Your Advisor Should Be Like A Top Doctor

October 27, 2014

Discuss Likely Outcomes

When faced with uncertainty, both the physician and financial advisor should discuss the range of likely outcomes, the uncertainty associated with them, the possible next steps and their consequences.

Whether you are a patient or a client, you should not let a smooth talker who pretends to have all the answers fool you. The following example, related by a friend, demonstrates the right way to address uncertainty.

My friend was getting a blood test, and the doctor asked if he wanted to include the subtest for prostate cancer indicators. The doctor asked this question because the latest evidence shows that many positive cancer indications, while true, end up developing into tumors so slowly that there is no point in performing the surgery to remove them.

As a result, some in the medical field don’t believe in even bothering with taking the measurement. My friend had a discussion with his doctor. In the end, he had the test done because a negative result would give him peace of mind, while a positive result would still give him the opportunity to discuss the situation with his doctor and decide what to do. He told me he was grateful for the discussion, as well as the fact that the test was no longer digital (and he didn’t mean the opposite of analog).

Understand That The Unexpected Can And Will Happen

Some diseases have a natural—although not exactly predictable—variability. They will improve or worsen at times, even with the appropriate medical care. This can be frustrating to patients, and can lead them to use unproven advice or remedies from other sources, such as the Internet, cable TV or their brother-in-law.

If taken at a certain time in an illness’ cycle, these agents may be credited with producing improvement (to the same extent as would other placebos, such as chewing gum, changing toothpaste brands and so on) however short-lasting it may be.

Outcomes can be random in nature. Luck can be good or bad. Believing there is a causal relationship where none really exists can undermine confidence in the physician’s advice and be a source of difficulty for the doctor. This is usually seen when dealing with patients who don’t allow themselves to be educated about their illness.

The same thing happens with investing. The right strategy can have either a good or a bad outcome, because outcomes are often determined by random or unpredictable events. This can cause investors to confuse strategy with outcome, an important error to avoid. In a world where there are no crystal balls, the correctness of a strategy should only be judged before we know the outcome.

Education, before the outcomes are known, is the way to prevent patients and investors from confusing strategy with outcome. Nassim Nicholas Taleb, author of Fooled by Randomness, put it this way: “Lucky fools do not bear the slightest suspicion that they may be lucky fools—by definition, they do not know that they belong to such a category. They will act as if they deserve the money. The lucky fool [is] defined as a person who benefited from a disproportionate share of luck but attributes his success to some other, generally very precise, reason.”

The problem is that a lucky fool will repeat the behavior that led to a successful outcome. But if there was no causal relationship, it’s unlikely that the outcome will be the same. The costs can be significant, or even fatal, in terms of either physical health or financial health.



Find your next ETF

Reset All