5 financial biases doctors face when investing

Countering the herding effect

Rebalance your portfolio regularly to maintain diversification. This discipline can help reduce concentration risk when a single asset class or sector underperforms.

Diversification can protect your wealth when one industry, asset type, or global region underperforms or stalls.

The herding effect happens when investors follow the actions of others rather than relying on their own information or analysis.

Humans are social animals. There’s a definite safe comfort that comes with following the pack—even when the herd may be acting counter to its best interest.

Even experienced investors are susceptible to the herding effect because we talk with our colleagues and friends about our money wins and wealth strategies. We seek out other sources of financial information and try to take action on that information.

Even Wall Street pros are not immune to the herding effect. “Some people follow the crowd when making decisions—including mutual fund managers,” writes Nicholas Tan for the CFA Institute. “High-herding funds underperform low-herding funds by 2.28% a year.”^{Disclosure 3}

Countering overconfidence bias

Consider going on a financial news “fast” during periods of volatility. Turn away from TV, social media, and other noise that can stir up your emotions. Avoid too much exposure to reaction-driven news and instead find ways to focus on what matters in your overall plan.

You can also work with a qualified wealth advisor to counter the herding effect. They can be your sounding board for considering investing trends and whether the right move for your goals is to go with what others are doing or to take a different path.

Bias #3: Illusion of control bias

Illusion of control bias is overestimating your ability to influence outcomes that are largely driven by markets or chance.

Making frequent trades is one yellow flag for this bias—buying and selling multiple times a week or even each day can be an investing behavior driven by an illusion of control bias.

In your profession, you have the ability to exert an incredible degree of control over the health and well-being of your patients. As an investor, you don’t have that same level of control. Some negative events and trends affect everyone participating in the markets, no matter what. Medicine can be similar. Some human diseases cannot be completely prevented or fully cured.

Countering the illusion of control bias

First, build your awareness of what factors you can control in your investing and which ones you can’t. Global conflict, government intervention or interference in the markets, or changing consumer buying patterns are examples of factors you can’t control. But the quality of advice you seek, the discipline you sustain in your investing, and the due diligence you conduct are factors you can control and focus on instead.

A trusted advisor can be a valuable partner. Together, you can look out for moments where an illusion of control is hindering your progress in your overall plan.

Bias #4: Recency bias

Recency bias is thinking that what has happened recently in the markets or our portfolio will repeat or continue going forward. A 2024 Cerulli Associates survey showed 67% of respondents admitted to being swayed by recency bias.^{Disclosure 4}

We’re all familiar with the “past performance is not indicative of future returns” disclosure. Yet, behavioral studies show that we all tend to expect that whatever has occurred most recently will continue to happen in the future. Humans have short memories, which helps us get over past stress. So, an investor may pay more attention and put more weight on a rise in stock prices this week than a drop in stock prices last year.

Countering recency bias

Countering recency bias when investing in a longstanding company, mutual fund, or established market is straightforward: Look at the long-term performance of that asset to see a complete view of its gains and losses.

Countering recency bias is more difficult with investments such as startups or asset types. And as high earners, physicians are often solicited to participate in funding speculative ventures. These offers may even be presented by trusted medical colleagues or friends. Conduct due diligence with the help of your wealth advisor.

Bias #5: Loss aversion bias

Loss aversion is the tendency for losses to be felt more strongly than equivalent gains. This happens because we tend to experience the pain from losses more strongly than the pleasure from similar gains.

As investors, this can show up in several ways:

• Holding on to lackluster assets, wishing they would rebound
• Liquidating volatile assets rapidly before they have a chance to deliver a return
• Keeping conservative, low-growth assets instead of buying higher-growth assets

Research by Shlomo Benartzi and Richard H. Thaler uncovered that many investors can be reluctant to hold stocks even when they historically yield higher long-term returns.^{Disclosure 5}

“Loss aversion can cause double trouble,” Bracewell says. “An investor may compound a mistake by refusing to sell when an investment begins declining—chasing good money after bad.”

Countering loss aversion bias

As with recency bias, look at the long-term performance of assets with your advisor. This can help you feel more comfortable weathering short-term losses from a selection that still holds promise. Or it can help you feel more confident in letting go of lackluster performers and replacing them.

They can also help you determine how your ability to weather losses stands relative to your timeline. If you have years or even decades until you expect to reach a goal like college savings or retirement, you may be able to relinquish your fears of losing on some investments while potentially gaining with others.

Every medical professional’s individual perspective and financial goals are different. An advisor is a partner in creating an evidence-based plan and helping track financial health for each client.