We like to believe that we’re rational beings capable of reaching correct decisions by carefully weighing all the facts. Classical economic thought explicitly embeds this assumption in theories which all begin with the phrase: “Assume all decision makers are rational.” As scientists, doctors believe in the need to be deliberate and rational. And yet, it turns out that we are far less rational than we would like to believe. In recent decades a new field known as behavioral finance has documented many instances in which we are overly influenced by a variety of non-rational decision-making factors. For example, we tend to be overconfident, we see patterns where none exist, we’re unable to cut our losses even when it is clear that we should, we overpay for items, and we succumb to confirmation bias, among many others. I discuss these biases in the chapter on making good decisions.
The key is that we do all this unconsciously in the most ancient portions of our brains, and that makes us vulnerable.
Marketing experts at financial services firms know we’re susceptible to psychological biases and they shamelessly take advantage of us in their advertising and sales pitches.
We can thwart these tendencies by being aware the biases exist, not jumping to conclusions impulsively, seeking knowledge and objective facts, and finding reliable people who can serve as sounding boards for our ideas and plans. The key is to be disciplined and deliberate in our financial planning decisions and override impulses by shifting decision making to the more introspective, evolutionarily newer, portions of our brains rather than allowing the more ancient and impulsive portions to dictate our choices.
Be Grounded in Reality and Seek Objective Knowledge
There’s a saying on Wall Street that “money doesn’t grow on trees.” The point is that if an investment opportunity sounds too good to be true—it probably is too good to be true. Chasing such “opportunities” is invariably a waste of time and our hard-earned money, but greed makes us want to believe otherwise. The best protection against self-destructive tendencies is to remain grounded and to surround ourselves with objective facts. Facts make it easier to resist the seductive appeal of what appears to be “easy money.”
Doctors understand the importance of knowledge because arguably more than any other profession, in medicine knowledge is the power over life and death.