Redefining Behavioral Finance for the Modern Investor with Brian Portnoy (EP.206)

0:28We all need to make smart decisions with our money. at CFA Live, the CFA Institute's Global Annual Conference, and my friend Brian Portnoy and I shared the main stage to talk all things behavioral finance. You'll hear why the traditional view of investor psychology may be too narrow and what's replacing it. Brian also shares a powerful five step framework for navigating market volatility, the role of storytelling and more meaningful client relationships and what the rise of AI means for the future of financial advice. And I am also excited to share right now on this podcast for the first time, I am writing a new book that will be out in the summer of 2026.

1:10It's called The Perfect Portfolio, and I'll be offering exclusive updates, early excerpts, and special bonuses to subscribers so you can sign up to subscribe for those updates at theperfectportfoliobook.com or just click the link at the top of this episode's description. Now, let's dive in to my conversation with Brian Portnoy. Hey, everybody. My name is Peter Lazaroff. I'm the Chief Investment Officer at PlanCorp. We're an RA based in St. Louis. We manage between$7 and$8 billion, depending on what the market is doing. And I'm also the host of the Long Term Investor Podcast, a podcast that's nationally syndicated.

1:52And today's conversation will actually be publishing on May 28th. So if you want to go to thelongterminvestor.com, you could subscribe anywhere where you listen to podcasts. My guest here today is Brian Portnoy. Brian, I think you can do a better job of giving your background because I think we're talking about behavioral finance, fascinating topic, but I also think it's one that doesn't necessarily get covered in the right way anymore. And I was really excited when I was able to hear that you were joining me today to talk about this topic. Maybe give us a deep background. You've done a lot of things in the space.

2:26Cool. We have 56 minutes and 12 seconds. I'll leave two minutes at the end for questions. I actually started my finance and investing career here in Chicago at Morningstar, a boutique little investment research shop that maybe some of you have heard of. But when I was there, there were 350 people. It was an amazing experience. Fast forward through now a 25-year career in the industry. A good chunk of that has been on the investment side, investment research, portfolio management. I worked for one of the bigger fund of hedge funds in town for quite some time, was the director of research there.

2:58So I've managed large portfolios of complex investments. Lived in London for a while. Actually, the keynote speaker was talking about 2008 flash memories. We lived in London with our family at the time. It was a hell of an experience. And about 12, 13 years ago, I was sort of stepping back. It was one of several midlife crises that I was experiencing. And I began to start reading in social psychology, behavioral finance. The very first book in the space that I read was not Kahneman and Tversky or Thaler or Ariely or any of those legends. It was Sheena Iyengar's The Art of Choosing, which is a beautiful research, but also a meditation on how choice and agency fits into a life well lived.

3:41And it was just a real light bulb moment. And so fast forward to now, I've written three books in the field of applied behavioral finance, published in 15 languages, which I'm kind of proud of. And one of them is called The Geometry of Wealth, probably what I'm best known for. The first book called The Investor's Paradox was how to pick better mutual fund and hedge fund managers through a behavioral lens. And that was a fun project. Toward the end of that project, I said, well, what does this really matter? And so I stepped back and thought more broadly about where money fits into a meaningful life.

4:13So the geometry of wealth sort of took off. And at a certain point, I decided to take that on the road, so to speak. I transformed the geometry of wealth into Shaping Wealth, which is now a global content and coaching platform. We work with Peter's firm, PlanCorp. We work with firms on six different continents. If anyone here knows any financial advisors in Antarctica, I am desperate for that win. But in the field of what I'll call applied behavioral finance, and we're going to get into how broad that is now, because it's just not judgment and decision-making. It's emotional intelligence. It's positive psychology.

4:48It's a lot of really fascinating and dynamic fields that map to the dynamic element of the wealth industry, which is going beyond just managing client portfolios and really digging in more deeply into conversations about a life well-lived and where the money part fits into all of that. So I've got a team of experts in financial planning, psychology, neuroscience, and we create content, workshops, courses, seminars, you name it, both live, asynchronous. We have a content platform called Compass. You are the guide. We are your compass. So compass.shapingwealth.com. It's a free content platform, hundreds of pieces of bite-sized, read, watch, listen on the human condition as it intersects with financial planning and money management.

5:32Wonderful, because I think what you all get the feeling is why I asked Brian to join me today. We're going to be talking today, not just about the evolution of the investment profession and how we can become better investors or advisors through a behavioral lens. But I think because I have experienced some of the behavioral coaching that Brian's company does through shaping wealth, how I've seen it's impacted our advisors, and how I myself am applying behavioral insights into real client conversations, you're all going to learn a lot here today and go beyond that base level of behavioral finance.

6:04But before we get into that, I thought we maybe would just start whether at the macro or micro level. What do you feel like the average investor is thinking and feeling today? From the headlines, what the hell's going on? There's never a time when things are certain, but it feels like there's a lot of moving pieces right now. I actually just did a talk a few nights ago to a thousand mom and pop investors. And it was really fun experience because I got to watch the chat go as I was giving my remarks. And where is this all coming from? The pace of change, whether it be politics or AI or other major macro and micro influences, I think there's the question of not just, hey, what the hell's going on?

6:46But is this normal? Has this happened before? We are deeply wired to be pattern-seeking creatures. So we are always reflexively, you really can't escape it. We're looking at the world and saying, what is this like? So we did a fun piece at Shaping Wealth not long ago. One of my partners, Dr. Joy Leary, who's an amazing professional psychologist, expert in financial therapy, all-around wise person and empath. Well, her husband's a very senior officer in the U.S. Air Force. They've lived all over the world. And she introduced this concept that the U.S. military created 30, 40 years ago, maybe during the time of the Berlin Wall, so called 30 years ago.

7:24So the concept is VUCA, volatile, uncertain, complex, and ambiguous. And it's a concept that the U.S. military put into place to sort of describe and capture these punctuated moments where you say, is this normal? What's really going on here? VUCA, volatile, uncertain, complex and ambiguous. And one thing I'll add to that VUCA mindset, because I think that's where we're at, we're at a VUCA moment, is that the human mind is wired to have certain reactions to this depth of uncertainty. There's a few ways that we're sort of reacting and groping. And I think it's important to take note of these because it gives us an entry point to better client conversations, managing employee expectations, things like that.

8:10So in VUCA moments, number one, we're reaching for narrative. We're going to talk about storytelling at a certain point, I believe, but let's never forget that we were not born as calculators. We were born as storytellers. So we're always looking for the story that makes sense, especially during VUCA moments. We are looking for control. We don't like environments where we feel like we don't have much control. Back to that book I mentioned, The Art of Choosing by Sheena Iyengar. So much of that book is about the power of agency and what it feels like to have control versus things being very out of control.

8:43A third element of these VUCA spikes in terms of how humans react is that we reach for community. We reach for tribe. What is everybody else around me doing and thinking? Again, there's no getting around some of our hard wiring as it relates to our need to belong, that sense of connection. If anything, the tribe gives us a sense of safety, not only physically, but psychologically. So what's on the investor's mind? They're scrambling to find the patterns. They're scrambling to find the connection. They're scrambling to find the stories that make sense at times like this. And what's awesome about this conference and the types of people who are here is that we're very well positioned to bridge that gap and do some good for our clients.

9:28There's so much in there. You mentioned storytelling. You're referencing a lot of the way that people feel. And I think of my introduction to behavioral finance, I feel like Jason Zweig's Your Money, Your Brain was the first time that it occurred to me that something other than what I learned in school is impacting the way that my clients are behaving, impacting the way the investment committee is behaving. I remember sitting on an investment committee where we're picking individual stocks and it was like a hotbed for a behavioral finance textbook. One of the things I enjoyed about it then was this, oh, look at those silly little human moments where you can identify and recognize all the behavioral biases, whether it's recency, loss aversion, overconfidence.

10:12But what is also standing out to me in your experience and in books that you've written, like The Geometry of Wealth, is that instead of just pointing out these behavioral works that make us human and are perfectly normal, totally fine to feel and important to recognize, you actually have gone a level deeper, in my opinion. I've heard you from time to time call it behavioral finance 2.0. Can you talk a little bit about that? I love the feeling of standing on the shoulders of giants following my heroes like Kahneman and Tversky, who basically in the 1970s were looking at how people make decisions and they're like, let's look over to the US economics profession.

10:50They're really smart and successful. Let's see how they conceptualize human decision-making. And they said, my God, they don't have any idea what they're talking about. So they went ahead and invented a whole new field of investment decision-making called behavioral finance. If you don't know the history, it's not hard to make behavioral finance interesting because it's the psychology of money. So Michael Lewis published a book called The Undoing Project some years ago, if you want to get into social history of behavioral finance. So there is this unbelievably rich legacy spurred by those two gentlemen and carried on by Dick Thaler here at the University of Chicago and many others, broad-ranging, complex, fascinating.

11:29The challenge is that as the investment industry and the wealth management industry connected to learn from this for one reason or another, just call it an accident, just call it evolution. We've focused on such a narrow piece to what those wonderful scholars taught us. And specifically, all we talk about almost all the time is biases and heuristics. I took the CFA exams 25 years ago, so apologies that I can't remember what was on them, but I don't remember it being a big part there. And the extent that people find behavioral finance interesting, they want to lean into all of these quirks or biases, loss aversion, the endowment effect, recency bias, confirmation bias, mental accounting.

12:13There's literally like 190 of these. Go to the wiki page. And it's not that it's wrong, but it's so terribly incomplete. It has led the investment and wealth industry in directions that haven't been particularly fruitful. And I'll punctuate it by saying that basically what we've done as an industry is pathologize normal human behavior. We've pathologized normal human behavior by saying you are flawed. You are irrational. Irrational is nothing more than an economist's fancy word for stupid. We spend a lot of our time calling our clients stupid. We use the word irrational. Advisors have reacted very differently to the last couple months, good versus bad advisors, in my view.

12:53So let's broaden the lens. Let's widen the aperture and start not with human beings as flawed, but instead human beings as being normal and having a whole series of really fascinating adaptations to a complex world that we've evolved through millennia. And with that, we can pivot in a variety of different ways that answer is not how can we be less rational, but instead, how can we flourish? How can we live lives of meaning? How can we live lives of purpose? Because to be honest, whether a portfolio manager or a financial advisor, almost none of the time is your client saying, geez, I hope there's a little bit more alpha in this portfolio.

13:31No, they're answering foundational questions as to, am I going to be okay? Are my loved ones going to be okay? How much is enough? Where does money connect to happiness? Those are the bigger picture question that our clients have in mind. So we can move on what I call going beyond bias, BFI 1.0 to 2.0. And we go from it being an emphasis on analytics and now adding some balance into empathy. So to me, in the age of AI, emotional intelligence is everybody's superpower. Self-awareness, self-regulation, empathy, relationship skills, leadership skills, and so forth. So BFI 2.0, it's not that it's not analytic, but it leans into empathy.

14:11Numbers versus story. BFI 2.0 recognizes that we weren't born as calculators. We were born as storytellers and that every one of our clients, every single person in this room is living a story, a series of stories. and we are more or less aware of those subconsciously, consciously. And when our clients are working with us, the focus isn't just, well, what do I want to do or what do I want to own? It's also, who am I going to be? Another element of BFI 2.0 is that it pivots from weakness to strength. So what I said before about pathologizing normal human behavior, well, there is an older model of medicine, a disease model of medicine that basically says, If somebody's sick, let's cure them.

14:53And management has adopted that over time. But the whole field of positive psychology, and I'm not sure if folks are familiar with it, but this is basically the science of happiness that was invented by Marty Seligman at the University of Pennsylvania starting in the 80s and 90s. And now go to the bookstore at O 'Hare at Barbara's bookstore. Half the books are in positive psychology. There is a massive and well-funded and constructive evidence-based research into what makes a life well-lived, connecting Aristotle's concept of eudaimonia 2 ,400 years ago to collecting evidence as to the value of gratitude, the value of community, the value of many other things.

15:30Behavioral 2.0 is a massively wide vista that gives everybody here the next leg to their career to connect to their clients in a way that really matters to them. You mentioned something in there like AI. By the way, you can put questions in your app. You'll see me playing on my iPad every once in a while so that I can approve them. And then you can vote them up or down. And we got an AI question. I think we'll work in there a little bit. But ultimately, this idea that whether you're an advisor or a money manager or an analyst, we're often thinking of how do we solve that problem? And we're looking at the behaviors as something to solve.

16:07And I've always thought you can't take the human out of human behavior. We have to build solutions around them or construct them within. And I feel like in a world where AI can generate a financial plan or an allocation, and maybe it can't do it perfectly yet, the human edge, as you mentioned, is going to be that emotional intelligence. It's going to be asking better questions. You mentioned joy. It's a great example. You said you have to listen like a therapist. Everybody here in the room is probably in the finance profession, whether you're working with individual clients or analysts or executives or institutions, you have to really hear what the people are saying.

16:43How can you do that? You can ask better questions. There is an art to asking better questions, right? Absolutely. So when we work with clients at Shaping Wealth, and they It could be one-person RIAs. We have clients who have more than 10 ,000 advisors on the platform, and we create design learning journeys for any number of those firms. The opening framework that we use is what we call mechanics versus guides. I was on the investment management side of the industry for 15, 17 years, and now I've been more on the wealth management side for the last decade or so. In the wealth management space, advisors are helping people move along life's journey, Doing so wearing two hats as a mechanic and as a guide, as a technical expert with expertise in building portfolios, putting together estate plans, optimizing for taxes, all those sorts of things.

17:33Mission critical, non-negotiable in their importance. But the other side of it is that they are guides, that financial advisors are humans helping other humans navigate uncertainty, change, and complexity. Those aren't going anywhere. And our mission statement at Shaping Wealth is we train the guides. Four words. We train the guides. We assume that you guys are very, very well-trained experts and that you know how to build a great portfolio. Now, we can maybe circle around later as to whether or not AI is commoditizing some of those technical skills. But on the guidance side, well, what are the skills that are relevant and how do you learn them?

18:09One of them is asking questions. So a key principle in channeling Joy Leary again, I would strongly encourage everyone, number one, to understand the power of questions. Questions open up spaces if asked the right way. Questions excite possibilities that might not have been there before. Questions inspire agency that we all deeply crave. So questions are, They're more deeply powerful than I thought about up until a few years ago, given what we've been building and the types of clients that we're working with. If there's one principle I'd want to share with everybody to really emphasize is that we should think about questions as invitations, not interrogations.

18:51We often ask questions as technical experts in order to fact find, to get the information we need in order to build the portfolio in a way that comports with the client's express goals or risk tolerance and things like that. We ask questions in a financial planning context in order to understand goals and risk tolerance and time horizon and things like that. There's obviously nothing wrong with fact finding. But in terms of how do financial professionals excel now in an age of AI via question asking, if we think of questions as an invitation instead of an interrogation, it really opens the space and then there's better types of questions.

19:30Ultimately, the referral worthy moment in our space is really not finding the next NVIDIA. It's fun to try. Trust me. We all know that. The referral worthy moment is when the client feels seen and heard and they say, wow, this feels right. I didn't know it could be like this. And they tell their sister or their neighbor or their coworker. And now that person wants to work with you. They want to buy into your advice business or into your portfolio. Invitation, not interrogation. So if we are addressing a client, I think of when I go into a client meeting as chief investment officer, I don't have any clients of my own, but advisors will call me in when a client is nervous.

20:09And I always try to understand the why, because you'll see an email and it will say, my client is worried about XYZ, or maybe they'll even forward the client email and it'll say, I'm worried about XYZ. And I always think, I wonder what they're worried about. They want to know about this news item, but are they worried about their portfolio? Do they just want to know that we're thinking about it? Are they worried that they won't be able to live the life that they had designed carefully with their advisor? One of the questions that we got in from the audience is, what's the most beneficial messaging to investors during periods of volatility?

20:43And are you grounding investors in their objectives? Ultimately, I feel like educating throughout is really empowering. Then when someone does have an issue, it's asking these questions. And so if somebody says they're worried about the markets post-Liberation Day, for example, since we'll kill two birds with one stone, that's a question in there. And I might say, well, okay, tell me what's on your mind first. The first step that I'm going to take is before sharing what I think, I want to hear what my client thinks. Because as you said, when you ask good questions and you listen and you empathize with them, suddenly you might pick up on cues where your response might change.

21:18The problem may not be at all what they are saying it is. They really just want to know, am I okay? When I think of the most recent bout of volatility, anytime you have an election, this is my experience, at least half of our clients are going to be a little upset. What was challenging for me this time around was clients who were upset from November to February, and they said, I want to get out of the market. Things are going to go bad. And we say, well, no, stay the course, and you do all the things to educate. But then something bad did happen in the market, and we did lose money. If the audience wants to know narratives, I point to earnings.

21:49Yeah, I say at the end of the day, remember what you're investing in. Is Coca-Cola going to stop trying to sell soda? Is McDonald's going to stop trying to sell cheeseburgers? And when you see the big fluctuations in price, that's largely people just pricing in what they think current or future earnings is going to be. And nobody knows. That's why they're big shifts. That's just the technical piece. So now maybe you've answered the client question, but if you don't ask them questions, you may not actually settle the real issue. So in terms of process or thinking about the different layers of why, how would you advise people think about those situations?

22:24I just want to reflect on the message that you put forth, because it's important, which is that expertise matters and competence matters. The social currency of any society is trust. Trust is essential, but it's hard to achieve. It must be earned and it's relatively fragile. So the anecdote that you just shared is important because there's multiple sources of trust conversation, but one of them is competence. One of them is excellence in your craft, because if you can communicate that clearly, and there is a line between communicating your competence and overwhelming someone with information and charts and pictures and things like that, that they might not be able to understand, then I would say kudos to you for stepping into that breach and giving people a clear perspective on how things might be okay.

23:11Because, and you emphasized it, if there's one question humans, all of us humans are asking every single day, 99 % of our thoughts are not for us to actually realize, but it is going on. It's the low hum of this software that's always running. It is the question of, am I going to be okay? I'm a little bit of a broken record about that because as a species, we are the dominant species on the planet for a few different reasons. But one of them is that we have a sensitivity to danger that is so fine-tuned that if anything is off a little bit, either physically or psychologically, we sense it. And that fight or flight tendency kicks in.

23:48We're not the fastest. We're not the strongest. We don't have fur. We don't have claws. But look at us. We're killing it. Way to go, people. And it's in part because we have that survival instinct. And guess what? Our deep ancestors who didn't have that, they're not with us right now. So we've inherited a gene pool that is finely tuned to survive. So we put out the beginning of April when things got a little bit janky. That Monday morning, I was sitting, you know, we had our weekly huddle. Half my team's in Europe, so we do it early morning in Chicago. I was like, guys, we have a lot to do, but time out on everything.

24:23Let's communicate to our thousands of clients throughout the world ways to talk to clients in a manner that is going to be constructive because these are the times when you earn that trust, you keep that trust, you're doing right by your client, but you're also widening the moat on a profitable business by doing the right thing. One of the things that we sent out, and we put this together a year or two ago, we call it our laser protocol. The Compass platform has all of this. I can't recall if it's right there to click and download, but we designed a protocol called laser. Listen, assess, scaffold, educate, revisit.

25:01And we do hour-long seminars for advisors on how to execute the laser protocol. But basically, let's go to the E first in laser. All of us here, CFA charters, MBAs, PhDs, we're kind of a smart lot. Good for us. So in a generous way, in a virtuous way, we want to share that knowledge with others. Hey, you've got a challenge. Let me tell you what's going on. Let me give you stuff that's going to help you understand the world. And we make the presumption that that wealth of knowledge is going to be the solution to what ails them. It usually isn't. As another human tendency, facts don't really change our mind.

25:42We're actually wired so deeply with narrative that we spend most of our time finding fact patterns that reinforce what we already believe. It's known as confirmation bias. So listen, assess, scaffold, educate, revisit, and I'll get to the other four letters, the tendency of most of us in this room, my tendency still, and I work on it because I'm not always great at it, is here's what you need to know. We want to educate. We want to give them a graph. We want to do that sort of thing. It's not the most effective way to solve your client's problem and to extend and scale that trust. You'll get there, but there's other things that you need to do.