It has been an amazing year for the podcast. We have had some incredible guests during 2022 who have provided us and listeners with insights and thought-provoking ideas about the world of finance. We covered a lot of ground and to wrap up the year we decided to recap some of our favourite moments for listeners. In this episode, we highlight the many themes covered during this year, such as the basics of investing, stocks and bonds, how to make wise investment decisions, gender inequality, asset management, index funds, market trends, and portfolio management. We also highlight some of the indirectly topics indirectly related to finance such as the value of happiness, enjoying the pursuit of happiness, the importance of goal setting, and much more. Join us as we reflect on some of our best moments from the year and provide an overview of the many vital lessons we have learned in this final episode of the year for the Rational Reminder podcast.

Key Points From This Episode:

• Mac McQuown explains how the data revolution changed the game of investing. (0:09:05)

• Robin Wigglesworth and tracking the performance of portfolios in the 60s. (0:12:56)

• Professor Fama shares what it is like to see the impact of his academic work on the practice of asset management. (0:16:02)

• Gus Sauter tells us about the role the University of Chicago played in the index fund revolution. (0:18:41)

• Professor Fama unpacks what it means for a market to be efficient. (0:20:52)

• Gerard O’Reilly and the differences in the types of market strategies available. (0:24:27)

• Professor Betermier shares his research from multiple papers concerning tendencies towards growth and value stocks. (0:28:50)

• Eduardo Repetto tells us whether having a portfolio consisting of 100% small-cap value stocks makes sense. (0:36:06)

• Professor Koijen explains whether index funds distort market prices and make markets less efficient. (0:40:30)

• Professors Berk and van Binsbergen discuss if it is possible to find skilled fund managers before they are absorbed by their fund. (0:43:44)

• Professor Cederburg explains how data sets can be upwardly biased and why you need to be aware of it when looking at data. (0:48:15)

• Bill Janeway describes the three-player game regarding investments. (0:50:51)

• Professor Phalippou compares the performance of private equity relative to public equities. (0:53:42)

• Antti Ilmanen tells us how investors can stick with an investment strategy during times of low performance. (0:59:10)

• Professor List tells us how often people should check their investment portfolios. (1:01:56)

• Leonard Mlodinow explains how the rational mind and the emotional mind are intertwined. (1:04:56)

• Professor Edmans’s Grow the Pie and making the world a better place. (1:07:27)

• Rebecca Walker outlines the effect learning about money has on people. (1:11:15)

• Colleen Ammerman describes the current state of women in the workplace. (1:13:21)

• Find out why the pursuit of a goal should be enjoyable with Professor Fishbach. (1:15:40)

• Andrew Hallam talks about life satisfaction after middle age and how to get there sooner. (1:20:28)

• Jay van Bavel details the effect of group identity on goal setting. (1:23:08)

• Professor Frank unpacks the relationship between the consumption of luxury goods and happiness. (1:26:55)

• Professor Bohns provides insight into why people are under-confident in their social lives. (1:31:01)

• Professor Fama reveals how many hours a day the brain can handle deep work. (1:34:24)

• Cassie Holmes and why happiness is a good thing from a scientific perspective. (1:35:30)

• Colonel Chris Hadfield shares the lesson he learned as an astronaut that he applies to his everyday life. (1:38:52)

Read the Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to Episode 233, which is our annual year-end episode. It's incredible. Ben, the end of another year.

Ben Felix: It is incredible. This one flew by. Feels like the time goes faster as more time passes. You probably know that better than I do.

Cameron Passmore: I appreciate that. This is the fourth time we've done this year-end episode, where we basically patch together segments from all the guests we've had this year and attempt to weave together a story of 2022 from our vantage point. Not an easy job to do, because we have many hours of interviews and conversations. We want to make sure we include everybody. Give it our best shot, though just the same.

Ben Felix: Every year, we reflect on the podcast, it's like, man, we're blown away by the people that were willing to come talk to us. We're blown away by the conversations that we had and all that stuff. Every year, it's the same feeling where it's like, “Man.”

Cameron Passmore: Yeah. Man, how do we find these people? How do we get them to come on and then to be blown away by people when they do arrive. It's just such a incredible experience.

Ben Felix: Yeah.

Cameron Passmore: Speaking of incredible, the numbers for 2022 are also pretty incredible. Podcast downloads last year, we’re up 48% over 2021 to 1.85 million.

Ben Felix: Wow.

Cameron Passmore: YouTube views, up 46% over 2021.

Ben Felix: 1.85 million downloads for the year 2022, to date.

Cameron Passmore: Compared to the same to date.

Ben Felix: Last year. Last year was when we hit a million. Or was that two years ago? When did we hit a million total lifetime downloads?

Cameron Passmore: I've lost track.

Ben Felix: I remember, that was a big milestone. In 2022, we almost doubled that in the year. That's crazy.

Cameron Passmore: Both audio and video are both up 48%, 46%, 515,000 YouTube views, 19,000 YouTube subscribers, which is still nowhere near what your Common-Sense Investing channel is at, which is what? Over 200,000 subscribers, I think.

Ben Felix: 294,000 at the moment.

Cameron Passmore: Almost 300. Incredible. In the community, 8,173 members in the community.

Ben Felix: The community is just over 8,000 members, but very active. The tool, the software tool Discourse that we use for that platform, it tracks the monthly pageviews. That's one of the metrics that the software tracks and that our plan is based on. If we go over a certain number of pageviews. Anyway. The pageviews is consistently over 500,000 per month. If you compare that to activity on a website, it's insane.

Cameron Passmore: Yeah. In the store, we had 230 orders this year. By far, the most popular items were Talking Sense Cards, and the T-shirts. Super happy about the Talking Sense Cards popularity. For the reading challenge, this is interesting. The 22 and 22 challenge, which we will be continuing into next year, the 23 and 23. We had 592 people sign up. We have 355 active readers. These are people who log their reading, 65 people completed the challenge, the 22 books. The total for the community was 3,776 books were read, and 80% of the readers said they read more books this year from joining the challenge, which is pretty cool.

We had our first live meetup in London a few weeks ago with over 20 friends coming up. That was incredible experience. We heard from so many people on all sorts of different platforms, be it LinkedIn, YouTube, Twitter, people phoning us out of the blue. We did our best to mention as many as we could. If we missed your reach out, we apologize. It did become a bit of a challenge at a certain point to keep track of everybody. Maybe you want to give a shout out to the moderators in the community, Ben?

Ben Felix: Yeah, sure. Dan FFA and Anarki and Marco, they make the community happen. I think, I've seen that comment a few times about the quality of the Rational Reminder community and the quality of the discussion being related to the fact that it is a heavily moderated community. I think that's accurate. That's because of the moderators and also, Angelica helps out with the moderation, too. Big thanks to them. They make that place what it is released, or at least help make it what it is. Of course, the users contributing content and discussing stuff really make it what it is.

Cameron Passmore: You bet. You mentioned Angelica. Would give a shout out to our marketing team led by Martin Dallaire. Angelica Montagano is our digital marketing lead. Instrumental in all things podcast. Sandrine Dugré, who's our Digital Marketing Coordinator, who does all the posts on Instagram, etc. Matt Gambino is our multimedia specialist. He's the man behind the YouTube videos. There's a tremendous amount of work that goes on there to pull these videos together with the graphics and whatnot. I also want to give a shout out to our compliance team led by Karine Deslandes. She's our Chief Compliance Officer. As well as Russ Mitchell, our Senior Compliance Officer. Of course, everything has to go through compliance before it goes out. We really appreciate the support they give us.

Ben Felix: That means our compliance team has listened to every single episode.

Cameron Passmore: Every minute of every episode, and in a very timely fashion. We really do appreciate that. Have to give a shout out to our incredible producer. Been with us since nearly day one, Matthew Passy at The Podcast Consultant. He has a whole team that does great work with him. We're very grateful to Matt and his team. Want to thank Quinn McGraw and on his team for great work, as well as Shannon Rojas, who was their Chief Operating Officer at The Podcast Consultant. This team is obviously very instrumental in keeping the production, this whole thing moving along, including shownotes, etc. We really appreciate that team.

Shout out to our merch supplier, Jen Beldam at Northern Craft, and also our phenomenal sock supplier. Sachin at the company, EVERSOX. We really appreciate his support. Again, we've had many orders from them for many years now. We keep shipping a lots of socks. Shout out to the University of Chicago Financial Education Initiative, who helped us make the Rational Reminder branded Talking Sense cards available. We shipped out this year, I think over 200 decks and there's another order on its way. The original music that we use was created by our good friend, Trevor May. Thanks to Trevor. Clearly, most of all, we want to thank the audience that listens to us every week, which is amazing. The numbers just keep increasing all the time.

Ben Felix: It is. Audience growth really is humbling and incredible.

Cameron Passmore: Yeah. 2023 is going to kick off with a bang next week, as we mentioned a couple times with Nobel laureate, Robert Merton coming up next week. Then we have a whole slew of unreal guests lined up, right through March. I think we're booked now, right?

Ben Felix: Yup.

Cameron Passmore: All right, Ben. Anything else to kick off this year-end recap show?

Ben Felix: I don't think so. Lots of great clips to cover to wrap up the year and hopefully, remind people about some of the great conversations that we had for 2022. Maybe some people will go back and listen to the episodes, which is something I know you've been doing, Cameron, because you've been doing the episode summaries. It’s something that I've got to do more of. So many past episodes, you go back and listen to. It's just mind blowing how good the conversation was. Our brains aren't good at retaining stuff like that for long periods of time, I don't think.

Cameron Passmore: It's funny you mention that, because that's why I'm so curious when we interview people to talk about books, how do they capture what they learn from books. Capturing the information from these podcasts is hard. I remember someone was at the meetup in London, and they had a whole system that they were showing others there, how they're capturing notes. I think it was OneNote, or some other note platform. It's just so impressive. It's so much work to have that recall from so many topics. It's not easy. Every week is just another episode just keeps on coming like a river, right? It's a job to tease out of this, what might be applicable to you.

Ben Felix: Yup. No, definitely. Hopefully, we help with some of that by doing this recap. I mean, it's a whole field. That's a professional field. Knowledge management, it's a area of study in a – it’s not easy. It's a hard problem to solve.

Cameron Passmore: Exactly. All right, with that, let's go to our year-end episode 233.

***

Ben Felix: Welcome to Episode 233 of the Rational Reminder Podcast.

Cameron Passmore: We sure kicked off 2022 with a bang, with a perfect guest with Mac McQuown joining us. Mac was so instrumental in the early days of indexing, which we learned from him that it had everything to do with the revolution of data. The curation and organization of data completely changed the game of investing. Of course, we had to ask Mac about that era, which frankly, to anyone today is unimaginable that that data wasn't available to have an index, you could put an active manager to an index. Mac’s insights on that were just sensational.

Cameron Passmore: Can you bring us back in time to when you studied finance and the role that data played?

Mac McQuown: Well, data upended the whole topic. When I reflect back on the finance I was taught in graduate school, and with my MBA, I majored in finance, and it was for all intents and purposes, devoid of data. In large measure, that was because there weren't any really important scaled computers. In fact, when I was in business school, as far as I can remember, there were no computers, whatsoever, on campus.

That, of course, was a long time ago. If you stop and think about the revolution that would have created by computers and data, and the data of course, followed from computers. Then of course, analytical procedures and ideas became the quest. I would say, both data and analytical procedures are still at the middle of the quest. Now, it’s changed a lot, because we've gotten more sophisticated. In a nutshell, we're still after data and methods of analysis.

Ben Felix: You went to Wall Street in 1961. You mentioned your studies being relatively devoid of data. What was it like when you got to Wall Street?

Mac McQuown: Well, it was even more devoid of data. As a matter of fact, I have a funny one about that point. I went to work for a well-known investment banking firm whose name I'll skip over because the next point that I want to make is I was questioned by one of the senior execs I was being interviewed by before they offered me a job and before I accepted it. His question to me was, “Why would an engineer want to go to Wall Street?” I'm not joking. That was a question that he was posing to me and expected me to say something.

Well, I was already clear from work that I have been doing across the river from Harvard at MIT, that data was going to be the story. That was just serendipity that I got exposed to that professor and that early data. The data I’m referring to are weekend share prices for a collection of 50, initially, and then a couple of 100 stocks on the New York Stock Exchange, over a period of quite a number of years. If you stop and think about it, that today is the holy grail of where analysis goes. Of course, we not only have weekly data, we have even hourly data on some equities from some markets, but we have data from something like 50 markets around the world. I think a lot of that data goes back at least a decade, if not five decades. In one lifetime, mine, that game has totally changed.

Ben Felix: Like you said before, Cameron, it's hard to imagine today, a time where engineering and math was not part of Wall Street. Completely incredible to think about. Our next clip ties into what we just heard from Mac. It comes from Robin Wigglesworth, who wrote the book Trillions, which was the history of index funds. Back in the 60s, there was no way to know how your portfolio was performing. Again, believe it or not, hard to imagine. Today, there wasn't the data and the systems to track performance. There was no market to beat. Robin told us about that era of finance and what it was like back then.

Cameron Passmore: How much do you think that culture was just because there was no benchmarking available?

Robin Wigglesworth: Well, it's almost a weird thing for us today to think about this, but there were indices, but they were by any modern standards, laughably, comically rudimentary. You have the Dow Jones Industrial Average in the US. Has a venerable history. Wall Street Journal bizarrely still quotes it, even though it has a terrible construction method. It was basically, to measure the strength of the economy and some industrial stocks. It wasn't really until the 50s, when the S&P, or Standard and Poor's launched a market cap-weighted index of the 500 biggest companies, that you had at almost real-time.

It took a decade before they could calculate it within minutes, but at least every day, a real-time gauge of what a broad swath of the US stock market did. Even then, people didn't know what the long-term return of stocks was. People literally didn't know that. The genesis moment was when Merrill Lynch wanted to sell stocks to ordinary Americans and households, to a generation scarred by the Great Depression, sold in the 60s, was going to run an ad. Every newspaper in the world in the US saying, "Stocks are a great long-term investment." The SEC told them, “No, you can't do that. You have to prove that they're a good long-term investment.”

They basically handed a wedge of money to Jim Laurie, a professor at the University of Chicago. He started a new project called Crisp to research security prices. Center for Research on Security Prices. He spent years doing this, because he manually had to collect, him and his colleagues, had to manually collect the prices of all stocks they could find in the US. Equalized for different tax treatment in different countries, dividend payments, and also, just the fact that some things that we’ll call the common stock were in fact not a common stock, and other things that may be called a preference share, or even a bond actually was common equity.

They had to do all this work and clean up the data. It took years and costs a lot of money. They were the first people that created this wonderful, really magical database of security prices in America that prove that stocks were a great long-term investment, but less conveniently for the investment industry, that the long-term return on the stock market was quite a lot higher than the average return of active mutual fund managers.

Cameron Passmore: Robin’s books is an incredible, beautiful description of the history of the index fund revolution. As everybody knows, I love the book. the University of Chicago is arguably the birthplace of modern portfolio theory. We were so lucky last year to welcome Professor and Nobel laureate Eugene Fama to the podcast. Fama’s career is an integral part of asset pricing models and market efficiency. We asked Gene, what is like today to look back and see the impact of his academic work on the practice of asset management.

Eugene Fama: It's satisfying. I don't take a lot of credit from that. I think my generation came along at a time when there was nothing in academia. Finance didn't exist, basically. My generation, basically opened that field up. It was great to be involved with all other people who did it. We were lucky in the sense that there hadn't been anything before that. It was like fishing in a barrel. We did threw the line and it always came up with a fish. The current people coming into finance have a big body of stuff. They have to match that before they can actually think about doing research in the area, so that they're a little bit hogtied relative to what we were in the old days. Because the downside of that is we're now all old.

Cameron Passmore: When you were fishing in that barrel, did you know what a big deal this was going to become? Did you have a sense?

Eugene Fama: No. Absolutely not.

Cameron Passmore: Really?

Eugene Fama: Yeah. Absolutely not. Look, the young people trying to do academic research that would eventually get us tenure. You didn't really know where this would go. Plus, as Mike Jensen always said, “I'm amazed that people pay us to do stuff we would do anyway.” Talking about academic research. That's basically, true. I mean, the people who do it basically love to do it. Isn't really a job.

Cameron Passmore: Did you see at all the evolution of indexing and Vanguard and the book Trillions by Robin Wigglesworth? Did you foresee this at all back then?

Eugene Fama: Well, in my view, that all took too long, that the evidence was there in the early '60s. That this was the way to go. It took a long time before they had a big impact. When Ken French did his presidential address with the American Finance Association, basically, and that whatever it was, 50 years period since the beginning of the research in the early '60s, late '50s, the world had gone from 0% passive to, I think, it was 20% passive at that point. Now, it's up to 50%. Still, we're far from a 100. I don't know. To me, that seems slow.

Ben Felix: Professor Fama’s perspectives on that are just – I mean, it's incredible to hear him talk about it. In episode 216, Gus Sauter, the former CIO of Vanguard joined us for an episode. He is a member of the University of Chicago Alumni. We asked him about the role that the University of Chicago played in the index fund revolution. We'd link that, of course, speaking with Gus, to the incredible success that Vanguard has had.

Gus Sauter: It all started in academia. The concept started in academia back in the 1960s. It pretty much developed at the University of Chicago, some of the big, big names in finance. Eugene Fama, Fischer Black, Myron Scholes, Jim Laurie. A lot of people were right there at the University of Chicago. They were known as the Chicago gang, I think. They developed the concept in the late 60s and actually implemented it. I think it was an assistant professor’s father was the CEO of Samsonite Luggage. An assistant professor at the University of Chicago. His father was the CEO of Samsonite and their pension fund had been underperforming for many years.

He convinced his father, “Why don't you just invest it in an index fund?” That was the very first index portfolio was Samsonite Luggage. Again, it was the assistant professor at U Chicago, who said, “There's been a lot of great work, a lot of thought going into this. Why don't you give it a try?” From there, it took off.

Ben Felix: Was there a distinct point that Vanguard realized that indexing was going to be huge?

Gus Sauter: I do remember about 1992 or '93, our indexing, as I mentioned, started at about a billion, then went down to 700 million with the crash of ’87. By about 1993, '92, '93, I think, we were maybe up to 2 or 3 billion. It was growing, but growing slowly. I remember Jack Bogle showing up in my office door saying, “Gus, you wait and see. Indexing is going to be a big thing. We're going to get 10 billion dollars someday.” I remember thinking, “Wow, 10 billion dollars. That'd be amazing.” Of course, nowadays, that's about two weeks cash flow for being alone. That was the first time I heard Jack express that that it would be a big thing. I thought, “Oh, 10 billion dollars. That's just unbelievable.”

Cameron Passmore: 10 billion dollars is simply unbelievable. It's such an incredible story how this all took off. Now, let's bounce back to Professor Fama with some rapid-fire questions. We go back to basics, and we asked him what it means for a market to be efficient?

Eugene Fama: Well, the simple statement is that prices reflect all available information.

Ben Felix: That's a pretty good definition from the guy who maybe defined the term. To follow up on that, we asked Professor Fama what the implications are for investors, if markets are indeed efficient.

Eugene Fama: Well, you can't expect it actually, that picking stocks are actually going to generate superior returns for you. You get the risk adjusted return appropriate to the risk level that you take with your portfolio, but you can’t expect more. That's another way to efficient markets hypothesis. Your risk adjusted returns are basically, expected returns are basically zero.

Cameron Passmore: The obvious next question for Professor Fama is what are the empirical tests that support market efficiency? Here's his response.

Eugene Fama: The strongest evidence from your perspective is that, if I look at managed portfolios, actively managed portfolios, what I find basically, is the distribution of returns around zero for excess returns are normally distributed around zero, before fees and expenses. After fees and expenses, it's a big negative sum game, for those who go into that active management. The distribution of outcomes looks a lot like what you'd expect by chance, if there were no ability to pick investments that have above normal risk adjusted returns.

Ben Felix: One of the questions that we hear a lot, and we've covered this topic in some of our own content this year too, is, if all of the money flowing into passive index funds, or maybe just index funds is a better term, pose any challenges for market efficiency? Of course, we had to ask that question to Professor Fama as well.

Eugene Fama: Well, you can't have a 100% of the money going into passive funds because then there's nobody there to train to make the market efficient. The people who actually have information that other people don't have, the one thing to stay in the market and use that information. The real question that’s nobody's never really answered is, how many of those people are there out there? How many does it take to make the market efficient? Most of the trading by these investors just offsets the dumb things that other active managers do. Active management does not always make the market more efficient. Sometimes it makes it less efficient because people make bad bets. The informed people have to offset these uninformed people who make the bad bets. It takes more informed to offset the uninformed, the more uninformed they were at.

Cameron Passmore: The index fund revolution that we've been talking about is largely focused, I think it's fair to say, Ben, on market cap-weighted strategies. As listeners know, we use the tools, often from Dimensional Fund Advisors in building our clients’ portfolios. These are different from a market cap strategy. We asked Gerard O'Reilly, the CIO and co-CEO of Dimensional Funds, to articulate the difference to us, as most people are very familiar with market cap-weighted strategies. He explained to us the difference between what Dimensional does and what market cap-weighted strategies are.

Ben Felix: This is why I stumbled on index and passive. Those words always get thrown around. What are those definitions actually mean? What is an index fund? What is a passive fund? You can argue that nothing is truly passive. Anyway, technically, Dimensional setup as active funds because they make decisions and implement in a way that is different from a passive market index. Anyway, it's interesting and important to hear Gerard O'Reilly explain this.

Gerard O’Reilly: Yeah. I think that you're right. Most investors are familiar with the index approach. I'll take you back about 40 years, in 1981, when Dimensional first began. David's idea was, could you have a rules-based, broadly diversified small-cap strategy that would appeal to institutional investors? At that time, there were no small-cap indexes on which to base the strategy. He basically started with a blank sheet of paper. When you think about a small cap index, especially in the '80s, and when you were going to be as rigid as an index, the consensus was, you will get killed by trading costs, and you wouldn't be able to make money because the trading costs will be so high.

When you start with a blank sheet of paper, really, you're not going to end with an index approach. You're going to end with something that is looking every day, implementing the rules on a daily basis, has some flexibility, is going to not have to buy every stock every day, or weight every stock perfectly relative to its weight in the market, but get that broad exposure. That's what started it all. Then you go through time and academic research came out to identify areas of the market that offer higher returns, like small caps, value, profitability, momentum, so on, so forth.

If you fast forward 40 years from that beginning, some of those essence from the beginning are still in play today. The way I describe what we do is first off, we start with what is it that the clients are looking for? Then, how do we deliver rules-based, higher expected return strategies to meet those needs? A few things that are important there, one is rules based. We think that we work with mainly financial professionals, intermediaries. We don't work with the end investor. We work with intermediaries. A rules-based approach is very good to work with intermediaries, largely because we can communicate, here's what to expect. Then you can monitor, you got what you thought you were getting. We think that's a good approach. It has to have the right support, the right innovation, the right pricing, and we can get into all that in the webinar.

The other two things, though, that I think are important to what we do, and articulate our approach is one, market prices are predictions of the future. You got to know how to use that information to manage risk and increase expected returns. That leads you away from having a broad-based market index. Number two, optionality has value. You got to be able to capture it for your clients. That also leads you away from wanting a rigid index-based approach. The way I think about what we've done over time is sensible ideas well implemented is how we often describe it. It has a lot of benefits of what you mentioned, these index-based approaches, but it doesn't suffer from the drawbacks.

The benefits are transparency, low cost, you know what you're getting. The drawbacks are lack of flexibility, rigidity, and you're not reacting to the latest research, you're not building your rules for every type of market environment. Those types of drawbacks we've left behind. Bring the benefits, but leave the drawbacks behind. Then you start to deviate from those market cap weightings to improve returns and manage risk. I think that you end up with a good solution for investors.

Ben Felix: Gerard is an incredible communicator, obviously, as you just heard. He makes very compelling arguments for moving your portfolio away from market cap weighted indexing into some factor tilting. One of, I think, the most interesting and eye-opening interviews, at least from a theoretical perspective for me this year, was with McGill's Sebastien Betermier. This episode has been discussed extensively in the Rational Reminder community and it keeps coming up again and again. This is back in episode 196.

Professor Betermier shared with us his research from multiple papers. This one is talking about who are the value and growth investors. You just have to think about, and we gave this a lot of coverage later in the year, too, who theoretically, in this case, empirically, who should be and who is investing in value and who's investing in growth and why? I think that's a very important question to think about.

Cameron Passmore: He added a lot to our knowledge this year. That was a great conversation.

Ben Felix: When you take the John Cochran episode that we did, and you build on that with the Betermier episode that we did, and it's all this ICAPM, the multifactor asset pricing, how do you fit into the world? How are you different from average? Of course, in the first episode of 2023, with Professor Merton, we get a whole bunch more insight on this. Yeah, I agree, Cameron. This episode with Professor Betermier was, for me personally, it was a big one.

Sebastien Betermier: As the title suggests, and as you said, we looked at which types of investors tilt toward value stocks, and which types of investors tilt toward growth stocks. The purpose was to understand more the literature around the value premium and the value premium puzzle, which has been a key topic in finance for many years.

What we do find is very significant evidence, again, looking at very detailed Scandinavian data. In that particular data set, we are looking at the entire population. Not just that the level of risky shares in their portfolio, but their exact holdings in every single stock and every single mutual fund. We construct for each household, a tilt, tilt to the value factor. How exposed their portfolio is to the value factor. Then we identify, well, which of these households tend to have the strongest tilt toward value, and which of the households tend to have the strongest tilt toward growth on the other side. Generally speaking, what we find is individuals with a value tilt, they tend to be older. They tend to be well here. They're less exposed to the macro economy through their labour income, and they're more likely to be female and they tend to have a stronger balance sheet.

Cameron Passmore: Fascinating. How do these valued tilts change over time? Or do they change over time?

Sebastien Betermier: We observed a very particular pattern over time. When investors are young, they tend to tilt their portfolios toward growth stocks. Then as they age, slowly, but surely, what we will find is they migrate towards value stocks. We say, they climb what we call the value ladder. The climb is steep over the full lifecycle, the climb approximately, the equivalent of half the value premium that we observe in the data. That's a big change in the tilt, from about age 25-30, all the way to age 65-70.

Ben Felix: Professor Betermier talks about the value ladder and how people migrate toward value stocks as they age. Now, an obvious and important question is why. Again, to come back to something that was discussed extensively in the Rational Reminder community in 2022, one of the big ones was this question. Okay, we observe this in the data, fine. Maybe that's because young people buy exciting growth stocks, like it's the old behavioural versus rational explanation for differences in expected returns. Maybe young people buy growth stocks, and then naturally migrate, due to inertia, toward value stocks as the exciting growth companies when they're young, become value companies as they get older.

Professor Betermier gives us the full explanation of the value ladder. Interestingly, in the paper, I don't think in this clip, though, he directly addresses that inertia concept, and says that it does not explain the migration toward value stocks as people age.

Sebastien Betermier: We think it's a mix of effects. It's a strong result. Oftentimes, when you have a strong results like that, you have multiple drivers coming on. To tease apart the multiple possible channels that could explain that migration, we create an econometric model, where we are going to regress, or see how that value tilt corresponds, or can be explained by a number of characteristics, like age, the balance sheet strength, gender, human capital, and so forth. What we'll find is that in general age explains about 60% of the migration.

Here, financial theory says that growth stocks they may be risky in the short run but they tend to be safer over the long run. A lot of their risk comes from transitory price shocks, which you may not face as much over the long run so they make more sense for younger folks with a long horizon. As they age, well, that benefits diminishes as the horizon gets closer. That can explain part of the shift toward the value tilt.

Another driver is human capital. We believe that human capital explains about 20% of the migration. That's 60/20, where 80% here. Here, financial theory says something else as well. It says that value stocks, in addition to the horizon effect we just talked about, value stocks end up being more exposed to bad recessions. These are stocks with low market value relative to book. There's a few growth options left in them. They tend to have more leverage. They tend to have more operating leverage, more fixed costs, so they have a harder time adjusting their production model during bad times.

They may be more exposed to default in times of bad recessions. When you're looking at the cross-section of individuals, you have younger folks, older folks. The younger folks have the bulk of their wealth invested in human capital. Little financial wealth. Whereas, among retirees, its tends to be primarily financial wealth. The younger folks may want to hedge away from that risk. Part of that means, well, not tilt as much toward the stocks as some of the other investors. Then the third driver, which we believe explains about 20% of the migration, so we're at 60-20-20, we’re at a 100 now. The remaining 20% is the strength of your balance sheet.

Again, going back to the concept of the composition of wealth, when you're young, we find that the bulk of your wealth is in your human capital. It's in real estate, but it's very levered at that point. You have some financial wealth, but your cushion is fairly small. There's also a lot of liabilities. There's the mortgage. You may have liabilities through your kids and other types of student loans that might remain. Whereas, when you're more mature, you tend to have accumulated more financial wealth, and you don't have as much liabilities.

By the time you're 60, 65, typically, the mortgage is being paid. These individuals have more bandwidth to take some of those risks, and they're not as exposed to those bad recessions as the younger folks. Again, it makes sense to tilt toward value if you have a stronger balance sheet and you can afford to bear the shocks.

Cameron Passmore: Now, we have some insights into who buys value and growth stocks and some of the reasons why. In Episode 228, we had Eduardo Repetto, who is the CIO of Avantis Investors join us. We push this line of questioning with Eduardo when asked, what type of investor if anyone does a portfolio that's made up of 100% small-cap value stocks makes sense for?

Ben Felix: He gives a great answer. It's also funny because he refers to, we were part of an article about ETFs, where you have to do a desert island pick and you have to pick – if you were stuck on a desert island for whatever, 50 years, what's the one holding that you would have? I think, each of us picked the US or developed small-cap value funds from Avantis for the desert island pick. Eduardo refers to that. He basically says it takes someone very special. Anyway, we’ll let you hear from Eduardo.

Eduardo Repetto: You answered that the one, or one of you answered that to a journalist in Canada, because a journalist in Canada told me because a journalist in Canada told me, “If you go to an island for 50 years, one of you take one portfolio.” I know which one you say. I think the one that’s a small valuable. Strategy. I don’t know who of you. But look, let's go to back to Markowitz. I think that there is an interview that has a beautiful phrase. I will paraphrase. I don’t want to say his right words of saying, look, when he was thinking about the mean balance optimization, he was saying, “It cannot be that people pick – when people create portfolio, it cannot be the people pick the highest expected return security. Because if you're trying to pick the highest expected return security, you're maximizing return. Just returns, but risk is not part of the equation. You have to consider returns and risk together.” That's what the guide of Markowitz, is to create a means by this optimization, or the risk return tradeoff, if you want to think about that.

In general, I would think that most investors will be happy to have a small value. But as part of their portfolio, but weighted probably because they want to enhance expected returns. But having it in isolation will be someone very special. Someone that only buys more value will be someone very special. Like you guys, if you go to an island for, I don't know for how long I think you mentioned. Who will be that someone very special? It will probably be someone that has excess capital, so money that they don't need really, a lot of excess capital. They have very long investment horizon with very long-term asset growth objectives. For someone like that, probably it will make sense. But most of us humans that are not in that situation, we probably have a portfolio that's a little bit more diversified than just a small one.

Ben Felix: Good answer. Such an interesting one, because small value might be more volatile. When you look at again, empirical data, what outcome is more reliable? Small value actually starts to look pretty good. It's a tricky one to think about.

Eduardo Repetto: Yeah. Remember, diversification matters. We learned that from Markowitz and Markowitz learned it by observing how people behave and then put it in a mathematical model that is the risk return tradeoff. But certainly, there may be something better that’s right portfolio, but most people will have something that is more diversified than just a small one.

Cameron Passmore: It goes back to your comment about trust. You really have to trust in this premium to hang on that long.

Eduardo Repetto: You feel better if you think that that's related to valuation, it’s not a pattern. That's why when you look at a company holistically, instead of just picking a factor. Like for example, if you pick a low price to book security. A low-price security can basically have a low price, because they really have no earnings, for example. And you say, have low price because of no earnings is not because they have a high discount rate. The price is low because no earnings. I call them like gas station sushi. The price is low, man. We want cheap sushi, let's go to a gas station. I don't know if that's the right thing. I prefer to go to a sushi place, like the one you have across the street you actually visit. You say, they’re an old Japanese guy, they have 10 seats, they have great price to be fair, and the quality is amazing.

Well, I prefer companies that the discount rate is high. The price is low, not because the company doesn’t have earnings, not because the company is full of liabilities. I prefer a company that price is low, because the price is embedded a big discount rate, and because that discount rate is my expected return. Low price for the sake of low price doesn't tell you much.

Cameron Passmore: That, Ben, is possibly the clickbait quote from 2022, which I know has been picked up by a lot of listeners. Gas station sushi. Don't buy cheap just for the sake of being cheap, which is a good point.

Ben Felix: Yea, it was a great point. Don’t buy gas station sushi. It's cheap for a reason.

Cameron Passmore: It’s cheap for a reason.

Ben Felix: Continuing on this concept of we've talked about the growth of index funds. We talked to Professor Fama a little bit about the implications for market efficiency, whether we're going to reach an index fund tipping point and that concept, which again, that's something that we gave within our content quite a bit a coverage too, one of the most insightful parts of our conversation with Ralph Koijen addressed this directly. We asked Ralph. He's looked at the numbers. He's done the research. He's got the model to look at it. We asked him just straight up, are index funds distorting market prices and making markets less efficient?

Ralph Koijen: Yeah, so it's not very obvious to me. In terms of an impact on elasticity, I think there's some evidence that they may have. In terms of directly distorting prices and making markets less efficient or something like that, from what I know, I think, at least from our calculations, that's not something that we see. If you look at, like going back to what we talked about before, if you look at where the money came from, that went to passive investors and see whether it came from investors who are systematically more or less informed about future fundamentals, that correlation is essentially zero. It's not that systematically. It went similarly from informed and uninformed investors to more passive institutions. Given the absence of that correlation, at this point, I don't think there's much evidence that I'm aware of at least. Maybe there's other evidence I don't know. Based on that calculation, it's not that obviously to me.

Cameron Passmore: Another interesting pair of guests this year were Professors Jonathan Berk and Jules van Binsbergen. They're highly engaged, a little bit spicy, which certainly made them really interesting. Not to mention, just their engagement was super, super engaging, super fun conversations. Their research shows that skilled fund managers can add value. We pose them the questions of whether it is possible to identify these skilled fund managers before the benefits of their skill are absorbed by the size of their fund.

Ben Felix: Their whole thing is that maybe the capital markets are a little bit less efficient than we thought. Therefore, managers are able to demonstrate skill, and you just have to know how to measure it properly, which, of course, they're saying in their research they're doing. Then they're also saying that the market for manager skill is highly efficient. Now, if the capital market is a little bit less efficient than we thought, but the market for manager skill is highly efficient, what do we expect to see? Anytime that the market identifies a skilled manager, they're going to reward that manager with capital, up until the point, like you said, Cameron, the manager’s skill, the benefits of the manager skill to the end investors are absorbed by the size of their fund. What does that mean?

It means that the alpha decreases with the scale of the fund. The fund grows larger, the net alpha to investors get smaller. In equilibrium, the net alpha is zero. Investors earn a return commensurate with the risk that they're taking. This came up in discussions a lot after their episode. This doesn't mean you can pick active managers, unless you can identify their skill before the market does, just like picking a winning stock. Same idea.

Then the other piece of that is that it doesn't mean that funds that seek multiple price risks, like Dimensional, Avantis, or whatever other fund is trying to do that, it doesn't mean that they're not able to have higher expected returns, if you believe that there are systematic premiums within those funds. Now, that was a whole other interesting part of the conversation with Professors Berk and van Binsbergen. They talked about CAPM being the only price risk, but that's a whole other thing. If you believe that there are multiple price risks out there, then you don't care if the net alpha is zero. That's what you want. You want the risk premiums, you're not expecting an alpha. You're expecting compensation for the risk that you're taking.

Berk & Van Binsbergen: Well, I gave you an example of that, right? If it's the case that you think people are making a mistake. And so, if a foreign sounding name means that people are not on the ball and therefore, they're too slow at capital allocation, just as much as if you think that the information about Apple that just came out is not properly incorporated by the market in the price because they're making a mistake and there's a good reason to believe they make a mistake, you can bet on that. If you think that there's a mistake made in the capital allocation process, and there are reasons for why people are irrational in the decision-making process, then you could try to exploit that.

It does have to be something where you know that the market – You know something better than the market, either because the market is making a mistake, or because you know something before they do. Just as it is with stocks.

Now that said, we do see that the flow performance relationship, which is this equilibrating mechanism, it is not as fast as with stock markets. With stock markets, or with bond markets, I think within an hour or 90 minutes, generally, we see prices quickly converge to the new equilibrium level that they have. With the flows of the mutual funds, there are some frictions there that can sometimes take a little longer for the flows to happen. They still happen. But I think that the flow performance relationship peaks after six months or something, three to six months. The little bit of evidence that we do have on alpha predictability is therefore, at the very short horizon, but it very quickly mean reverts and disappears.

Berk & Van Binsbergen: If you're willing to move your money every three months, there is evidence that you could exploit the fact that investor – the flow performance relationship is slower. But that said, if you have inside information, then of course you can make – I don't mean inside information is illegal inside information. I mean privileged information. Then of course, you can make money because there are lots of managers that have too little money to manage relative to their true ability. But the point is, it's very hard for individual investors to have information. It's not hard for the mutual fund companies. I mean, that's our other paper.

Ben Felix: Oh, wow.

Berk & Van Binsbergen: The mutual fund companies know who the good managers are, and they move the capital.

Ben Felix: Okay. I've got a question. We had Gus Sauter, who was the former CIO at Vanguard, for many years. He made this comment to us. He said that because of his position at the company, he felt that he did know that there were some active managers that he could allocate to and he believes in active management. That sounds like it perfectly aligns with what you guys are talking about.

Berk & Van Binsbergen: Exactly what we found.

Ben Felix: Wow.

Berk & Van Binsbergen: It’s exactly what we found.

Ben Felix: Very interesting.

Berk & Van Binsbergen: It is interesting. Jules and I are academics, and it's very interesting as an academic to then talk to practitioners about what they themselves are doing. One of the things you may say to me is, "Well, don't the practitioners already understand what they're doing?" And they do, in their own world. But generally, practitioners have never taken a step back, and thought about how they fit into the big picture. And that's where, when you have discussions with them, they suddenly begin to see where you are coming from and the big picture. It's an interesting process.

Cameron Passmore: That was a pretty fascinating conversation, which is very much like our next highlight, which is from Professor Scott Cederburg, also, great guy, great conversation. We asked Scott about datasets being upwardly biased, due to a number of reasons, which he explains, and why it's important to be aware of this inherent bias when looking at data.

Ben Felix: You think back to the earlier clips that we listened to, the index fund revolution is in many ways, synonymous with an S&P 500 index fund. I think that's what a lot of people think about when they think about index investing in general. One of the problems and we've talked about this extensively in not just in 2022, but throughout the podcasts history, the problems with that, the problems with the sample bias in the US and the survivor bias in the US data. Scott's done this incredible research, building what you refer to when we talked to Scott, Cameron, as this archeological dig dataset, where they're going through historical records and resources that people have not previously used to build extremely accurate data sets that take into account gaps in the data, like in those gaps, what happened, and countries that usually get omitted when that country's financial market went away, what happened? Those become really important additional data points when you're thinking about what are the expected returns of stocks? What are the historical returns of stocks? But that's not something that we really know, until Professor Cederburg and his team started pulling that data together.

Scott Cederburg: That's what we've found. Yeah, we've done a couple of investigations, where we purposefully put back some bias into something. If we just condition on which countries are currently in the OECD, that has some effect on our estimates. Then even more importantly, is if we dropped everything that was a gap period in the data, or before. I forget what the exact numbers were, but it roughly cut the probability of loss in half, if you introduced this bias back into the data.

Ben Felix: Why do you think having data like yours that corrects for the easy data bias and survivor bias, why do you think that's important for financial decision-making?

Scott Cederburg: Yeah. I think it's really important for any forward-looking thing. I mean, in one sense, we're obviously looking backwards, and we're looking at all these historical periods. When I'm thinking about this stuff, I'm always trying to think about the reason that we got into this in the first place is very practical. It's like, “What could happen to my investments over the next 30 years?” The focus that we've been doing and with most so far is distributions of returns at a long horizon, like a 30-year horizon.

If I'm sitting here in 2022, and I'm thinking about what's going to happen to me over the next 30 years, we've seen just a lot of paths that countries and markets have taken historically, that I don't think would have been anticipated at the beginning of those periods. I think, just trying to get as much of an ex-ante view of the world as possible is helpful.

Ben Felix: One of the contributors to long-term economic growth is innovation. I think that's pretty widely accepted. We talked to Bill Janeway, about how the mission-driven state programs, like the government investing and stuff that they think is important, that they have a mission toward and financial speculation, how those things occasionally come together to fund transformational technologies. This conversation was particularly interesting because in the last few years, really, there's been lots of talk about transformational technologies, and whether whatever technology we may be talking about in the moment is indeed transformational, one question, and whether there are outsized expected returns for investors in that technology, second question. We had a great conversation with Bill about that. Here's one piece of that.

Cameron Passmore: We asked him to describe what is the three-player game, which is exactly what you're describing here.

Bill Janeway: I began to recognize long ago the impact of technological innovation on the markets of the economy, the places where people work, and buy and sell and spend and invest. A question in the literature on the history of technological innovation did not address a really basic question. Where does the money come from to fund innovation at the frontier, when by construction, no one can know what the consequences are going to be?

That led me to two deep histories. On the one hand, the role of government, the role of the state in making investments for reasons that are not immediately concerned with economic returns, that are for national security, national development, like subsidizing the American railroads during and after the American Civil War. Then recognizing, and this, of course, really was the case in the late 1990s. The successive waves of financial speculation that have animated all markets where assets of any kind trade, from tulip bulbs at Amsterdam in the 1630s, on to cryptocurrencies today.

Occasionally, we can look back and see that the speculation has focused on assets, which when deployed at large scale, have a transformational impact on the economy. The railroads, electrification, the Internet are the obvious standout cases. My notion of the three-player game is this interaction that never finds an equilibrium. It's like the three-body problem in physics. Between mission-driven state programs, financial speculation, that occasionally come together to fund the development and deployment of transformational technologies. That's what I call the three-player game.

Cameron Passmore: Up next is Oxford’s Professor Phalippou. Arguably, Ben, the global expert in studying the outcomes from private equity. Private equity is an extremely popular asset class and one that we are asked about often, and there's so many challenges. One of my big takeaways was the challenges in measuring performance. We wondered, obviously, if the performance meets up with all the hype that's around this, AND that's exactly what we asked Professor Phalippou when he was on, about the comparison of private equity performance relative to public equities.

Ben Felix: It comes back to what we were talking about with Scott Cederburg. If you have historical data that's wrong, you may very well draw incorrect conclusions. I think we heard something, somewhat similar from Professor Phalippou that, here's how you should be looking at the data and here's what you see when you do.

Ludovic Phalippou: So, that caveats first that this is a past and it's more important to think about the future, but it's good to have an idea of the past, but we should certainly not make investment decisions based on past returns. We know there is no relationship, but people keep on just being very obsessed with past and track records. So in a nutshell, private equity in Europe has done much better than public equity in Europe, but the industry mix is completely different. So if I just tell you that public equity in Europe is banks, oil and gas, and things like that, and tell you they underperformed a portfolio of tech firms in Europe over the last 15 years, that shouldn't come as a surprise, right? So we don't know if industry corrected. That would be a different emerging market. It's about equal anyway, even the way it is.

In the U.S., there is this complexity with a large cap that did very badly from '98 to 2008, and did normally after. So what happens in the U.S. is that if you would take an index, which is not including the largest market caps, so anything like the S&P 400, S&P 600, or some older indices, or you take Dimensional Fund Advisor returns, things like that, or the CRISP with Chicago indices, you would find that private equity was very close to public equity over any time period.

The problem is when you use the S&P 500, to give you an idea over the last hundred years in the U.S., if you take any size categories and you calculate the 10 years returns, and you just roll it, right? You start in 1920, and you say, "Okay, 1920 to 1930, 1921 to 1931." You do this 10-years rolling for hundred years in the U.S., there's not a single category in this 10 size desize that have ever had a decade with negative returns, except for one category in one decade. And it is the largest gap of the top 10% from '98 to 2008. It's the only one. So an index like the S&P 500 has an extremely performance low from '98 to 2008. So up until 2008, whenever you would see an investment presentation, it would be benchmarked against the S&P 500 because it was trivial to be the S&P 500. So people keep on playing with that.

So when they show you the last 10 years of performance in private equity in the U.S., they will never show it to you against the S&P 500 because it's going to be close to one to one. When they bring in the S&P 500, it's going to be the past 20 or 40 years because then it's going to include the '98 to 2008 time period.

If they're going to show you a recent period, they're going to use MSCI World, because it's the worst performing index over the last 10 or 15 years. But if throughout, someone would've used a stable index like S&P 400 or something like that, you would've seen that any horizon, it would be very close to the public equity in the U.S. And like I said, in the U.S., the mix is pretty similar, so it is a reasonable comparison. So, it's not bad returns. And if private equity has been a bit diversifying net of all fees, if you get about the same as public equity, it's actually hasn't been a bad deal. It's not the amazing deal that the consultants are selling to you, but it hasn't been a bad deal.

Now going forward, one has to think about whether a high fee in a low interest rate environment is a good idea, right? So, if you're going to have low expected returns, even if private equity outperforms public markets growth of fees, and they do, you have a very high fee structure. And so, in a compressed return environment, how does that work? Right? So usually, it's not very good news.

That's why I encourage people to think more from fundamentals about the future, rather than just looking at the track record saying, "It wasn't bad in the past, so it's cool." But it's still important to know that in the past, it's not as rosy as what consultants tell you.

Ben Felix: One of the consistent pitches other than higher returns for private equity, is the idea that it is a diversifying asset class relative to public equities. If you add private equity to your portfolio, you're going to get some more diversification than you could get just building public stocks. I think, a lot of that pitch is often related to the smoothing in private equity returns. We actually got a much more nuanced answer from Professor Phalippou that I really appreciated.

Ludovic Phalippou: It's reasonable to think so. It's reasonable to think so. My question is to which extent. And then is when you need to do a bit more homework that some private equity funds one can see intuitively, we offer diversification. If you see some private equity firms investing in something like Hilton hotels, and you have a Marriott that is publicly listed in terms of diversification, I'm not sure, but it helps me to buy into Hilton on the private equity side when I can have Marriott on the public equity side. So, it depends on the strategy. So usually overall, the larger a fund is, the more they invest in mainstream type of companies, and so the more similar they are to publicly traded ones. So, if you want to look for diversification, you would tend to go towards more niche fund and most of it construction, right? Somebody doing software in Europe, I guess, if there's no such things that are publicly listed. So yes, that would be diversifying. I don't know if it's a good return or not, but that would be diversified.

Cameron Passmore: The demand for private equity, as you said, often is about diversification. We continually hear that 60/40 is dead, for example. I mean, you hear that. I know, my Twitter feed’s got lots of comments like that. There's also many investors concerned about volatility this year. We welcome Antti Ilmanen, who is the Co-Head of Portfolio Solutions Group at AQR to join us and he was on episode 202. We asked him, what are some of the things that investors can do to stick with investment strategies during periods of poor performance?

Antti Ilmanen: in the background there is this issue of, I don't know, investor impatience. Investors require more consistent performance than is feasible in competitive markets. And this is, again, even with equities, but certainly with anything. Anything less conventional then we get even more of this problem. Can be a factor, can a manager, can be anything. And we know that we need very long data to truly distinguish lack from skill, or whether factor is positively rewarded, but few investors have the patience for this. But strategy is good, only if you can stick with it.

And in that spirit, I emphasize the importance of identifying the strategies that are consistent with your beliefs and that you can then stick with. And for many that answer may be that, okay, really let's let equity conventional risk dominate. By the way, it's sounded like it's a binary choice. Then I think, one can do some of these other interesting things, but size them modestly so that you don't then capitulate too quickly.

But what I also do in the book is, suspect that most investors look in the mirror and like to see they're a patient long horizon investor. And I try to then cultivate that patience. And so, I give some ideas. So, I think being educated about both the empirical evidence and theoretical rationales for anything, they can help sustain patience in bad times. And I suggest some practical tips, such as viewing your portfolio broadly and rarely. So broadly means that you don't fall to the line item thinking, or try to reduce the line item thinking type of things. And there are tricks for that. Look at return contributions as opposed to – so, that's return of the asset times portfolio weight, which is a smaller number, that can be helpful.

Or when you look at performance over time, you have to probably tell last quarters' performance, but put it last as opposed to the first in the list. Start with some long horizon estimate. And again, this doesn't have to be – this shouldn't be done without explaining this to, let's say your client. The client should know that we are doing this together so that we are cultivating better long-run behaviour. And then, I think it makes all the sense in the world.

Ben Felix: Great advice from Antti. Now, what's an alternative strategy? Well, one of the things that you can do is not look at your portfolio. Like the smoothing effects and returns that I mentioned earlier. If you just don't look at it, you won't be worried about the return. In this clip, we talked to Professor John List from University of Chicago, author of the book, The Voltage Effect. Professor List has researched answers this question exactly. How often should people look at their investment portfolio

John List: As rarely as possible. So what we find in our research, and it was really taking some of the earlier work from Dick Thaler and colleagues, as well as Uri Gneezy and Jan Potters, and we took it to the field and we explored. First of all, our students and our professional traders, do they have what's called myopic loss aversion? Do they have both myopia and are they loss averse? When I say loss averse, I mean, you treat losses as much more important than comparable gains. So we took that to the traders and what we find is, yes, indeed, those traders as well as the students, because a lot of times people say, "Well, that's a lab result with students. The real traders won't have it.” Well I took that to task. What happens is the real traders have it and then some. They're myopically loss averse.

So what does that mean now for everyday investors like me and others, it means don't look at your portfolio. If you need to, I totally get it. But I would say once every three, six months is fine. But the reason why I don't want you to look at your portfolio is because when you do and you see losses, even though they're paper losses, you say, "My gosh, that hurts." And you're more likely to move your portfolio out of risky assets and into less risky assets. And as we all know, just look at the data, the data over long periods of time, that's the equity premium puzzle, is that you get much higher returns, if you're willing to bear some of that risk.

Now, if you look at the account a lot and you have myopic loss of version, you'll be much less likely to bear that risk. So, you'll move out and you'll be in inferior investments. The implication is don't look often, and as rarely as you can take a look. It's always good to take a look, but, don't punish yourself.

Cameron Passmore: Part of what I got from Professor List’s comments is that emotions can really play a big part of your behaviour, which of course, bad behaviour can lead to less than great returns. This is always a rational mindset. We're talking on the rational reminder. One of the big lessons I got this year was from our longtime friend and theoretical physicist, Leonard Mlodinow, who explained to us how the rational mind and the emotional mind are actually quite intertwined. It’s a bit of a mind-blowing conversation to me. This is back in episode 190, early in the year. We asked him the question, are emotions detrimental to decision making?

Ben Felix: This was a mind-blowing conversation. Basically, there is no such thing as an unemotional decision, whether you like it or not. No such thing as a rational thought.

Cameron Passmore: We both did a double take with that, and he's right.

Ben Felix: Yeah.

Leonard Mlodinow: Well, that's one of the big revelations of the last 10, 20 years is that's definitely not true. That's been the idea all the way back to Plato with his chariot and the idea that you had certain drives, passions that had to be put under control by irrational mind. In the modern world, in modern science, it was Darwin who really created the modern theory of emotion, scientific theory of emotion. And Darwin wanted to know why we have emotions with respect to his theory of evolution. Why did they evolve? What role do they play? And he studied cultures all over the world and also all sorts of other animals, mammals, to understand what kind of emotional experiences they have. And he concluded that emotions play a role in the animal world, mainly of communication. So that if one member of a species approaches or attacks another, and that one looks angry, that the first one might back off, or if there's a predator in sight and one looks scared, the other ones would notice that and they would all take action.

And since humans have language, and since we have rational processing, Darwin concluded that this was outmoded. It was a vestige like the appendix. And we really didn't need it. And that when emotions played a role, they would interfere with our rational processing and they were a lower kind of processing. Well, now we know that that's all wrong that, first of all, as I said, your brain is a processor, but it cannot work in a vacuum. Like all computers, it needs to know what questions it has to answer, it needs to know what data to consider and how to value that data, et cetera. And all this is governed by your emotions. So, first of all, without emotions, you wouldn't even get off the chair because what motivates you to do things, if not feelings? So emotions are not just productive and a useful part of our processing, they're inseparable. There's no such separate thing as an emotional mind and a rational mind. Those two minds work together always.

Cameron Passmore: These two minds work together, and they really are inseparable. To me, this links nicely, Ben, with goal setting, for example. You need to have an emotional attachment to the goal and that attachment will motivate you to seek out rational ways to achieve that goal. A common goal that a lot of people have is to add value to improve the world. In Episode 192, we spoke to Professor Alex Edmans, author of the book, Grow the Pie. We asked him how people in everyday life can use Grow the Pie mentality to make the world a better place.

Alex Edmans: I'm really glad that you asked about people then, because often people ask me this about companies and with companies, unless you're the CEO, you don't really control the companies. So pie economics might be irrelevant for the ordinary person working in an organization. So what is the heart of pie economics? It is how to create value. And, why I think that's so powerful is that anybody can create value, even if you're the most junior person in an organization.

So one thing that I encourage people to ask themselves is, what is in my hand? What do I have in my hand? It could be my resources, my expertise, my time, and how can I use this to benefit other people? So, as an example, my first job was at Morgan Stanley in investment banking. I was right at the bottom. I thought nobody works for me. There's nothing in my hand, I have no influence. But in fact, what I realized was that people did work for me. There was my secretary, there was the IT department and there is perhaps the most abused department in an investment bank, which is the graphics department.

So a graphics department, what you do is, you scribble some slides, you give it to the graphics department, they come up with some PowerPoints. And, often the analysts would shout at them for not doing what they wanted, even though it was the analyst fault for or not having explained it clearly. But, there were times when I got some good work back from the graphics department. I called them up and I say, "Hey, this is Alex. Somebody just did my job. I just wanted to say it was really good. All these three things I asked for were great. And this fourth thing I didn't even ask for, but you did it anyway."

So even as a junior person, in my hand, what I had was my words and my ability to say, thank you. And honestly, I did not do this to be seen to be a goodie goodie, to be seen to be a nice person, I did this honestly, just to say, thank you. But, because I was so junior because I was right at the bottom, I did not have my own office. Right? I sat in the bullpen, which is where all the analysts sit. And so, other analysts heard me doing this and they started to do it themselves. Now, I'm not going to claim I changed the entire culture of Morgan Stanley, clearly I did not.

But certainly that seventh floor of the offices in Canary Wharf, London, people started to think, oh yeah, can I say thank you to others? And so, I'd say, whatever level you might be an organization, you can actually have a much greater influence than you think you might because whatever you do might be noticed by others that has a catalytic effect. Similarly, in the pandemic, when some of my friends posted on Instagram or Facebook that they were helping doing shopping for elderly neighbours and we could ourselves say, “Well, what can we do to help out?” One of my friends, who's a lawyer said, oh, he went to his local coffee shop and he advanced purchased a hundred coffees to give them 300 pounds to give them a little liquidity injection.

So all of these things are small things, but if you go with the mindset of how can I actively create value and have a positive impact, that's really different to how people typically approach sustainability. With sustainability, we think about how can we do less harm? How can we cut our carbon emissions and so on? And certainly, that is something which is important. Can I sort of bike to work rather than taking an Uber? But, I think what's often overlooked is that pie growing idea of actively creating value from our words and our actions. And, I think that is something that really can be unlocked.

Cameron Passmore: In episode 208, we welcome author Rebecca Walker. One of my takeaways in that conversation was the importance of trying to understand one's money story. How is money discussed as you were growing up? How did your family actually handle money? Did you handle it well? Did you have enough? Each of us has a money history. I do think it's important to try to understand yours. We asked Rebecca, what effects do you think learning about money has on people's lives?

Rebecca Walker: I think it's critical to learn about money. I think that this book is really – people come to it and they say, “Oh, you know. This is completely different than I thought it was going to be.” They thought it was going to be a book about how to invest, how to create a budget, breaking down the stock market, savings bonds and – and I say, well, this is actually the book that comes before you do that work. This is the book that really helps people to excavate their own stories about money. What they've learned about money, what they feel about money. Do they feel they deserve money? Do they feel guilty because they have too much money? Do they feel that they're just following a script for how to engage with money, or do they feel that in fact they have an awareness of how they want to use money that makes them feel good? That makes them feel good and that is, again, as I just said, in alignment with the higher vision.

So, I think that so many people think about learning about money in this very specific, solely financially pragmatically based way. It's these numbers, you're making this, you do this with it, da, da, da, da. And for me, learning about money, it's about learning about yourself. What do you care about? At the end of the day when you die, you will have left a legacy, not just in how you've treated people, how you've loved, what you've created, what you've said, but how you have used your money, how you have transformed your labour, your mind, your intellectual capacity into something that can help and support the things you believe in. So, in that way, I think that learning about money is really about learning about yourself and knowing who you are, first and foremost, so that you can act effectively and skillfully with money as an extension of yourself.

Cameron Passmore: Colleen Ammerman, who is the Director of Race, Gender and Equity Initiative at Harvard, joined us on episode 218. We wanted to learn more about gender inequality. We posed to Colleen the question, how do you describe the current state for women in the workplace?

Colleen Ammerman: I could call it a stalled revolution, maybe is one way to think about it. If we think back to the past 50 or 60 years an enormous amount of change has happened. Things like sex-segregated classified ads, where you would literally open up a newspaper and see jobs for men and jobs for women, used to be perfectly legal. We're a long way from that. But if you look particularly at rates of women, proportion of women in leadership really across any industry or sector or field, that has not really budged since the 90s. We have been in a place where a lot of progress has made the latter half of the 20th century and we've continued to make progress since then, but still at a much slower pace and we're certainly not a gender parity.

Cameron Passmore: Interesting. What are the quantifiable symptoms of gender inequality in the workplace? In other words, how do you really know there is a problem?

Colleen Ammerman: Sure. Well, one really easy way is to just look at who's in leadership? Who's in positions of power? Lots of indices and metrics will tell you that. You look at marquee things like CEOs on the Fortune 500, S&P 500, FTSE, etc., etc., women on corporate boards. We have these measures of who is in power in business and in corporate America, and women are still certainly a minority and women of colour an even smaller minority. But then there's also lots of other quantitative ways that you can look at it. Compensation, rates of promotion. There's lots of different ways that you can think about how organizations value employees and see ways in which women, I would argue, are not being equally valued in terms of their rewards.

Ben Felix: One of the things that we spend a lot of time on this year, learning about ourselves and doing research on ourselves, which is fun to do our own somewhat primary research on goal setting. We did the goal survey. We turned that into a goals master list that people can use. It's a white paper now on our website. We discussed that in episode 223. Earlier in the year, and this was a big part of the finding and funding a good life paper that we did. Earlier in the year we spoke with Ayelet Fishbach, from the University of Chicago. She wrote the book, Get It Done. We asked her in Episode 188, how important she thinks it is that the pursuit of the goal itself be enjoyable,

Ayelet Fishbach: It is very important that the pursuit of the goal will be enjoyable, or somehow that it will feel good. Sometimes it feels right, even if it's not enjoyment. It's very important because we really discount anything that is in the future. Now, it's not that we should, we should not discount outcomes that are in the future, but we do because this is our human, our animal nature. It is just hard to do something that will benefit me in the future, we are so much oriented toward the present. I had a conversation with a colleague the other day and we were just in our minds thinking about the kind of time commitments that we make, and basically most of us would say, "I'd rather give you an hour next week than five minutes today." What does that mean? I can absolutely not afford five minutes today, but I'm very happy to commit one hour of my time next week because it's in the future. We discount too much beyond what's good for us, that just makes it harder.

But if we add the immediate outcomes, if we make something pleasurable or feeling right at the moment, then we can do it for the sake of the moment. Let me also say something about feeling right, which is not necessarily enjoyable. We recently published a study about improvisation. We did it here at The Second City, which is the famous Chicago improvisation club. We invited people who were just starting improvisation to feel discomfort while they're doing that. We actually told them, "Your goal is to feel uncomfortable while you engage with the exercise." Now, here's what that did. It was very easy to feel uncomfortable. If you ever try to do improvisation, if you are not a professional, the first thing that you would feel is embarrassed. You’re not comfortable. If that's your goal, then you actually – it feels right. You are doing what you are supposed to do. You were asked to feel uncomfortable and here you are feeling uncomfortable.

By having people trying to feel uncomfortable, we got them to engage more, and they did more, they were more interested in doing improvisation. Again, they were excited about doing it. It's not really just about enjoying the present, it's about feeling that this is right, that you are in the place that you wanted to be, that you're making progress.

Ben Felix: That's a cool study.

Ayelet Fishbach: Thanks.

Ben Felix: What about long-term retirement planning, where the goal is very far in the future in many cases? Progress – I mean, you're saving money. It's not fun, it doesn't necessarily feel good. How would you approach that situation?

Ayelet Fishbach: One of the hardest goals. Everything goes against you. It's hard to get excited about it. It will help a person that is very much in the future and not quite connected to me. It's highly extrinsic, and despite that, very much necessary. One thing that we find that works is making it into a habit, or using a default, just getting it off your mind. If you had to decide every month, or even every year about your retirement saving, we know that people just don't do that. They don't want to engage. Most of the interventions with retirement are really geared towards creating some plan that will just be automatic, will take care of that, giving people really good defaults. If you just don't make any decision, then your default is really good. These interventions are better than telling people, "Every day when you get up in the morning, remember that you need to put some money aside for retirement."

Cameron Passmore: The idea that it's hard to set a goal for some distant person is so fascinating to me. We all know for example, we should save for retirement. However, that's not always terribly enjoyable to save for some future person in some future decade. This really gets to the question of life satisfaction, which is something we talked about with personal finance author, Andrew Hallam. His most recent book is called Balance, which talks a great deal about happiness and life satisfaction. We asked him about his observation that life satisfaction increases after middle age, and whether people can get to that satisfaction place sooner in life.

Andrew Hallam: I think, Cameron, is difficult, but it's doable. I think too, one of the things about, when you get older too, you recognize your own mortality, and you start to realize what's really important. But I think that young people can recognize this stuff when they see the science behind life satisfaction. I think it can become a lot clearer to them when they see the science behind material acquisitions and hedonic adaptability, for example, and how pursuing things won't enhance your life satisfaction, that perhaps trying to keep up with the Joneses is a futile quest that doesn't enhance any kind of internal satisfaction long-term.

I think once people can see that, it's sort of – a lot of people tell me when I explain to them about cars, a lot of people, when they get their first job, they borrow a bunch of money and they buy a brand new car. I know that when I started telling people about Thomas Stanley's research on like, what does the average millionaire drive? Did you know that, in 2019, the median price for the most recent car in the United States purchased by millionaires was $35,000? And that most high-end cars are not driven by wealthy people. They're driven by people with high incomes, but also high debts.

It's been interesting over time, because I've been with a lot of younger people who've said to me, "I remember that. That, I remember that, and now when I see somebody who's young, who's driving a super expensive car, I don't necessarily feel envy for them.” I recognize that, that person probably doesn't have, or might not have a lot of money. Most people that drive super high-end cars, most of them don't. Some do for sure, but most of them don't. I think then, back to your question, when you look in at research on life satisfaction, although it's probably harder for younger people to be able to put that aside and decide they're going to be true to themselves at a younger age, they're not going to be as influenced by peer and social pressures, although it's more difficult at a younger age in your 20s, and 30s, and early 40s. Is it doable? Absolutely. I think it is.

Ben Felix: Always so good to hear from Andrew. That was him back for his second appearance on the podcast. Another fascinating conversation that we had related to goals was with Jay van Bavel. He wrote the book, The Power of Us. One of the big takeaways from our conversation with him was the power of identifying yourself, or a member of a group, which becomes a source of inspiration, since you'll create goals relate to that identity. Could be for your career, your health, your social life, or for retirement, whatever. We asked Jay, in episode 214, would affect group identity, the group that you identify yourself as being a part of has on goal setting.

Jay Van Bavel: Yeah. So identity helps activate certain goals at the front of their mind. So I said, I'm an author, that's why you're interviewing me. The moment I adopted that identity, I actually got included in different communities and conversations with other authors. They helped me out. The conversations we had, were about those types of things. But also had a set of goals. I had to take responsibility for writing the book, editing it, making sure it wasn't going to be embarrassing. And then there's a whole year of promoting it, doing podcast, op-eds, talks. And so, those are a lot of things that I've never done before because I'd never had a book before that were focused on it. And so, I had to achieve those goals to make sure that people could hear about the book because a book's very much like that old philosophical saying like, if a tree falls in a forest and no one hears it, did it really fall, or did it make a sound?

Books are very much like that. It's a lot of effort for someone to buy it and then pick it up and read it. It's a major commitment. So you have to convince them why that's interesting. And so, that activates the authorship of being an author, activates all those types of goals, and then you're hustling to try to achieve them. But as I said, I'm a father in the mornings. When I wake up, my kids need lunch, they need to be packed for camp. I need to help with their homework. I need to make sure that they don't spend too much time on screen. When I'm thinking about myself through that lens, it has a whole bunch of goals that come to mind that are very different, and that are immediately important. And so, that's one of the ways identity affects goal pursuit. It activates different goals.

So you want to think of adopting and leaning into the right identity because it will come with a set of goals and responsibilities and norms that you want to uphold. The other way that identities help with goals, is that they can keep you on the right track. So this is one of the reasons why, if you want to get in shape, it's good to have a gym buddy because you can easily avoid going to the gym if it's just you. You're not feeling it that day, you don't want to exercise, but if you have a buddy there, they're going to hold you accountable for that. You got to show up each day and they're going to push you to do that extra rep. And that's what groups do, identities do. They uphold you to the norms of the group.

And so, if you're a part of a group, I'm a professor, and so what set of responsibilities I have, is to publish scientific articles and do research. If I don't do that, I would not have gotten tenure. I would've lost my job or I would not get a pay raise. Or if I write an article and it's really bad, I'll have dozens of other professors and scientists who read it and scrutinize it and criticize it. They'll write a blog about it or drag me on Twitter. And so, there definitely is a certain set of norms that you have to uphold. And they're different when you're scientists, say than when you're an author.

An author is more expected to be able to tell stories. You get a little bit more flexibility about what the evidence is. But when I go back to my other job, I have to actually have very rigorous evidence. And if they find me talking on this podcast about stuff that's not backed up as science, my reputation will actually drop. My status will drop. I'll stop getting invited to scientific events. And so for me, I'm often actually trying to juggle those two identities a lot, make sure I'm telling good stories, but that they're backed up by the science. Otherwise, my other identity, the status in that community, will suffer.

Cameron Passmore: That to me is so cool. Honestly, it was a surprising interview, I loved it. When you start applying how be part of a group can inspire you to set goals, like I'm an athlete, therefore, I work out every day. As opposed to, “Ugh, I got to go to the gym this morning.” Just these identities, whether you're a parent, an athlete, a scholar, a reader, whatever your identity might be, has an impact on setting goals. It is so cool.

Ben Felix: Yeah, definitely. Professor Robert Frank was a relatively recent conversation that we had. I thought that one was incredible as well. We've covered so much, so much ground. He's done important research for many years now on the link between consumption and happiness, which is something that we think a lot about. It comes up a ton in the happiness research. We asked Professor Frank and in Episode 230, about the relationship between the consumption of luxury goods and happiness.

Robert Frank: When you buy a bigger TV, or a nicer refrigerator, you're happy about that. If everyone has a flat screen TV with 4K resolution, then you do quickly adapt to that. Am I happier watching? As it happens, I have a seven, or eight-year-old plasma TV, which seemed really exciting when I first got it. I can't honestly testify that I'm happier now because maybe if I go visit a friend who has an 8K TV, then my TV will seem blurry and I'll need a new one. Those things, the link between them and once you've adapted and once everybody else has them, the link between them and psychological well-being is tenuous at best, and in most cases, not even measurable.

The link between many other kinds of expenditure and happiness and well-being is easily demonstrated. My colleague, Tom Gilovich, has done some very compelling work showing that money spent on experiences has a far more profound and enduring effect on psychological well-being than money spent on goods. People are less likely to have contexts in which they compare experiences unfavourably with the experiences of others. It's just the psychology we've inherited has some asymmetries in it that make us as individuals, choose expenditure patterns that don't add up to a very good outcome for us collectively.

Ben Felix: Yup. We've talked about a lot of Tom’s papers. That's fantastic work. You've mentioned a couple of – well, we haven't gotten into it at all, but you've mentioned policy a few times. If we step back from that, what do you think individuals can do to recognize these patterns and maybe avoid them?

Robert Frank: A lot of this is local. If you don't want your kids to feel like material things are the be all and end all, there are some cultures that celebrate material acquisition – local cultures I'm talking about that celebrate acquisition much more than others. I think that would be one of the things to factor into the mix of a decision about where to live, who to choose as friends. If you want to be more of a climate advocate, then choosing a peer group that has similar aspirations will make it seem more comfortable with the consumption standard that's consistent with climate advocacy.

If most of your friends are jetting off to destinations two or three times a month and you're not, then you'll feel deprived. If you hang out with bicyclists and hikers who vacation on old railroad trails closer to home, you're not going to be less happy, but you'll be better able to live whatever you feel your ideals call for.

Cameron Passmore: Yeah. The part that really I find intriguing is that as you get older, I find that stuff matters less to me. It all makes sense. I know a push back on this about the relativism comment. He really does get you thinking about policies. I'm not saying I support the policy, but makes you think both this relative happiness, and if we could do things from a society level, that wouldn't affect anyone's independent level of happiness, but increase society's happiness. That was really, really profound. I know, it's not part of this clip, but it's worth listening to the episode to think about that.

Ben Felix: Super interesting point. It's just the idea that individuals can behave rationally in the structure that they are in, but that individual rational behaviour can lead to society level irrational behaviour. Again, I'm not advocating for his policies, which he was excited to talk about. Conceptually, it's very, very interesting to think about.

Cameron Passmore: Another great guest this year, Ben, was Cornell's Professor Vanessa Bohns, author of the book, You Have More Influence Than You Think. There's so much psychology behind how we make decisions, and a great variance in our levels of confidence when we do make decisions. In many areas, such as driving, many people are overconfident. We asked Professor Bohns in Episode 206, why are people under-confident in their social lives?

Vanessa Bohns: Yeah, this is really interesting and I think a big part of it – so as you said, people tend to be overconfident in things like their driving and their morality and their intelligence and things like that. What they show is basically, when you are thinking about how smart am I compared to other people? Or how moral am I, or how good of a driver am I compared to other people? What we tend to do is we reflect inward.

We think to ourselves about how moral we are, the last decision we made, or the last time we drove, if we're thinking about the driving question. We just reflect inward. We remember experiences we had. We tend to do this selective search of those experiences. We come across those experiences that paint us in the most positive light, not surprisingly because that's what people do. So we feel pretty good about ourselves in the end. And we say, actually I'm a really good driver because I remember all these great times that I navigated these really difficult situations.

When we try to think about ourselves socially and look at, "Well, how social and influential and likeable am I?" What we tend to do is instead of reflecting inward. For social categories, we tend to reflect outward and we compare ourselves to what we see other people doing. And the things that come most easily to mind when we think about other people are the influencers, are the people posting on Instagram about all their fancy dinners and their exciting social parties and whatever it might be.

So we think of these exemplars of being influential and popular and social and clearly most of us pale in comparison to those exemplars. So we think, "Oh, well, I'm definitely like that." So I'm clearly lower than average on my social ability. Right? But in fact, both of those are errors, right? They often say like the average person thinks they're smarter than the average person. And in this case, the average person thinks they're less social than the average person. And they're both errors because that's impossible.

But we tend to make this assessment by turning inward when we're thinking about something about ourselves, but outward when we're thinking about, "Well, how social am I?" This kind of social category.

Ben Felix: In thinking through the time that we put into creating the podcast, and even doing a review episode like this, which a lot of time has gone into, makes us think about someone like Professor Fama, who's just incredibly productive, in a level that even us doing this little podcast, Professor Fama’s work makes it seem tiny in comparison. We had to ask Professor Fama, how many hours per day does he think the brain can handle real thinking work?

Cameron Passmore: What a career. You think he's been working, basically, every day for, I don't know, 50, 55-plus years at this. To been that fortunate to have found a career that interests you so much that you want to work that much for so long, now, that kind of impact, but also going back to the comments at the top of this episode. To have that impact at a time when so much change was happening. I mean, what an amazing confluence of events to happen in his lifetime.

Ben Felix: Definitely.

Eugene Fama: Okay. That's very good question. It took me a long time to figure that out. I would say, you have four hours a day. I say, all my academic life, I do my work in the morning, and I do other people's work in the afternoon. Because in the afternoon, I've been burned out. I can't do this, the original stuff. My productivity per unit time goes way down. Then, what I found out later in life is, this is when I took up golf. What I found out was you can take those four hours anytime. It's not important if you get to do in the morning, you can go play golf in the morning and get the four hours in the afternoon, but then nobody else gets your time.

Cameron Passmore: I love Professor Fama’s take on work ethic. As I said earlier, you can tell he loves what he does and makes him happy and wildly productive. Happiness is another theme that we covered quite a bit again this year. UCLA’s Cassie Holmes, author of the excellent book, Happier Hour joined us and we get a chance to ask her scientifically speaking, why is being happy a good thing?

Cassie Holmes: Yeah. It's a really important question, because sometimes people think of happiness as somewhat of a frivolous thing, that may seem indulgent, but it's absolutely not. I would actually say that the last couple years, folks have come to recognize just how important it is with anxiety rates, depression rates, burnout rates as high as they are, everyone has come to recognize just how important our emotional well-being is. To your question of, are there studies to show just how important our well-being is? Absolutely. Research has shown that feeling happy benefits across our domains of life and the workplace and our personal relationships with respect to health.

For example, in the workplace, when we feel happy, it increases our creativity. It makes us more adaptive problem solvers. Happy employees are more engaged and better performers. It helps us in our interpersonal relationships. When we feel happy, we like others more. We are liked by others more. We're more likely to help others out, which also centre interpersonal relationships, as well as if you think of that in the workplace, when we feel happy, we're more likely to help our colleagues, we're more committed to the organization at large.

Also, with respect to health, happiness increases our immune functioning, our threshold for pain and makes us more likely to stick to our treatment regimes, and is associated with longevity. All of this is to say that, yes, we want to be happy. Wouldn't that be nice? We want to be happier, which I actually think is an important qualifier. The title of my book, Happier Hour is purposeful. It's not about happy that you turn on, yes or no, I am, or I am not. It's what can we do to feel better? Feeling better has these positive consequences.

Ben Felix: Cassie’s arguments are very compelling. I mean, we've spent a lot of time on the podcast talking about happiness, but to hear, again, like you said, when you introduce that clip, Cameron, scientifically, why is this a good thing? It's easy to say that being happy is good, but really why? Why is that true? That's really good to hear from Cassie.

Now to bring us home to the final segment for this wrap-up episode, and I think it's a pretty good way to finish it, we have Commander Chris Hadfield. Chris joined us for an episode based in his book An Astronaut's Guide to Life on Earth, which is an excellent book. This is the episode where we had to go back and encourage people to listen to it, because the download numbers were lower than usual. We weren't worried about that. We thought this was such an incredible episode, we didn't want people to miss it. When we went back and encouraged people in the next episode after his to go back and listen, we heard so many comments back from people saying, “I'm so glad you encouraged me to do that. It's one of the best episodes that you've ever done.” I think that's true. Chris is a Canadian astronaut. Very well-known in Canada, maybe less so around the world, which is maybe one of the reasons some people skip it. Anyway, to take us home for this wrap-up, we asked Chris, what the most important lesson that he learned as an astronaut was that he continues to apply to his everyday life on Earth.

Chris Hadfield: Goals are super important. Having a clear vision of things that you want in your life, things that you want to happen, events, places, people, opportunities, whatever. I think having barely possible or impossible goals, that's a really important thing. But the odds of doing those things are very small. And even if you do them, they're going to be different than you thought. So, I think maybe the most important part of the book, An Astronaut's Guide to Life on Earth, but also, my own takeaways from the decades of experience in spaceflight is that what you've done already, you can't change. And the things that you're aspiring to are just theoretical.

What matters the absolute most is what are you going to do next. That's what matters. And when I say that, what are you going to do in the next 10 seconds? One of my fellow astronauts, Tracy Caldwell, she grabbed a grease pencil and wrote on the wall of the space station, “There is nothing more important than what you are doing right now.” And it's the truth. When you think about it, your life is not what you set out to do. Your life is just knitted together, series of all of your little decisions of what to do next. And we often forgive ourselves, our little decisions. That doesn't matter. That’s just a little decision. But that's all you got.

So, I think the deliberateness of how you make each of your small decisions every day, that is going to be your life. That's going to determine the path of who you are tomorrow. And so, think about them, take them seriously, and be deliberate in your own choices every day. And that is something I learned throughout the pattern of training and development that I went through. But also, it's something wherever I could, I tried to be mindful of and I'm still, even more so now at this particular phase of life. I think about that a lot.

Cameron Passmore: I'm not sure if there's a better guest to close out this episode than Chris. He was phenomenal to have on. That's one episode that I share with friends and my brothers and their kids and my nieces and nephews and my kids. I've encouraged a lot of people that I know in my personal circle to listen to that episode, which I don't normally do with other episodes. Anyways, that's our 22 guest and review episode. What a year. We learned a lot, safe to say. Put a fair amount of time into this, safe to say.

Ben Felix: Yeah, yeah, yeah. We did learn a lot. That's one of our early episodes in 2023 is going to be a lessons learned in 2022 episode. That should be interesting.

Cameron Passmore: On the investment side, on your segment side. Yeah, which would be very cool.

Ben Felix: Not a guest wrap-up like this, but more of an all-encompassing, one of the big lessons that we took away from the research that we did ourselves, but also from conversations we have with guests. That'll be an upcoming episode.

Cameron Passmore: Anyways, everybody, thanks for listening. Been a heck of a year. We wish you a great 2023.

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Episode 182: John 'Mac' McQuown — https://rationalreminder.ca/podcast/182

Episode 184: Robin Wigglesworth — https://rationalreminder.ca/podcast/184

Episode 186: Andrew Hallam — https://rationalreminder.ca/podcast/186

Episode 188: Professor Fishbach — https://rationalreminder.ca/podcast/188

Episode 192: Professor Edmans — https://rationalreminder.ca/podcast/192

Episode 194: Bill Janeway — https://rationalreminder.ca/podcast/194

Episode 196: Professor Betermier — https://rationalreminder.ca/podcast/196

Episode 198: Gerard O’Reilly — https://rationalreminder.ca/podcast/198

Episode 200: Professor Eugene Fama — https://rationalreminder.ca/podcast/200

Episode 202: Antti Ilmanen — https://rationalreminder.ca/podcast/202

Episode 204: Professor List — https://rationalreminder.ca/podcast/204

Episode 206: Professor Bohns — https://rationalreminder.ca/podcast/206

Episode 208: Rebecca Walker — https://rationalreminder.ca/podcast/208

Episode 210: Professor Phalippou — https://rationalreminder.ca/podcast/210

Episode 212: Professor Koijen — https://rationalreminder.ca/podcast/212

Episode 214: Jay Van Bavel — https://rationalreminder.ca/podcast/214

Episode 216: Gus Sauter — https://rationalreminder.ca/podcast/216

Episode 218: Colleen Ammerman — https://rationalreminder.ca/podcast/218

Episode 220: Professors Berk and van Binsbergen — https://rationalreminder.ca/podcast/220

Episode 222: Cassie Holmes — https://rationalreminder.ca/podcast/222

Episode 224: Professor Cederburg — https://rationalreminder.ca/podcast/224

Episode 226: Colonel Chris Hadfield — https://rationalreminder.ca/podcast/226

Episode 228: Eduardo Repetto — https://rationalreminder.ca/podcast/228

Episode 230: Professor Frank — https://rationalreminder.ca/podcast/230