As you might have heard or read, particularly if you’re familiar with The Millionaire Next Door, physicians are known to be under-accumulators of wealth. That is, given their high income, they often fail to build wealth to match.
There are those of us out there trying to change that paradigm, including me, The White Coat Investor, Passive Income MD, and today’s author Dr. James Turner from The Physician Philosopher.
There are some practical reasons like getting a late start, but I really like how Dr. Turner approaches questions like the one posed today from a human behavior perspective. His philosophy major comes in handy time and time again.
This post originally appeared on The Physician Philosopher.
Why Aren’t More Doctors Wealthy?
In the 1960s, Lew Goldberg showed that a physician’s intuition and judgment could be fatally flawed.
Interestingly, the same fatal flaw that Goldberg exposed is the same fatal flaw that causes some of the biggest financial mistakes that doctors make with money. Why aren’t doctors rich? Psychology has an interesting explanation that everyone should understand.
Tag along as we dive into the mind of physicians and investors and where those two worlds intertwine. After the deep dive, we will discuss how to defeat this flaw and set ourselves on a path for financial success.
In the beginning, Goldberg asked several well-trained radiologists how they set out to determine when people had stomach cancer. The doctors explained that there were 7 criteria that they use to make the diagnosis.
Goldberg created an algorithm that would strictly adhere to these 7 criteria. Thus, he removed many of the psychological hoops that radiologists jump through (and the biases produced) when making a decision.
Goldberg didn’t stop here, though.
See, Goldberg was not so much interested in the accuracy of the algorithm. Instead, he was much more interested in how the physicians came to the diagnosis of malignant or benign in the first place.
So, Goldberg set up an experiment.
In this study, he compared his algorithm, which was built on the criteria provided by expert radiologists, to the radiologists themselves. He showed dozens of images and asked for a diagnosis.
During the study, the radiologists were also shown duplicate images multiple times. However, the duplicates were randomly presented and separated by many other images.
The results were surprising.
First, though the physicians were the ones with the experience and knowledge to provide the criteria, the algorithm outperformed the doctors by a staggering margin.
In fact, the algorithm outperformed all of the clinicians as a group and even the single most accurate physician involved in the study.
Second, many of the physicians made a different diagnosis based on the same image. In other words, they saw the same image twice and gave a different diagnosis. Of course, during the testing, they didn’t realize it was a duplicate image.
Third, the accuracy of the judges did not correlate with experience. The least experienced doctor was just as likely as the most experienced to make the same mistakes.
Irrational Spending in Intelligent People
This study (and many others like it) show that humans are irrational.
While we don’t diagnose stomach malignant processes in the same way today as we did in the 1960s, the point remains the same. How many times has a bad patient outcome impacted how you practice medicine in the future (even if there is no evidence to support the change)?
We all do it (or at least have to fight against it actively). We make exceptions when we shouldn’t.
Personal finance decisions are no different. Think about the number of times that you have made a purchase that you regret.
This may be a house, a car, or some designer gadget.
If you think back to how that transpired, there was likely an inner dialogue that explained why “this time” you “needed” the item you bought. It may have even involved saying those inner thoughts out loud to your significant other.
This process involves reasoning our way through a purchase. It’s the same process that happened with the radiologists in the study. Instead of following their own criteria strictly, they said, “Well, in this specific case, I think this criterion is less important than that one.”
Unfortunately, the more intelligent you are, the easier it often becomes to “reason” our way to a bad decision.
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Why Aren’t Doctors Rich?
Because we are irrational. Just like everyone else. But we are also really good at reasoning our way to bad decisions.
The way to defeat our irrational thinking is by creating a rational financial plan that we can stick to – regardless of what is going on. If you want a good place to start, consider reading a great book on personal finance.
You can also defeat your irrational mind by sitting down when you aren’t in a moment of heated passion for a new car, house, or gadget. Then, spend some time discussing what we want our ideal life to look like using the Three Kinder Questions.
Once the big picture is squared away, we take a look at preventing us from getting there. If you are like most, it probably has something to do with your high debt burden and lack of assets.
So, we create a plan to destroy our student loans, which may involve pursuing student loan forgiveness, refinancing our student loans, or both.
It also likely involves creating a practical investing plan. This plan should involve “automatic” payments that go into their designated accounts before you even have a chance to screw things up.
This way, you can stick to the plan without a chance to rationalize a bad decision.
You can look at the plan and determine the best course of action because you’ve already outlined it, just like the algorithm that outlined the criteria for diagnosing cancer above.
Take-Home: Simplicity Wins
The doctors in Goldberg’s experiment had the intelligence and education to diagnose cancer. Actually, they gave him the criteria to make the algorithm in the first place.
Yet, they failed time and time again because they didn’t stick to the plan and reasoned their way to bad decisions.
While we don’t diagnose stomach cancer these days through plain films, these same biased thought processes still exist.
This bias towards reasoning our way to an irrational decision is why simplicity always wins in clinical medicine and personal finance. If you can create a “set it and forget it” financial plan that will get you to your goals, then all that is required is to stick to the plan.
This means that there are no “this time it’s different” thoughts or “yeah, but buying this would really help us do that!“
As John Templeton so astutely pointed out:
The four most expensive words in the English language are “this time it’s different.”
Don’t fall into that trap. Create a plan, and then stick to it. If you do that, you’ll be far ahead of your peers. And, if you learn this skill, you just might be a better doctor, too.
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What do you think? Are there biases that you fight against? Have you ever regretted a purchase that you rationalized at the time?
12 thoughts on “Why Aren’t More Doctors Wealthy?”
I was with a doctor for twenty eight years. I can tell you she is seven million in debt and the reason i think is Doctors appear like they know everything. So good salesman can play to their egos and figure out what to say to play on their what i feel is lack of humility. They are use to telling patients what to do so they may think they know real estate stocks bonds everything and nothing could be further from the truth.
Some doctors have bigger egos than others, but even the biggest know-it-all has to do much worse than assuming they understand RE, stocks, and bonds to land $7 Million in debt. What’s the full story there?
The full story is my ex thought she knew everything If she wanted it she bought it Cars Houses Commercial real estate, She was succesful as a hematologist and oncologist. Any way she could bill medicare and they paid. She could get loans on her signature alone. Never thinking that all the debt she was acquiring would come back to haunt her. Now the commercial real estate is vacant The rental houses are vacant and she did not know about stocks bonds diversification asset allocation or portfolio theory When i say all the debt she was acquiring i bailed
It seems so easy, when you don’t know from experience, to be able to win at picking winning stocks. I have learned through “the school of hard knocks” to just Dollar Cost Average my way every month through several Vanguard Index funds over several years. I never sell. The worse things look, the more I buy. I tell my adult children to never sell. “I don’t care if there is a nuclear war, DO NOT SELL!” Just keep dollar cost averaging in to the index funds. And buy more. As Rothchild said, “Buy when there is blood in the streets of Paris.”
Great post, really enjoyed reading and can relate for sure.
Irrationality is even more dangerous when mixed with a lack of education. And unfortunately most physicians have a complete lack of education surrounding finances.
Thankfully the solution is pretty easy but it is surrounded by shame around past mistakes and intimidation about the subject matter.
Thanks for helping all of us to overcome this!
Good post, very interesting. As someone who made a lot of money and invested it well I’m always curious why other high earners don’t automatically end up wealthy. It is such a gift to earn a high income, and a terrible thing to waste that.
The reason to the question is that many docs think they are smarter than Wall Street
All past evidence proves indexing wins the game hands down
Stock trading is a fools game
It’s not always unwise purchases or divorce that ruins our finances, although I’ve done both.
More important was the irrational belief I could time the market or individual stocks ( indexing was not popular until much later). I sold many winners well before their breakout over temporary lulls in performance or a missed quarter costing me millions in the end. I even sold 10 BRK for 30k each in the early nineties!
It wasn’t until 2016 that I finally realized my own pathology. When the media said Trump would tank the economy and the futures were down election night, I stayed in. When the pandemic hit, I stayed in, even bought more.
I’m able to retire now, but I just barely changed my behavior in time!
Most of the docs i know who are financially unhappy blame it on getting divorced, some of them up to three times. I suppose we could apply the article’s logic – “this time it will be different” . I was fortunate enough to become divorced (once) when i had a negative net worth (loans) so it never affected me financially. But it could have easily been a financial catastrophe had it happened a few years later than it did.
Yup. My divorce is the only reason I’m still working full time. 🤨