Investing Insights from Doctors
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A list of Dan Richards’ previous articles appears at the end of this article.
I work out in the early mornings with a psychiatrist. He recently forwarded an article in the New York Review of Books by Jerome Groopman, a physician and frequent writer on the challenges of modern day medicine. As I read it, I was struck by the parallels between the things that cause doctors and investors to go wrong.
Dr. Groopman began by writing that “10% to 15% of patients suffer from a delay in the correct diagnosis or die before the correct diagnosis is made.”
Technical problems almost never cause this. Rather, human nature and the difficulty in making good decisions under pressure get in our way – “clear thinking cannot be done in haste,” Dr. Groopman writes.
In his article, he points to pioneering work by psychologists Amos Tversky and Daniel Kahneman in identifying three biases that cause people to make poor decisions. In 2002 Professor Kahneman received a Nobel Prize in economics for this work, the only non-economist to date to receive this honor.
The perils of anchoring
The first factor that causes doctors and investors to go wrong is “anchoring” – the tendency to focus on one factor and ignore other evidence.
Tversky and Kahneman said that people intuitively associate higher income and sunshine with happiness. As a result, they dramatically overestimate the impact of an increase in income or living in warmer climates on happiness, even though no evidence supports those beliefs.
Another example might be someone buying a used car who fixates on the mileage while ignoring the overall condition of the engine.
Doctors can anchor on the first symptom that presents itself, ignoring other problems.
And investors can focus only on a company’s share price, only buying when it has dropped from previous levels – neglecting to consider whether there have been changes in the firm’s circumstances.