Doctors Make Lousy Investors

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You know that confidence that makes you cool during chaos? Well that asset can become a liability when managing your portfolio.

Physicians generally don’t like to admit their mistakes. After years of grueling training, we are unmistakably the experts in our respective specialties. But that doesn’t mean we know everything. After most shifts, I have no clue what is wrong with most of my patients. Most patients walk out with a diagnosis equivalent to their symptom. And sometimes I’m just plain wrong: that vague abdominal pain patient I discharged really had appendicitis. So just like the QA process in the ED, let’s do some QA on our investment behavior. I’ll discuss the two biggest psychological hurdles to good investment performance.

The number one obstacle to good investment performance is probably overconfidence.  In residency I couldn’t stand my senior residents and attendings who thought they knew everything. I still see this in private practice—you know the EP, the one who, when you sign patients out to him, thinks that the diagnosis is SO obvious. There was a survey taken once that asked drivers to rate their driving ability. 80% of drivers thought they ranked in the top 30% of drivers. Similarly, numerous studies done on investor behavior show that overconfidence is pervasive—we think we are better investors than we really are. Multiple studies over the past two decades looked at the trading behavior of individual investors in discount brokerage houses and concluded that individual investors who trade frequently tend to vastly underperform the broad stock market. A primary factor contributing to this underperformance is overconfidence in the investor’s ability to beat the market and pick the winning stocks. Individual investors think that the information they have about a particular stock or the broad market is private and exclusive, causing them to exclude others’ beliefs. When you research information in the stock market, you may think you have knowledge, but it’s really an illusion of knowledge since millions of other investors know the same information. Information also leads to an illusion of control. I’m scared to death of flying in an airplane. There is something about moving 500 mph at 40,000 feet that makes me feel unsafe even though statistically it’s more dangerous to travel in a car. But in my car, I feel like I have more control, even if it’s an illusion. Trying to out-research other players in the market gives you a sense of control even though most events are unpredictable. This sense of control also leads to an investment portfolio which is poorly diversified. As I’ve written in previous columns, prudent investors should broadly diversify their investment portfolios to avoid being stuck with owning just the losers. Interestingly, while emergency medicine is a male-dominated specialty, studies have also shown that women outperform men when it comes to investing. But before the women EPs reading this rejoice, the studies show that you are still terrible investors—just not as terrible as men because you trade less frequently and don’t suffer from as much overconfidence.


There is nothing that matches the feeling of saving someone’s life in the ED, and we take great pride in this skill. In investing we also feel euphoria when we choose investments that provide great returns. You know the feeling: you sell your $10,000 investment in a small biotech company a year later for $30,000. You’re patting yourself on the back for your wise decision. On the flip side, we tend to ignore our mistakes. When I go to Las Vegas and play at the blackjack tables I ask the people sitting next to me, “Are you up or down?” Their response is almost always the same: “I’m about even.” So, let’s see, if they are all “about even,” then who built this $2 billion casino? If we admit mistakes, we feel guilty. According to several studies, this is the reason why we sell winning investments too early and hold on to losing investments for so long. We would rather hold on to an absolute dog than to sell it for a loss because selling a losing investment makes us feel guilty. It also means that we become emotionally attached to certain investments. As we look at our accounts every day and see the same ticker symbols, we tend to ignore bad news about those investments, leading to poor investment decisions and ultimately poor investment returns. In behavioral finance there is a term for this—it’s called cognitive dissonance. We try to avoid psychological pain by blocking out losses and focusing on gains. When was the last time you heard a doc say to you, “Let me tell you about this absolutely awful investment I made!” Other studies looked at individual investors recollection of their investment performance. It turns out that on average people overestimate their returns by 5% or more because we focus on the winners and forget the losers.

While there are many distractions out there keeping you from having a disciplined investment strategy, there’s one that stands above the rest—YOU. To manage your wealth successfully, get out of your own way and start working towards a more realistic strategy.

Setu Mazumdar, MD practices EM and he is the president of Lotus Wealth Solutions in Atlanta, GA



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