. Before I go into that, I want to say that for the average investor who doesn’t care about these things and just wants to live their life, and set aside a little money each month, index investing and diversifying across many asset classes is absolutely the way to go.

There are a couple of psychological problems with indexing, I think, and one of them is that most indexing tends to concentrate you in the largest and most expensive stocks, which have historically not done that well. The way that an index works is, a stock takes up a bigger or a smaller percentage of an index based on how well it’s done recently and how the market cap of that company, how big it is.

If you have an index like the S&P 500, you are overweight companies that are large, and expensive, which of course you’re in effect buying high and buying big, and over time, smaller stocks outperform larger stocks, and cheap stocks outperform expensive stocks. With that in mind, I think there are some small tweaks you can do to make it a little better.

The other thing that I talk about in the book is how a lot of people think of indexes as being mined from the earth, they’re existing from a natural state. What we see is that the S&P 500 again, is a secret group of nine people decides which stocks go into the S&P 500; unfortunately, these nine people are subject to the same errors and biased thinking that you or I are, and so they’ve tended to do the wrong thing again. You know, at the turn of the century, the S&P 500 was loaded with tech stocks, to a degree that was not historically where they had been, but they loaded the boat with tech stocks because of the mania going on in the tech world at the time, and they were grossly overweight banking stocks in 2007, 2008; and so because of this bias on their part, you the investor get screwed by their bias entering the equation.

I’m talking about what I call rules-based behavioral investing, if you put it on a continuum between what’s commonly referred to as passive investing and active investing, it’s probably somewhere in the middle.

Brett McKay: Got you. As I was reading that whole thing about index funds, I’m like, “Hmm, maybe I should switch strategies.” At the same time, I’m like, “Man, I don’t know if I have the time to twiddle with my portfolio all the time.” There are these companies coming out, like WealthFront … I forget what the other one is, where they basically create your portfolio, the algorithm. Are they applying some of the research and behavioral science, and that, to help people create a portfolio that fits for them?

Daniel Crosby: There’s a couple of things that WealthFront and Betterment- Those are the big two, and they’re referred to in the industry as robo-advisors. I think there’s a couple of things they do well, and I think there’s a couple of things that are either room for improvement, and maybe they haven’t been fully tested yet.

What they do exceptionally well is they allocate you across a number of assets in a very scientific way. It’s unbeatable, it’s very, very good, the way that they diversify your portfolio, and do so with reasonable fees. That aspect is hard to beat. I think where the jury is still out, most of these companies are still relatively new, and they haven’t seen periods of great market volatility; most of these companies are like five, six, seven years old, and it’s been a great seven years.

What we find in the research is that people who work with a financial professional tend to outperform those who don’t pretty dramatically, by about two to three percent a year, and it’s not because financial advisors are good stock pickers, it’s because they’re holding your hand and they’re keeping you invested when times are tough. They’re a coach, again. I think where the jury is still out for me with robo-advisors is, how do their participants react in a thirty, forty, fifty percent draw down?

Interestingly this week, we’re talking the week after the Brexit vote, and I believe it was Monday of this week, Betterment actually shut down; they made their funds a liquid. You couldn’t get to your account, so they basically said, “Hey, we feel like people are going to make dumb decisions today,” which they were, to be fair, probably right about. They said, “We think people are going to make dumb decisions today, so we’re just going to lock up your money.” Well, maybe that’s well meaning, but it’s also not what their investors signed up for. It’ll be interesting for me to see how they manage the behavioral side of this over time, but their credentials in diversifying your portfolio are unassailable.

Brett McKay: We talked about some of the rules, kind of tangentially, and I know we can’t get into the specifics of all of them, but what are some of the rules in your rule-based investing idea that people can follow to start being a better investor?

Daniel Crosby: One of the things I talk about is consistency, so just having rules. I mean, whether it’s as simple setting aside X amount of dollars each month, or just making a hard and fast rule to buy every dip of ten percent or more, just so you don’t have to think about. There’s an increasing literature on how really exceptional people just try and streamline their decision making process, and I think this sort of checklist manifesto mentality is more applicable to investing than just about anywhere else.

I mean, you see people like Obama who wear the same two types of suits, day in and day out, people like Nick Saban who eat the same thing for breakfast and lunch every day. You just want to free up that head space for the stuff that matters, and investing, frankly doesn’t matter very much in terms of living a great life. Consistency is one of the things that I advocate.

The other thing that I talk about is conviction, which is back to the active versus passive debate. It’s a dirty little secret in the investing world, that most funds that are marketed as being active, don’t differ meaningfully from their benchmark. What you get is expensive index funds, basically, and so you’re eroding your performance. A recent study found that basically, three quarters of funds that were marketed as active, didn’t really have an opinion; they were just basically what we call closet indexes.

That’s another principle is, be in one camp or be in another. Either index, like you do, which is sensible and a great approach and save your fees, or seek out a fund that’s truly differentiated and has an opinion, but never be in the middle.

Brett McKay: Okay, so consistency and conviction is one of those two, I guess they’re two C’s.

Daniel Crosby: Yeah.

Brett McKay: Before we go, we’ve talked about living the good life, finances, we’re going to talk about this other book you wrote, because I remember I got it in the mail, I was like, “What in the world is this?” It’s a book for kids. It’s a child’s book about how people die. I think it’s called, “Everyone You Know Will Die,” right?

Daniel Crosby: “Everyone You Love Will Die.” It’s a little more morbid than you thought.

Brett McKay: Right, “Everyone You Love Will Die.” I’m curious, what was the impetus behind writing this book, and why did you do it?

Daniel Crosby: To scare the children of America. No, I wrote this book … I have two children, and next week, I’ll have three children, so I have soon to be three children, and you know they’re the loves of my life. One of the great struggles for me is finding ways to talk with them about the tough realities that we all have to confront. I found that I do this well and it gives me a window to talk to them, if I write it out as a poem first.

It’s almost like I get my thoughts straight with writing a children’s poem, read this to them, then we bond over this and we can have a meaningful discussion over it. I’ve written poems about everything from gay marriage, to being an individual, to everyone you love will die. “Everyone You Love Will Die” was the first one I wrote, and I wrote this poem when I was talking to my daughter, I believe, after her fish died. I was talking to my oldest child about this, and I put it on Facebook, and I said, “Hey, this is just kind of a funny thing I did,” and it is ultimately hopeful, and hopefully endearing, and encourages you to spend time and make the most of every moment with the people that you love.

I throw this thing on Facebook, the next day a friend of mine sends me a file that she’s illustrated this poem. Long story short, we put it on Kickstarter, Kickstarter made it their pick of the day, it was funded in like five hours, and you know, we got enough money to print up a couple hundred books.

Brett McKay: That’s awesome. Memento mori for your topic?

Daniel Crosby: Yeah, memento mori for your toddler, yeah. I love that concept.

Brett McKay: Yeah, I think they need that. It is true, I think particularly in our modern world, even adults, we’re so shielded from death, right? I can count on like one hand, probably more than that, the number of people I know that have died, experienced that. Kids even more so, we shield them from that stuff, but that’s a natural part of life.

Daniel Crosby: For me, the reality of death is one of the things that most effectively animates me to try and live a meaningful life, and I think that we leave that value on the table when we hide from it. The weird paradox is in a day and age where you turn on the TV on any given Tuesday and there’s been a suicide bombing or a mass shooting, it’s almost like death has become so ubiquitous, that we’re almost even that much more detached from it. I think there is an appropriate and a meaningful way to reflect on the inevitability of loss as a way to animate a better life.

Brett McKay: That’s awesome. Well Daniel, this has been a great conversation; where can people learn more about your different books you’ve got out there?

Daniel Crosby: Go check out “The Laws of Wealth” on Amazon, you can go to if you’re so moved, you can follow me on Twitter @DanielCrosby, and my wealth management firm is Nocturne Capital.


Brett McKay: Awesome. Daniel Crosby, thank you so much for your time, it’s been pleasure.

Daniel Crosby: Thanks so much.

Brett McKay: My guest today was Daniel Crosby, he’s the author of the book, “The Laws of Wealth,” it’s available on and bookstores everywhere, also check out the show notes at for links to resources mentioned throughout the show.

Well, that wraps another edition of the Art of Manliness podcast. For more manly tips and advice, make sure to check out the Art of Manliness website at, and if you enjoyed the show, and got something out of it, I’d appreciate it if you’d give us a review on iTunes or Stitcher, help us out a lot.

As always, thank you for your continued support, and until next time, this Brett McKay telling you to stay manly.

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