As surgeons, we’re good at asking our patients questions that cut deeper than our scalpels so that when it comes to making the big decision to operate, we’re confident that it’s their best route forward. In this article, we dissect some of the deeper concerns around investing.
“Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.” Benjamin Graham
As we enter the operating theatre, we need to be at the top of our game. We can’t be distracted with political agendas, dinner plans or even financial plans. In the same way that Benjamin Graham spoke to the prudent principles of investing, we have principles of our oath to first do no harm. This is why we bring our A-Game to theatre.
But the world still turns outside those clinically cleaned walls. Life goes on and our families, friends and loved ones still need us as much as the patient on that table. So whilst we have our best focus during surgery, we need to know that we have a plan to manage our finances that keep us covered in the other areas of our lives.
The study of behavioural finance, a sub-field of behavioural economics, arose in the 1980s. Since then, we have been learning more and more about how our emotions, biases, and blindspots affect our money-making choices and can hinder our investing outcomes. We know these emotions well because we have to manage them in our patients, both pre- and post-op.
Behavioural finance, however, is contrary to traditional financial theories, which failed to take human behaviour into account and instead were based on the assumption that in any given situation humans make rational, economically-sophisticated choices by considering all the relevant information available.
The recognition that part of being human is that we are all prone to biases and emotional thinking helps create an awareness that can help us in our approach to investing (and surgery).
It is helpful to consider the areas where the biases manifest themselves in real-life decision making. These can be broken down into four main areas – as follows:
1) Self deception –
Mistakenly thinking we know more than we do can prevent us from being able to make an informed decision;
2) Heuristic simplification –
When our decisions are impacted by information-processing errors;
3) Emotion –
When our emotional state interferes with rational thinking and affects decision making;
4) Social influence –
How others influence the decisions we make.
Financial biases span all of these areas. The most common of them include: projection and hindsight bias; overconfidence and underconfidence; self-serving bias; herding behaviour; loss aversion; anchoring; confirmation bias, the narrative fallacy, representative bias; and, framing bias.
To overcome our emotional influence to become an impartial investor (and this is not so different to surgery) it is important to have strategies that guard against these biases.
1) The decision-making process –
Focus on the process, not the outcome. This promotes reflective versus reflexive (thoughtful vs automatic) decision-making, making us more prone to deceptive biases and emotional and social influences. Reflective decision making requires more effort, but results in better decisions based on logical decision-making processes;
2) Commitment to a prepared plan –
Behavioural finance teaches us to invest by preparing, planning and pre-committing to our plan.
Before we cut, we need a plan. One that our patient is confident in and one that our team is fully qualified to assist and ensure the best possible outcome.
There is always risk, so we ask those deeper questions and dissect our options. We manage emotions and consider the outcomes – and this is exactly how we as surgeons can become better investors.
With thanks to Mike Moore
mikemoore@wellsfaber.com
