Afford Anything - How Your Personality Affects Your Finances, with Dr. Sarah Stanley Fallaw

Episode Date: May 4, 2020

#255: When a crisis hits, do you stay calm and collected, or do you launch yourself down a rabbit hole of worry and worst-case scenarios? When the stock market spirals downward, do you shrug and stay the course, or do warning bells explode in your brain? When news of the pandemic hit, was your first instinct to form a calm and reasoned action plan, or rush to the store to buy months of supplies? Your personality influences your reactions to these scenarios. Today’s guest, Dr. Sarah Stanley Fallaw, has a Ph.D. in applied psychology and is the founder of DataPoints, a research firm based on the science of building wealth. What links between personality and money management has research uncovered? We discuss this topic in today’s episode. For more information, visit the show notes at https://affordanything.com/episode255 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else. And that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention. Any limited resource that you need to manage, there's an opportunity cost with everything. And that leads to two questions. Number one, what do you value the most? And number two, how do you align your day-to-day decision-making in a way that reflects that?

Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast, and today, Dr. Sarah Stanley Fala joins us to talk about how your personality affects your finances. Dr. Fala is the co-author of The Next Millionaire Next Door, which she wrote with her father, the late Dr. Thomas Stanley. He was one of the two authors of the classic personal finance book, The Millionaire Next Door, which told the surprising secrets of millionaires in America. Both books were the product of incredible amounts of research that went into discovering an incredible amount of data about millionaires in the United States. What was their early life like? How much money, if any, did they receive from their parents? what types of fields or occupations or careers are they in? How do they invest? Where do they live? Both The Millionaire Next Door and its sequel, The Next Millionaire Next Door, are groundbreaking books with regard to research and insight about millionaires in the U.S. Now, Dr. Fala is the director of research for the Affluent Market Institute, which is the research company that her father founded. And she also is the founder of data points, which engages in research.

around financial psychology. Today, she joins us on the show to discuss the Big Five personality traits and to describe how these traits influence the way in which you manage your money, your career, your investments, your life. We also discuss the impacts that these traits have on our investment and financial decision-making processes during high-stress or high-anxiety situations, such as a global pandemic. Here is Dr. Sarah Stanley Fala. Hi, Sarah. Hi, thanks for having me on today.

Thank you for coming back on the show. Absolutely. Tell me about some of your work with studying personality. And also, as basic as this question may sound, what is personality? How do you define it? Personality is really a combination of our values and attitudes and experiences. It kind of forms who we are, what we do. and it's really broad. And so in terms of the kinds of things that you or your listeners have heard of before, you can think of something along the lines of what's called a Big Five model. That's one of the most well-researched categories, if you will, of personality out there. So things like being conscientious. You can think of the folks that you know that might be very detail-oriented. They always show up on time versus those that maybe are a little more big picture. And,

you know, they just kind of fly by the seat of their pants. That's one of the areas of personality that you can think about. There are a lot of other ones, including things like, you know, how agreeable we are. So do we generally go along to get along? We try to keep conflict to a minimum. Or are we someone who really likes to say what we think? You know, we're not as in tune or maybe don't feel that relationships are quite as important as making sure that we get the right thing out, that kind of thing. So personality encapsulates a lot of different aspects of who we are and what we do every day. And you mentioned the big five. So two out of those five are agreeableness and conscientiousness. Can you review the other three? Yes. The one that we probably think about a lot is that introversion,

extroversion factor. So do I get energy from being around people and putting myself out there and talking with others? Or do I really get energy by being by myself and, you know, thinking about things, really deeply, not maybe reacting very quickly. That's kind of the introversion side. So that's another kind of aspect of our personality. The other one is called openness to experience. This kind of aligns with that creative side. So are you someone that loves going to new restaurants? Maybe not right now, but generally loves new and different kinds of foods. Maybe we'll put it that way. Different cabinets in my pantry. Right. Right. Exactly. Or do you like traditional things? You like pretty much do the same thing all the time every weekend. My weekend looks the same. That's kind of someone that might be a

little bit lower on that openness piece. And that, of course, aligns with individuals who are very creative and do work in things like marketing or graphic arts, things like that. And the last one, you know, I think about this specifically, you know, related to finances and that is emotional stability. Sometimes it's called neuroticism. That's kind of the flip side. But emotional stability really relates to the way in which we experience emotions. So someone that tends to be high on emotional stability doesn't typically get very fearful or anxious about what's happening around them. You can really think about that in the context of where we are right now. And those who are maybe lower on emotional stability tend to view things in a different way. They experience that fear or anxiety

when they see what's happening, let's say, in the markets or on the news right now. You know, they tend to worry. They kind of ruminate over things. And that can really impact someone's ability to make decisions. And all of these components of personality can impact our financial decision making. But when we think about, you know, really what's happening today and how we may be reacting to things today, that emotional stability piece is important. How situational or context dependent are each of these factors? For example, could a person have a high degree of emotional stability when it comes to managing their investments, but low emotional stability or high neuroticism when it comes to their family life or their relationships? Yeah, that's a great question. You know, generally, you are pretty consistent in terms of how you react and act in different situations. But there are some contextual things to think about. There's been a lot of research on that situational specific. So can I be very conscientious, let's say, on the job? But then I come home and, you know, my bills are a mess and I can't find, you know, any list that I've made. I don't know when people's birthdays are, anything like that, right? So there is some contextual piece to that, but oftentimes we are pretty consistent in terms of our, how we react in different situations as well. How malleable are these factors? Yeah, you know, personality is generally stable across someone's lifetime. You know, if you're conscientious,

when you're in high school and college and you get good grades and do your work and turn things in on time. When you start working, you're going to be the same. You're going to have really good job performance and things like that. But there is some research to show that as we get older, things change. And you can kind of think about that in the context of grumpy old men, for example, getting nicer as they get older. You know, sometimes that occurs. But in terms of kind of drastic changes to our personality or, maybe more quick, if you would say, you know, something like that,

changes to our personality. That can occur if we go through what we call a critical incident in our life. So I've been thinking about this particularly related to what's happening right now. You know, many of us who haven't had COVID-19 or haven't had a family member or loved one have it or had someone pass away because of it, sheltering in place has been maybe something of a nuisance, right? It's kind of an inconvenience for us, but those who have really been directly affected by it, they've had a significant life experience.

And that is when personality can change rather quickly, not always and not always in predictable ways either. But certainly it's the case that having that direct experience, particularly a negative experience, can lead to some change in personality. You know, there are a couple of examples of that, too. So if we think about if you're someone that is generally pretty calm and cool when it comes to what's happening around you, the news doesn't bother you, maybe even changes in the stock market don't really bother you. You're not really affected by them. This particular event can lead to some dramatic changes if you were directly affected by it. So for example, if you had a loved one that was working on the front lines, let's say in a health care facility and you were constantly worrying about. them, maybe they're not even living with you anymore because they don't want to infect the rest of the household, something like that. You may begin, and even in the future, may have some, you know, be more worried about situations like this. You know, another example, too, is for those who

maybe have experienced job loss because of this, instead of having maybe a personality that really views external factors as being something that didn't really matter when it came to their job. You may now view those external factors as being very significant. And that's a component of personality called locus of control, where I view external factors as being very impactful, whereas I feel like I can't do anything to really improve my situation. And that's more of an external locus of control. You just described locus of control as an aspect of personality. Is that as ingrained as personality or is that mindset? Yeah, so I think that's a great question. You know, we looked at this a couple of different ways. We measure that at data points, you know, looking at not only attitudes, but also patterns of behaviors.

And it's a little bit of both, right? So you can imagine that as we develop, for example, our adolescent life experiences could cause us to sort of have a mindset that, hey, there's not a lot I can do to improve the way in which my family lives or my lifestyle, I'm just all out of my control. And that could have been because of negative experiences that you had while growing up. But it is, you know, from what we know from academic research, we know it's a blend of both kind of how we're born and then the experiences that we have as we develop and grow older as well. So it's a little bit of both. So let's talk about how these personality factors that you've described, how they impact

our feelings, thoughts, and actions related to money and work at a time like this. Yeah. So, you know, really what we know is that individuals who tend to be very detail-oriented and, you know, high on things like loyalty, those conscientious folks out there that they know to the penny every, you know, they're what they're spending every month, those kinds of things. Those folks tend to do better from a network. perspective than those that aren't detail-oriented. That is something that's been found throughout the years. So no matter what environment we're in, if you're really focusing on the details of your finances, if you're diligently doing the things you need to do to manage your financial life, in general, you're going to be more successful. You're going to be able to meet your goals. Right now,

in terms of what's happening around us, individuals who are, I would say, less than detail-oriented, and I'll put myself in that camp sometimes. Right now is when you need to kind of turn on any kind of detail orientation that you have. And you can think about that in the context of making sure if you have subscriptions, for example, and services that you don't need, this is the time to really be diligent about looking at your budget and making sure that you're eliminating some of those. So again, all the time is a great time to have that conscientiousness piece. But if you don't typically act that way and you don't typically have that as part of your personality, it's now time to sort of call on some of those things

and think about ways that you could implement some more focused time to take care of your financial life. So in the example that you just gave, in which a person who typically is low on the conscientiousness scale, typically is not detail-oriented, this would be the most appropriate time for them to call on all of their inner resources and force themselves to behave in that way because that will be most beneficial to their financial life. How, though, could a person call on those inner resources at a time

in which they are experiencing unprecedented levels of stress and anxiety? Yeah, that's a good point. You know, I think that that's very tricky. I think that you also have to think about your other personality characteristics like emotional stability. So, you know, thinking through, you know, whether or not your emotional ability right now and sort of your mindset is able to make some decisions is important as well. I mean, what we recommend for individuals who tend to be lower on what we call frugality, which is related to conscientiousness, is to use tools and technologies that can almost make it so that you're not even thinking about some of the things that you might otherwise have to do from a diligent standpoint, right? So there are a lot of tools and

techniques out there that you can use to improve. But in terms of, as you rightly mentioned, the stress level, talking with others about this, looking to your network, if you have others that you are either friends with, family members, again, if you want to pursue a financial professional that's out there, looking to individuals that are acting in your best interest, to help you kind of set up a program or process so that you can pay attention to some of those details can be useful as well. So you've described how conscientiousness affects our management of money. What about the other four personality traits that we've discussed? How would those impact the way a person handles money, particularly in the middle of a pandemic? Right. So I think the other piece,

or the next one we can kind of tackle is that agreeableness factor. You know, we all want to be helpful and, or rather those that are high on agreeableness want to be helpful. They don't want to have conflict. They may be out there, you know, looking for ways to help their neighbors or their family members, that kind of thing. The trouble, if you will, with being agreeable in an everyday sense is that often that can lead to some not-so-great financial decisions. You know, if everyone wants to go out to eat, you maybe don't have the budget for it this weekend, but you want to go along anyway, you end up going, that kind of thing. Now, that's a very simple example. But there is research to show that those of us who tend to be a little more agreeable are also not maybe the best money managers from a household perspective.

So, you know, I think the things right now in terms of what to think about, if you tend to be someone that's more agreeable, think about the example, you know, on an airplane is to put the mask on yourself first and then help others. I think that that's where, at least from the folks that we work with that they're hearing from their clients, that that's where they're trying to help them is recognizing. you have to take care of kind of your household first so that then you can take care of others. I think that's probably the best advice in this situation, especially when you're feeling like there's so much I want to do. I want to help others. I want to be out there contributing, you know, whether it's time or money or what have you. But again, you know, ensuring that you are aligned or that those decisions are aligned with your financial goals is the first and foremost, the most important. What about people with low levels of agreeableness?

people who have no trouble embracing conflict. Right, right. And they're all at home and they're not helping anyone, right? No, no, no. I can't say that. But, you know, I think that the trick there is to recognize there's always a flip side. There's a flip side to any personality characteristic, whether you're high or low. There's always a positive and a negative on either poll. And, you know, I think that the struggle with individuals who typically are maybe lower unagreableness is that they're not, attuned to what's happening around them in terms of maybe how their family members are reacting or their friends. So they're not able to, or rather they maybe have little interest in kind of checking in with people, right? We're not seeing our coworkers right now. No one, you know,

again, if you worked in an office before, you're not seeing friends or, you know, other individuals that you might see throughout the community, making sure that you check in with them and recognize that some of them may need help, whether that's business owners that you know or friends and family members that you know as well. So that's kind of the opposite side of those that tend to be lower on agreeableness. The other main, I guess, personality factor, and we talked a little bit about this before, that tends to rear its ugly head in one way or the other during a time like this is that emotional stability piece. That from both a kind of how we react when we go to the store as well as how we react when we're looking at, you know, the markets go up and

down, that piece of our personality tends to be what is really going to kind of make or break us right now. And so while the others are important, this tends to be something that is even more important than it usually is. How can a person develop emotional stability around their money and their investments. So I think first, let's recognize the fact that emotional stability piece is, you know, do I feel negative emotions quite a bit compared to others? And so when you're thinking about how you might react or how, you know, your friends and family members might react to what's happening around us, you can kind of call on some past experiences as well and think about how you reacted and what made the most sense or what you would have.

have rather done. So I think about this just as an example, you know, when my my father passed away and I was going through grief and, you know, I'm typically not, I will put myself on the low side of emotional stability. I was definitely feeling like panic shopping when when this first all started. But when my father passed away, I quickly made a lot of decisions, a lot of decisions that maybe weren't in my best interest. And they were long-term decisions, like even writing a book or, continuing his business and things like that, that had I, you know, really been thinking about things, I might have made maybe not necessarily a different decision, but I may have made that decision in a different way. And so what I would say and what research and other financial

therapists talk about related to this emotional stability piece when it comes to either our investments or any other large-scale financial decisions is that, number one, take a time to pause so you certainly don't want to make any rash decisions, especially if you're feeling a lot of anxiety and fear. Seek assurance from a network. So if you, again, have family and friends that you call on that generally have really good advice. If you are working with a professional, whether that's a financial coach or advisor, you know, someone that can help kind of bounce ideas off of before you make that large-scale decision, that can be one as well. but also recognizing, and I think even doing exercises, to recognize that you do have some level of control over the decision that you're about to make and that the experience and the situation isn't controlling you. And I think that that's often what individuals who feel or rather are low on emotional stability feel like is that they're out of control.

They're helpless. Again, thinking about that panic buying when you go to the grocery store on March 16th, for example, there are things that you can do. You can still take control of your own decisions, even when, you know, the world is chaotic around you. When it comes to investing specifically, that volatility, we call it volatility composure. It's emotional stability related to the markets. And so those that tend to be high on that emotional or volatility composure take action when it makes sense to take action. And those that don't, one, to rush and try to control the situation. And so I think it's a combination of taking the time to or to sort of back away from the decision to reflect, to seek advice when it makes sense to do so, and then also recognize that the decision that you make is something that you can control, even if you can't control everything else that's swirling around you. What about the flip side of that? If a person has a high internal locus of control and now they feel excessive,

or shame around decisions that they've made in the past. They blame themselves for what they perceive as their financial failures. How does that play out at a time like this? Yes, individuals who have a high internal locus of control often feel some anxiety, especially when they look back on their own decisions, right? They believe that they can control everything. And so when they're in a situation like we're in today where they, obviously we can't control everything. They may feel a heightened sense of anxiety about the markets and things like that. I think that this is a really important time for those who view themselves as controlling everything to recognize sort of what they can and cannot control. So that's one of the exercises that's often given to help individuals who do have

that high locus of control. You know, write down everything that you can control about the markets right now and what you cannot control. The other piece is that we often see individuals who are, you know, if we are feeling very anxious and we do have high internal locus of control, so we feel like we can make, you know, the best decisions and things like that. We may not share how nervous or scared or apprehensive we are about the future. It's important to recognize that in yourself. If that's typically, you know, how you react, that you think that you can control everything, kind of give yourself some grace around that, that this is something that's out of control and have more of a balanced viewpoint about the things that you can do something about

and those that you cannot. I think this is especially important for those of us maybe who haven't seen something like this before. I think maybe we could all argue that none of us have seen quite what we're going through before. But, you know, if you weren't really aware of what was happening during, or, you know, maybe you weren't old enough to be aware of what was going on between 2008 and 2009, for example, it can be very anxiety-inducing. And so I think, again, it's recognizing what you can do, what you can't control, and then kind of having more of a healthy mindset around that by putting that all on, you know, again, in black and white. Let's talk about introversion and extroversion. Are introverts having their heyday right now? That's funny. You know, when we first started this,

My husband and I are both pretty much introverts, even though we do talk a lot or he talks more than I do. But we certainly thought, oh, this is going to be great. We're going to be by ourselves. We will get so much done. That kind of thing. I think that what the research or at least a lot of psychologists are seeing is that, you know, there are a lot of complex things that go into how you're feeling about being quarantined. Certainly introverts can get a lot of energy by being by themselves. But at the same time, whether or not we seek, and crave and need interaction with others isn't necessarily always an introversion, extroversion thing. There are some other components that are important as well. So generally from a financial standpoint, those who are extroverted tend to, especially if they have high incomes, they often are spending a lot of that money. Those that are introverted tend to spend less generally. That's just kind of what research has shown. But for right now, in terms of kind of how everyone's reacting, I think it's more complex than just being introverted and extroverted. There's

some other things that go into whether or not this is a good experience for you or something that's more of a pain. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech Hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your

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Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. In addition to the Big Five personality factors, are there other qualities that a person might have, such as confidence, that would impact the way that they are reacting to the current situation? Yeah, absolutely. A lot of how we're reacting, especially about the... related to our investments has to do with kind of how we view ourselves in terms of our self-esteem. You know, do I kind of view myself as someone that's capable and able to do things in general? And also what we call our self-efficacy. So do I feel like I'm someone that can actually manage my financial life effectively or manage my investments effectively. And so individuals who are very confident, which is sort of a combination of those two things,

both being, you know, having high self-esteem and having high self-efficacy about a certain area of finance, tend to believe that they can make their own decisions, you know, that they're very confident making their own decisions. They don't have to ask anyone. They can do the research themselves. They view themselves as very capable in terms of their investments. They may also be reluctant to take advice from others, which can be a good thing sometimes. I think that the downside of being extremely confident, though, is that overconfidence piece. So if your belief in your own abilities borders on being overconfident, this can be a really challenging time for you, particularly related to the ups and downs of the market.

You know, you may be succumbing to some of those behavioral biases or cognitive biases related to investing, thinking that you can time the market. things like that. So that's kind of the downside of being high, you know, on that confidence piece. Those that tend to be maybe not as confident may be doubting some of the plans that they've put in place, if they've put plans in place at all, they may be looking for confirmation for others. So if you think about what should I do next, they're kind of looking all the time. They're asking all the time for confirmation from others. They also may be reluctant to dive in to some of the technical details. I think this is why it's so important to continually build our knowledge about

whether it's financial management or investment management specifically, always listening and learning and reading more can be beneficial. Whether you're maybe not as confident as you want to be or you're very confident. It's always important to recognize that there are others out there that have knowledge and that you can always be building your knowledge too. So right now, in terms of how this plays out from the pandemic perspective, those that are lower in confidence right now are maybe feeling like the plans that they put in place aren't the best. They feel like they maybe can't make great decisions. And they're not going out to seek guidance or knowledge from others. And so that, I would say, is the thing to be aware of. If you're feeling like this is beyond me,

I don't even understand what's going on in terms of the ups and downs and the highs and lows, this is the time to build that knowledge and to become more of an expert than you were yesterday. And of course, things aren't going to happen overnight, but continuing to build that knowledge slowly can be very useful, especially right now where we have maybe more time on our hands than we have in the past. Likewise, for those of us that maybe are overconfident and, or I should say, bordering on overconfidence, that's a nicer way to put it, is recognizing that there are other experts out there, there are other ideas out there, and that even, you know, the best investors available don't know what's going to happen tomorrow. And I think that remembering that can be really, really beneficial.

With regard to financial decision making, how do we evaluate what is a quote unquote good decision versus what is a quote unquote bad decision, particularly in the context of unprecedented and trying times such as now? One of the things that I think all of us have to remember is that we have a kind of a unique perspective. We have a unique set of experiences and our personalities are all very different. You know, with that in mind and with all the other sort of demographic characteristics that each of us has, we're all going to react to what's happening differently. Some of us are going to feel panicked and want to go out and prep like we've never prepped before. Others of us are saying this is a myth and there's really nothing going on out there. There's a lot of different

reactions. But I think, like what you're saying, while all of our reactions are different and there really aren't any right or wrong reactions to what's happening right now, the consequences of those reactions or the decisions that we make can help or hurt how we are achieving our goals for the long term. You know, a lot of what we think about when it comes to personality is, am I in the right mindset right now to make a financial decision, particularly when we're thinking about altering, you know, our investment strategy or large-scale purchases right now, thinking about our unique reactions to that. Again, there's not a right or wrong reaction. I might be very nervous or anxious or maybe I'm very laid back about everything, but it's ultimately the decision that's

going to impact the trajectory that we're on. So with that in mind, it's important to recognize if we're overreacting right now, if we're sort of in an emotional state, that's the best state for us to make a decision. Are we getting feedback from others? You know, what kind of knowledge am I building or resources am I seeking out to help me make decisions? Those are the kinds of things we need to be thinking about right now. You know, and not worrying so much about, am I feeling the right way or is this kind of the wrong way to be reacting to everything that's happening around me. You mentioned that a decision can lead to consequences and those consequences can either have a be positive or negative. But that established there is also a distinction between

the soundness of the decision-making process itself and the result or outcome, you know, given that a number of variables affect that outcome, some of which may be outside of your control, like broad macroeconomic forces that could not have been reasonably anticipated. So how would a person evaluate the soundness of their decision making during times of high stress? Well, the first thing I would say is to make sure that you're in an emotional state where you can make good decisions. It's very difficult to make decisions in a time of stress, in a time of grief or, you know, any time of extreme anxiety, our decision-making ability declines when that occurs typically. Think about, for example, the way in which fighter pilots are able to keep their cool and make

decision, life or death decisions. It's because they're typically emotionally stable. Things tend to be very cool under fire. So when we're not, our decision-making capability can be really impacted. So when you think about, you know, you're confronted with a decision, let's say, maybe you're about to buy a house. You've had this decision going on for a long time, but you're kind of getting to the point where you're about to close on it, thinking that through, not from a kind of, oh, we've got to get this done right now, but rather from a long-term financial perspective can help you make a better decision. So running your decisions through sort of the lens of, is this the best decision for my long-term financial status and the goals that I have

outside of this one specific event can be really useful? But I think that the first, piece is making sure that you're sort of in that state that will allow that decision to be made. It really just depends on what the decision is and all of the other factors that may be going on around you. But the first step is to really make sure that you're in the right mindset to make that decision. As you talk about some of these actions that people can take, building your knowledge, talking to other educated investors, believing that you can time the market, it strikes me that all of those seem to be examples of trying to exert some level of control in this situation that has shaken a lot of people's sense of control. Yeah, you know, I think that that is where,

especially those of us who tend to be a little lower on the emotional stability side, can benefit from having essentially a checklist of things to make us kind of feel like, okay, there are some things that I can do right now. That can benefit those of us who maybe are feeling those emotions more strongly, as well as those of us who, again, have that high internal locus of control where we always want to control everything. But absolutely, having a checklist ways to improve what we're doing today, but also feel like we have some level of decision making related to what's happening around us can be very, very useful. And again, we see that too from a financial therapy perspective, having that short list of things that we can view and see and actually do something

about can be kind of empowering, if you will. You've mentioned that sometimes speaking with other investors and recognizing that other people know more or may know more than you can be educational and beneficial. But at the same time, you also mentioned that not listening to the voices of the masses, not designing your portfolio by committee. On the flip side, that's also a beneficial thing. Can you talk about that? Yeah, this is the piece where we have to think about from a personality perspective, how susceptible we are to the influence of others.

So if I'm someone that tends to look to others to help me make my decisions, especially if I lack confidence, I may be influenced by what others are doing from all kinds of aspects, whether it's what they're buying to, you know, what they're driving and what they're wearing, that kind of thing, too. So, you know, in terms of the guidance that we're trying to give to the folks that work with us is that their clients and, again, individuals who tend to be influenced by others kind of have to have sort of a checklist, if you will, again, going back to a checklist idea of the kinds of influence that makes sense, right? So looking for reputable, knowledgeable, experts in the field when it comes to the kinds of insights they're giving about actions to take

related to their investments. Also, not being susceptible to marketing tactics. We've had friends and neighbors that have shared with us that they've been, they've received a lot of solicitations from different folks in the financial services industry with all kinds of ideas about what they should be doing. And that's where having a network of folks that you can trust and kind of bounce ideas off can be useful as well. I think recognizing that there are individuals, particularly in the financial services industry, that are operating out of a fiduciary standard and are going to act in the client's best interest. That's obviously very important as well. But recognizing how typically you are influenced by decisions of others can be useful even when you're thinking about your

investments. Typically, when we talk about that, what we call social indifference, we're talking about it in the context of what people are driving, buying, and wearing. So do I want to fit in with my neighbors in terms of their lifestyle? That's where this really comes into play, particularly when we're talking about building wealth. But it certainly can be part of what's happening when it comes to our investments. How do you know, other than credentialed financial professionals who have a fiduciary duty, how do you know when you should trust the judgment of others? How do you know it's not the blind leading the blind? That's the real trick for sure.

We talk about patterns of behaviors at data points. That's what we focus on. Patterns of decisions, patterns of behaviors. Think about the advice that you're giving and the person that's giving it and think about the decisions they've made in the past. Have those been decisions that have turned out successful? Or have they typically been, you know, here's another. Here's another example of a bad decision from a financial.

Here's another thing that they bought that they shouldn't have bought, you know, that kind of thing. You know, that's one way to think about it. That's how we think about, you know, helping individuals, helping them understand their patterns of behaviors. That can be one way to sort of judge the relative expertise, if you will, of individuals that are giving you advice. You know, I think it's also incumbent upon all of us to build our knowledge so that we can then seek out those that are, that are, experts as well. So part of that is reading reputable sources related to personal finance, you know, listening to podcasts like yours, you know, things like that that, you know, are helping us build our knowledge so that then we can be better consumers of financial information overall.

And that is a trick for sure. But I think that the starting point is looking at those patterns of behaviors, looking at the kinds of advice that's been given and whether or not it's in general really solid or something that has been kind of suspect. So we've been talking about confidence and social indifference. We've been talking about how those attributes affect the way in which we handle money. What about our natural inclination to be either spenders or savers? Being frugal right now is sort of mimicking what happened back in maybe 2009 during the Great Recession. It's now become very, it's almost popular to be frugal. You know, you can probably see on social media posts and things like that, being frugal is kind of coming back into fashion. And rightfully so, you know, we're all trying to

prepare for this really uncertain future. The trick is whether or not those behaviors are going to sort of stick for the long term. In other words, if you are someone that doesn't tend to be very frugal when it comes to what you're buying and you, you know, maybe spend, more than you should every month. Now you have the opportunity to see, in many cases, the benefit of spending less. Maybe you've turned off certain services. You don't have as many subscriptions. And so that can help you see the benefit in terms of savings over time for these couple of months. As our lifestyles maybe goes back to normal or a new normal, it will be really interesting to see what happens from that frugality perspective. Will we all continue being frugal or will some of us

go back to sort of enjoying things maybe more so than we should given what's given our financial goals overall? This one's a trick because generally that frugality is a pattern of behaviors. We are generally savers or spenders. But, you know, some of us will come away from this experience, maybe being a little more of one or the other. So being frugal is a general pattern of behaviors. We know that many of us are more savers than spenders. Some of us just can't stand to spend anything at all on some things. And others of us are out there spending every dime we make. That's kind of a pattern of behaviors that tends to be pretty stable over time. However, right now, what we're seeing, you can probably see this yourself from social media

posts. And maybe you're feeling this yourself is that now it's very in to be frugal, right? We're all, we're making our own paper towels at home and we're, you know, all kinds of things that we're doing. We're coloring our own hair, that kind of stuff that we haven't done before. What you have to think about is whether or not you can leave this experience, having learned something related to being frugal, having seen some of the upside of maybe a more economical approach to how you live, that you're able to save more. you're able to maybe contribute more to long-term goals that you have for yourself, whether that's taking vacations in the future as soon as we're all able to do that or saving for some other kind of goal in the future.

You know, we've seen this. There have been studies looking at this kind of general sense of frugality during, like, the Great Recession, for example, and it quickly shifts back because if we don't take this experience and I would say maybe learn from it, then, it's just the case that we'll go back to spending the way that we did once things become a little more, you know, quote unquote, normal. Yeah, it strikes me that recency bias would play a large role in that. Absolutely. It also depends on your level of influence. So if you are someone that tends to be easily influenced by individuals around you and maybe everyone you see is being very,

very frugal right now, you're going to maybe feel the same way. And then as that spending starts to increase consumer spending especially, you may feel that push and that pull to do that as well. And so recognizing that about yourself can be really, really useful and can help prepare you for when things do start to change. And as you mentioned earlier, people with high levels of agreeableness may be more susceptible to that type of peer pressure. Right. Exactly. You know, hey, we're all getting together. We're going to go in and host a big party, a post-coronavirus party, right? and all of a sudden, you know, you're in for $300 and you didn't realize that. You know, when you said yes, you said yes without knowing it, I'll put myself in that camp sometimes.

You know, I want to agree to these things. They sound like a lot of fun. Does that fit in with everything else I'm doing? You know, and then I especially love what you say, which is you can afford anything, but you can't afford everything. And that absolutely fits into what we're talking about right now. Yeah, it does strike me that once this is all over, there will be some people who have pent up demand. and rush to every hair salon, restaurant, bar, tattoo parlor out there. And then there are others who will take a more conservative approach to their finances and lean more towards cash because they don't want to be caught off guard by a Black Swan event again. Right. I think that if you have viewed this event as something very significant in your life, you may be more inclined to prepare better in the future. part of that could be externally driven. That is, you either were sick, be with COVID, you saw someone that was, you lost a loved one, you lost a job, that can really influence you and spur you on to be more prepared in the future. Or if you simply start adopting the mindset that even if this wasn't significant from, you know, the ways that I just described, that you're going to take this event and decide that you're going to do something to prepare better in the future.

for it. That's another way that you can maybe trick your mind into making sure that this was significant and that this was a way to improve how you view finances in the future. We'll return to the show in just a moment. Are there certain personality types or certain character attributes that would make a person more or less likely to convert paper losses into real losses to panic about market conditions and go against years of training and convert paper losses into real losses or in other ways sabotage the progress that they have made. Yeah. When we study individuals who are really good at investing, who tend to make the best decisions, they tend to put money into a down market, they tend to not take money out of long-term

savings accounts and things like that, they tend to. They tend to. They tend to take money out of long-term savings accounts and things like that, they tend to be very confident in their investment decision making. They tend to be composed. And they generally have a knowledge base about investing that allows them to recognize what's happening in the markets. The flip side is that those who tend to be very anxious and worried, they tend to watch the markets, right? So consuming all of that information related to what's happening, those individuals tend to make rash decisions. They tend to make decisions. They tend to make decisions that are not in their best interest for the long term. If you combine sort of that emotional piece with lack of confidence along with lack of knowledge, that can be really a dangerous

cocktail for your investing strategy for the long term. So if you are someone or you feel like you're someone that maybe isn't as confident as you could be, you don't have a ton of knowledge about the stock market and you get really caught up in the highs and lows of the market, you definitely want to take a step back, begin building knowledge, which will obviously lead to helping improve your confidence about investing, and then save any long or rather major investment decisions for a few days. Take a step back from that decision and make sure that you're in a mindset that will help you understand the long-term strategy. and not just focus on the short term.

So on our website on datapoints.com slash research, we have a link to our understanding great investors white paper where we talk about five characteristics of individuals that tend to make really good investing decisions. And so you can learn a little bit more about those characteristics there and think about, you know, hey, am I on track? Am I someone that, you know, has those characteristics? And that's one way to kind of learn a little bit more about the psychology behind investing.

And what are those characteristics as an overview? Yeah. So going back to some of the things we've talked about, one of them is volatility composure. That's kind of the emotional stability of investing. How cool can you stay even when markets are really in flux? investing confidence. So going back to that idea of believing in yourself as an investor, believing in your ability to make good investing decisions. The other is risk personality. So generally having an openness to taking on some risk within your portfolio. Also risk preference. So having some preference for some level of risk in your portfolio as well. And then the last piece is investor judgment. So recognizing kind of the long-term strategies around investing, building knowledge,

understanding what the highs and lows of stock markets and how they work, that kind of thing. Well, thank you so much for spending this time with us. Where can people find out more about you and your research if they would like to learn more? Yep. They can go to datapoints.com. That's where we have a blog and a lot of the research that we've done. We have the links to the next millionaire next door. Obviously, they can go to The Millionaire Nextdoor.com, too, to learn about all of the research that my father worked on and all of the books that he wrote as well.

And if you go to datapoints.com slash personality, you can take one of our personality assessments and learn a little bit more about your own characteristics and how that may impact your financial decision making as well. That personality assessment sounds really interesting. I'm very curious to see how I stack up. Absolutely. Got to take it. Yep. Excellent. And we will link to all of those in the show notes as well.

What are some of the key takeaways that we got from this conversation? Here are five. Key takeaway number one. Your personality type directly influences how you manage your money. Personality is really a combination of our values and attitudes and experiences. It kind of forms. who we are, what we do, and it's really broad. You can think of something along the lines of what's called a Big Five model.

That's one of the most well-researched categories, if you will, of personality out there. So here's a review of the Big Five personality traits and how each trait influences our financial decision-making. One is the degree to which you are conscientious, meaning detail-oriented, punctual, versus the degree to which you think in the big picture, you're creative, you're visionary, but you may be more spontaneous, you might fly by the seat of your pants, and you may not be super attentive to details. Right now, in terms of what's happening around us, individuals who are, I would say, less than detail-oriented, and I'll put myself in that camp sometimes, right now is when you need to kind of turn on any kind of detail orientation that you have. And you can think about that in the context of making sure if you have

subscriptions, for example, and services that you don't need. This is the time to really be diligent about looking at your budget and making sure that you're eliminating some of those. Now, if you are low on conscientiousness, if you are not highly detail-oriented, automating your finances so that you can think big picture about what you want your money to do and then set up automations such that you don't have to tend to any of the details, the system just takes care of it for you, that is an approach that you can take in which your actions correspond to your personality type. If you are highly conscientious, you might enjoy having a detailed line itemed budget in which you know where every penny is going and into what category

and what that month over month changes. That might be something that fuels you. Whereas if you're more big picture, you may enjoy the anti-budget where you simply decide. how much you're going to save, pull that off the top, through automations, and then live on the rest. So that conscientiousness is one of the traits. The second trait is agreeableness. This describes our tendency to want to keep conflict to a minimum, or to be blunt and straightforward and say what we think, even if it might rub some people the wrong way. People who are highly agreeable may end up, For example, spending more money than they intended to because they just want to go along with the crowd. All of their friends are going to this thing and they don't want to be the party pooper.

So if that's you, if your people pleasing tendencies are interfering with your ability to stick to a budget, practicing some kind, polite, non-offensive ways of sharing your concerns and setting boundaries could help you avoid situations in which, you go along with the crowd and then suffer the financial consequences later. A third type is introversion versus extroversion. And broadly speaking, all else being equal, introverts tend to save more because they're not going out quite as much. They need some solo time at home to decompress. My husband and I are both pretty much introverts, even though we do talk a lot or he talks more than I do. But we certainly thought, oh, this is going to be great.

We're going to be by ourselves. We'll get so much done, that kind of thing. I think that what the research, or at least a lot of psychologists are seeing, is that, you know, there are a lot of complex things that go into how you're feeling about being quarantined. Certainly, introverts can get a lot of energy by being by themselves. But at the same time, whether or not we seek and crave and need interaction with others isn't necessarily always an introversion, extroversion thing. There are some other components that are important as well. If you'd like to learn more about introversion versus extroversion, episode 93 of this podcast is the episode

in which we interviewed the author of a book called The Secret Lives of Introverts. And that entire episode is dedicated to explaining introversion and discussing how to manage your career, your money, your life choices in the context of introversion. So you can access that at Affordainthing.com slash episode 93. That's Affordanating.com slash episode 93. But let's move to the fourth of the Big Five personality traits, and that is openness to experience. Are you the type of person who loves new and novel things? You love trying new restaurants, trying new meals, going to different cities or countries? Or are you the type of person who enjoys a routine? If you are into routine, if you're a creature of habit, then depending on the routines and habits that you set up, you may be in the habit of either frugality or overspending.

And so for you, tweaking those routines, tweaking those habits can be a way to decrease some of your spending. On the other hand, if you love new and novel experiences, then your challenge is to find a way to pursue those that also allows you to reach your saving and investment goals. So that is openness to experience. And finally, the fifth of the big five is emotional stability versus neuroticism. If you are high in neuroticism, you may experience a lot of anxiety. So for example, you might get fearful when you watch the news. Contrast that with somebody who is low on neuroticism, who may not get as fearful when watching the news. And of course, this personality trait, the way in which we experience emotions, impacts the way that we manage our investments because fear, anxiety, panic, those emotions can lead us to making poor investment choices.

And so those big five personality traits and the notion that your personality traits influence how you manage your money, that is key takeaway number one. Key takeaway number two. During this pandemic, your volumin. Volatility composure can be the make or break factor with regard to your ability to manage your investments well at this time. It's emotional stability related to the markets. And so those that tend to be high on that emotional or volatility composure take action when it makes sense to take action. And those that don't want to rush and try to control the situation. If you feel calm and composed, even as you watch your investments fall, even as you watch the balance in your 401K, your IRA, your taxable investment accounts, even as you watch those balances crumble and turn into a fraction of what they were, whether that's now during a pandemic or whether that's in any of the next bear markets or any of the future recessions that we will experience in our lifetimes, if you feel calm and composed and collected as,

the market crashes, then you're more likely to be able to resist the temptation to start fiddling with your investments. You're more likely to resist the temptation to engage in market timing. And you're likely to do better in the long term. By contrast, if you're in the latter camp, the camp of people who wants to rush in and control the situation, you might find yourself making rash decisions that lead to financial. disaster. And so the best thing that you can do is take a step back. Build your investment knowledge, build your financial knowledge, take more time to reflect on decisions, and don't try to meddle too much or change your strategy midstream or try to guess or time or speculate on the market.

So that is key takeaway number two. Key takeaway number three, social indifference makes a difference. The way we approach our spending and investing decisions can be highly influenced by the peer group surrounding us. Recognizing how typically you are influenced by decisions of others can be useful even when you're thinking about your investments. In general, what our neighbors are driving or buying or wearing has an impact on us. It influences us, each of us, to different degrees, to want to fit in with our neighbors and our community in terms of their lifestyle. Similarly, peer pressure can also influence the way in which we handle our investments. How confident are you in your investment decisions? Do you have an investor policy statement? Because if you're not confident or you don't have a set of rules,

then you may be more susceptible to false information or to following the crowd. So, create a checklist or write in your journal to reflect on who are you influenced by and in what ways? Develop a support network of trusted individuals to fall back on. People who you can bounce ideas off of. We have a great free community that you can access at afford anything.com slash community. It's full of people who listen to personal finance podcasts. A lot of people who are in the fire movement, people who are highly financially literate, who you can bounce ideas off of, you can ask questions, you can share successes,

you can share frustrations. This is your community, your tribe of people who you can talk to about how you're handling your savings, your spending, and your investments, and this gives you the opportunity to access a positive peer group. So again, join our community for free at afford anything.com slash community. And remember, when it comes to following the crowd, particularly when it comes to following people who have inflated lifestyles, people who spend most of what they make, if not all of it, the more that we can tune out negative influences, the stronger our bank accounts and our net worths will be. So social indifference makes a difference. That is key takeaway number three.

Key takeaway number four, know what is within your control and what is outside of your control. People with a high internal locus of control might feel more anxious because they operate under the belief that they can or should be able to control everything. And so when anything goes wrong, they may feel guilt or shame about not being good enough, about being inadequate, about making poor decisions in the past. Or they may feel anxiety about whether or not their current or future decisions are the right ones. So while having a high internal locus of control can be very beneficial in many ways, it can also turn into too much of a good thing. Write down everything that you can control about the markets right now and what you cannot control. Writing down what you can control and writing down what you cannot control can help give you a break and put things in perspective.

So if you have a high internal locus of control, that is a fantastic exercise that can help you. But what should you do if you have a low internal locus of control? If you are the type of person who feels like everything is out of your control, that life happens to you, that you've lost control, What can you do to regain a sense of control? Well, make a list of things that you can do right now to improve your situation. Recognize that you do have some level of control over the decision that you're about to make and that the experience and the situation isn't controlling you. And so that is key takeaway number four. Finally, key takeaway number five.

This pandemic has the. capacity to change your habits and your life. Dr. Fallow says that most behavior patterns remain stable throughout our lifetime. If we're introverts or extroverts, the chances are pretty good that that will remain true unless we experience a critical incident. Now, this pandemic can qualify as a critical incident depending on how it has affected you. So if you or someone in your life has been directly and highly affected by the pandemic and the global shutdown, this could rewire you, rewire your behavior patterns, your mindset, and the way that you frame and approach financial decision making for the rest of your life. If you have viewed this event as something very significant in your life, you may be more inclined to prepare better in the future.

As counterintuitive as it might sound, you can use this to your advantage. This pandemic can be a turning point for your finances in a good way. So, for example, frugality is really in right now. Now, you may have been forced into frugality due to getting furloughed or getting laid off. Or you might not be forced into it directly, but this pandemic might have shown you that it's a really good idea to save right now because those savings will give you a sense of security. and those savings will act as an emergency fund, which can spare you from some of the pain that you see other people experiencing.

So think about ways in which the rescripting that emerges from this pandemic can function as a turning point for good. Those are five key takeaways from this interview with Dr. Sarah Thalla. Thank you so much for tuning in. I have a special announcement. As you may know,

I teach an online class about real estate investing. The class is called Your First Rental Property, and as the name implies, or really as the name directly states, it is a class that is aimed at beginner rental property investors. And it walks you through everything you need to know to start investing in rentals, regardless of whether you're investing in state or out of state, regardless of whether you're house hacking versus buying a single family home that's 2,000 miles away, you might only lay eyes on once, you know, regardless of your strategy, your approach, this class will show you how to analyze properties, how to find properties, how to finance those properties, how to negotiate for and purchase those properties, how to think about renovations and upgrades, how to build a team around you, how to advertise your property for rent, how to screen tenants and how to maintain long-term tenants.

So this course is, I built the course that I would have wanted when I was getting started. And it's full of checklists, worksheets, small accountability groups, quizzes, spreadsheets, loads of resources that you need in order to buy your first rental property. We also have live Q&A office hours with me on Zoom. We have these regular Zoom calls where you can come to me with any questions that you have. We have graduates from previous cohorts, our alumni, who are working with us now as TAs for the course. We have forums in which you can talk to other students, and in addition to those also small accountability groups in which you and other students can get together to discuss your progress through the course. course to discuss any questions that you have. So we've put a lot of work into this course. I'm very proud of it. It's a 10-week-long course. You are welcome to self-paced through it if you would

like to, but we encourage you to go through it with the cohort so that you will have a group of students who share the same camaraderie and who can give one another support and accountability. Now, we only teach this course twice a year. We have a spring semester and a fall semester. If you would like to join us, enrollment for the spring semester opens on May 18th, 2020. And that enrollment window is one week long, so we will close our doors on May 25th, 2020. If you don't join us by that time, then I'm sorry, we can't let you in. You'll have to wait until the fall. If you are interested in taking this online course, getting set up with all of the knowledge and the tools and the resources

and the group accountability that you need in order to buy your first rental property, then welcome to the Spring 2020 cohorts. May 18th is the day that we open enrollment, and you can get all the details at affordanithing.com slash enroll. That's afford anything.com slash enroll. That's where you can join the VIP wait list and read loads of details about the course. Thank you again for tuning in. If you enjoyed today's episode, please share it with.

with a friend or a family member, and make sure that you hit subscribe or follow in whatever app you're using to listen to this podcast so that you don't miss any of our upcoming shows. My name is Paula Pan. This is the Afford Anything podcast, and I will catch you in the next episode.