Aug 28, 2017 · 1h 7m · capital-allocators
Dan Egan – Better Investment Outcomes (Capital Allocators, EP.23)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Dan Egan, Director of Behavioral Finance and Investing at Betterment, joins Ted Seides to explain how quantitative behavioral economics, automated tax management, and intentional interface design optimize investor outcomes. The conversation explores algorithmic rebalancing, crisis communication strategies, and the engineering required to scale fiduciary wealth management.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 21.5% of the talking time here. How this is scored →
Ted as informed peer 4.0 Guest teaching 5.6 Guest disagreement 0.8 Ted pushing back 0.9
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 41:18 Dismissing active vs passive as a distraction
Dan forcefully rejects the premise that active vs passive debates matter for individuals, calling all the ink spilled on it a total dead-weight loss.
Hardest push from Ted ▶ 19:29 Questioning long-term TLH compoundingTed directly challenges the value proposition of tax loss harvesting over multi-decade horizons, arguing that accrued gains eliminate opportunities.
Biggest teaching moment ▶ 19:47 Mathematical breakdown of tax loss harvesting valueDan systematically reframes Ted's skepticism by outlining the three convex compounding mechanics: ordinary tax arbitrage, reinvestment, and inflation erosion of future tax liabilities.
Ted holds their own ▶ 45:16 Equating retail and endowment behavioral thresholdsTed connects Dan's retail principles to institutional reality, asserting that regardless of sophistication, endowment boards and retail investors cut investments at the exact same pain threshold.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Dan Egan's Academic Path and Early Career | 3 | 3 | 1 | 0 | Ted opens with a friendly analogy comparing Dan's career path to Gladwell's Outliers. Dan explains his background combining economics and cognitive psychology to study decision-making. | |
| Applied Behavioral Finance and Tax Impact Preview | 4 | 6 | 1 | 1 | Ted asks how Dan translates scientific research into automated behavioral tools. Dan details his previous experience at Barclays Wealth and reveals data from Betterment's Tax Impact Preview test. | |
| Betterment's Core Portfolio Framework and Glidepaths | 4 | 5 | 0 | 0 | Ted inquires into Betterment's core portfolio construction philosophy and asset class coverage. Dan explains their market-cap weighting with factor tilts and liability-driven glidepaths. | |
| The Mechanics and Compounding Power of Tax Loss Harvesting | 5 | 8 | 2 | 4 | Ted challenges the conventional wisdom of tax loss harvesting over long horizons, arguing that embedded gains eliminate harvesting opportunities. Dan corrects him by showing how benefits compound monotonically through tax rate arbitrage, reinvestment, and inflation. | |
| Automated Rebalancing and Drift Threshold Management | 4 | 5 | 0 | 1 | Ted asks about the practical and institutional differences in rebalancing methods. Dan explains their 3% drift threshold algorithm and how deposit allocation avoids taxable events. | |
| Communicating Complex Strategies to Diverse Client Segments | 4 | 6 | 1 | 0 | Dan describes designing UI to prevent panic selling, such as withholding individual stock volatility and using forward-looking color palettes rather than past performance cues. | |
| Mental Accounting, Shifting Goals, and Decumulation | 3 | 6 | 0 | 0 | Ted asks about client demographic drift and changing financial goals. Dan explains how mental accounting and labeling goal buckets aids both disciplined saving and comfortable decumulation. | |
| Managing Investor Behavior During Market Drawdowns | 4 | 6 | 1 | 1 | Ted questions how robo-advisors survive market crashes without live hand-holding. Dan shares empirical data on customer communication experiments during market pullbacks. | |
| Commitment Devices and Crisis Desensitization Tools | 3 | 6 | 0 | 0 | Dan discusses developing commitment devices and crisis desensitization simulations to train investors before volatility hits. | |
| Active vs. Passive Investing and the Power of Savings Rates | 5 | 7 | 3 | 2 | Dan strongly dismisses the active vs. passive debate as dead-weight loss for everyday investors, proving that saving an extra $33 a month outweighs finding a 1% alpha manager. | |
| Integrating Human Financial Planners to Automate Advisory Systems | 4 | 5 | 0 | 1 | Ted inquires why Betterment hired live CFPs. Dan clarifies that human advisors are used to triage non-scalable questions and help codify new algorithms to automate their own tasks. | |
| Professional vs. Personal Portfolio Management and Feedback Loops | 5 | 5 | 1 | 2 | Ted observes that professional investors often abandon discipline in their personal accounts. Dan attributes this to emotional feedback loops and lack of negative accountability. | |
| Betterment's Identity: Technology Firm with a Fiduciary Mission | 4 | 5 | 0 | 0 | Ted probes Betterment's identity tension between being an asset manager and a technology company. Dan discusses team composition, hiring for cognitive diversity, and fiduciary duty. | |
| Future Frontiers: Algorithmic Personalization and Granular Feedback | 4 | 6 | 1 | 0 | Dan details upcoming research frontiers, including algorithmic personalization of UI and tight decision feedback loops to help retail investors trade less. |
Statements from this episode (24)
Egan: Behavioral Finance Knowledge Does Not Stop Irrational Decision-Making
“It doesn't stop you from having all of those issues. It doesn't stop you from making irrational decisions. It doesn't make you some sort of super rational person. It just does give you a framework of saying, okay, this is why this is happening. This is how thi…”
Egan: Betterment tax impact previews reduced trade completion rates by 70%
“And what we found was that if we showed them a positive tax number, they were about 70% less likely to go through with a transaction. If you look at transactions that would have incurred 50 dollars or more in taxes, the completion rate was somewhere around eig…”
Egan: Changing portfolio allocations trades certain tax costs for uncertain benefits
“Taxes represent a fairly certain cost. Whereas, generally when people are changing their allocation, they're looking at an uncertain future benefit. So, if I reduce my risk today, I think that at some point over the next year, markets will drop, and I will hav…”
Egan: Tax loss harvesting is most valuable during an investor's first decade
“So strictly speaking, the value of tax loss harvesting grows over time monotonically, but it is convex. So the tax loss harvesting you do the first sort of 10 years of your life will be the most valuable tax loss harvesting you ever do. It will continue to be …”
Egan: Tax loss harvesting acts as structural arbitrage on tax rates
“So generally speaking, you are using investment losses to offset ordinary income. Ordinary income is your highest marginal tax rate. You embed a tax gain in the portfolio that you then pay off generally 20 or 30 years in the future, and that's going to be the …”
Egan: Marginal gains from over-optimizing rebalancing methodology are very low
“The marginal gains from thinking about rebalancing too much are really low. As long as you think about, like, the tax component of it, and you're not letting your asset allocation get crazy, You're fine. If it's daily, quarterly, monthly, annually, drift-based…”
Egan: Only 5% of Investors Demand Deep Technical Due Diligence
“I would say five percent of the population is going to be a sophisticated investor, and they want to know how we do it, and how we calculate the benefit, and everything that you would think is sort of good due diligence on it. The other 95% of people want to t…”
Egan: Wealth platforms must build for 5% of experts to win 95%
“The 95% of normal people, they're asking the five percent of people who they should use. So you can't simply say, oh, well, we'll just target on the 95%. You actually have to provide the transparency and knowledge for the five percent of sophisticated people t…”
Egan: Betterment hides individual security returns to enforce diversified portfolio framing
“One good example is that we don't show individual item, individual security returns. You can only ever see the returns of your diversified portfolio.”
Egan: Advisors cannot implement behavioral finance without controlling software interfaces
“They might want to implement some of these insights from behavioral finance, but unless you control the technology, it's very hard for you to do that.”
Egan: Retirees struggle psychologically to spend down accumulated portfolios
“If you talk to financial planners, especially who work with retirees, one of the biggest problems is that they have a really hard time spending down their portfolio.”
Egan: Earmarking accounts for virtuous goals stops people from raiding them
“There's a whole line of brilliant research on goal-based investing that says, if you title this goal, Bobby's college fund, you are dramatically less likely to take money out from there and go to Vegas. If you name it in your market for a virtuous thing, that …”
Egan: Telling panicking investors to do nothing is the worst strategy
“So the worst thing you can ever do if somebody's freaking out to say, stop, don't do anything, sit still, et cetera. You have to take that anxiety and that energy and redirect it towards more positive things.”
Egan: In-app crisis popups reduced negative investing behaviors by 15% at Betterment
“And we found that that simple, easy thing to do, just a pop-up notification, reduced the bad behaviors by about 15% and increased deposits by about 10 or 12%.”
Egan: Betterment will not make capacity-constrained hedge funds a core offering
“I don't foresee us Making that a core part of our value prop. If only because our mission is to democratize a lot of the higher end wealth management things. And those are almost always capacity constrained or exclusivity plays, right?”
Egan: Searching for manager alpha is only worthwhile with millions in assets
“However many hours you spend trying to find the right manager, or trying to find the right strategy and understand what this stuff is doing, is not well spent unless you already have a very, very large asset base. I'm talking in the millions, at least.”
Egan: Saving $33 more monthly matches 1% annual manager alpha for averages
“He basically found that for that person, in order to, if that person went with finding out how to, you know, save more or invest more, rather than pick the better manager, they would need to save something like 33 more dollars per month. So, that's the trade-o…”
Egan: Excitement about an investment is a warning sign for investors
“If you're excited about what you're investing in, you should worry. Right? If you're kind of like, oh, I'm doing this thing, it's pretty standard, you know, like, it's not very exciting, you're gonna stick with it. You don't, you're not motivated to monitor it…”
Egan: Betterment employs human advisors primarily to study and automate their jobs
“In the longer term, to be clear, We are going to keep automating a large part of that. So it is not simply a matter of, oh, we hit some brick wall and we had, you know, we ended up having to use advisors. Every single financial planner or licensed expert on ou…”
Egan: Personal investing lacks accountability because investors cannot fire themselves
“Giving advice and being responsible for somebody else's money is different than what you do with your own. So I know people who have made bets on Bitcoin or various other things that lost tons of money, and if they were an advisor, they would be fired, but you…”
Egan: Many professional investors enjoy investing personal capital as entertainment
“I think that's where a lot of professional investors, they enjoy the doing more than they care about the outcome of it.”
Egan: Betterment employs 120 software engineers and only 8 finance professionals
“There are maybe eight people here who come from a finance background out of 250 employees, whereas there are probably at least a 120 software engineers.”
Egan: Betterment Aims to Be First Fiduciary Advisor to IPO
“I think that's, in the long run, what we see ourselves as being, is The first company that goes public off the back of being a fiduciary advisor rather than a broker or mutual fund company.”
Egan: Non-Professional Investors Suffer From Poor Feedback Loops
“The vast, vast majority of investors, unless you're in a professional shop, you have a very low quality feedback loop about how well you're doing. The only people who have really high quality feedback loops are professional PNs, sometimes analysts, who get lik…”