The hazards of normalcy bias were recently put on my radar by my invisible friend and unconventional thinker Dr. S, to whom I am grateful for the continuing mind expansion that has defined our virtual friendship.
Having a friend who is unafraid to test and confront your definition of reality only strengthens your long-term resilience and the soundness of your financial plans. In fact, in her Docs Who Cut Back interview she shared the following pearl:
I personally think that many docs are in stealth burn out: We think it's normal to work hard simply because of the medical culture. It's really not normal to sacrifice so much for work even if it's a passion.
This starting point helps us derive a working definition of normalcy bias, which is a cognitive bias that leads people to disregard or minimize threat warnings. We tend to underestimate the likelihood of catastrophic events, and to play down potential adverse effects such events might cause us downstream.
In work-life balance, Dr. S made the point above that the culture of medicine has historically demanded a level of willful blindness to needs outside of professional obligations.
I recall watching a skit during my second year of residency while on our annual program retreat to Catalina. The actors were senior residents in the program, and it was modeled on the game show Jeopardy using trivia questions about our faculty. The question I remember involved three fully tenured Professors in Emergency Medicine.
The answer: Total number of spouses among the three named male faculty.
The question: Eight.
When you invest so much in your career, you tend to let things slide in other areas.
It will be okay if I miss dinner again tonight to work late.
I guess working Thanksgiving several years in a row is just the cost of being a doctor.
During fellowship, I was asking a mentor about how he balanced home life with a successful academic career. For a moment he let his guard down in uncharacteristic frustration: My kids never remember the birthday parties I did make it to!
That was around the time I realized a career in academics might not be compatible with the family life I envisioned.
In professional terms,we tend to manage the business of our careers poorly. Numerous examples readily come to mind:
- The pandemic won't adversely affect income from my medical practice, since medicine is a recession-proof career.
- The hospital administration would never terminate our contract in favor of a corporate medical group - we've served our community faithfully for 40+ years and that relationship is deeply valued.
- My hospital's policies are based on protecting both provider and patient health and well-being. If they mandate that we do not wear masks in the hospital, it must be based on sound evidence.
When it comes to finance, investing is susceptible to normalcy bias and often discounts the likelihood of Black Swans: events of extreme rarity and severe impact.
When I look at my early asset allocation, I am grateful that I got lucky when I might just as easily have been hosed.
An overly aggressive allocation to equities compounded by the erroneous assumption that my gonads were made of brass instead of flesh could have left me working longer and harder than I would have liked.
With age and reflection, I've come to spend more time looking to reduce risk and less time seeking outsized returns. Normalcy bias meant that I formerly used the investors around me to define what was an acceptable level of risk tolerance, without realizing we sought out like-minded others to reassure ourselves.
Now I've rediscovered Mike Tyson: Everyone has a plan until they get punched in the mouth.
I spend a lot of time these days trying to craft a plan that will survive that punch, looking at my portfolio from different angles, revisiting Bernstein's four deep risks: inflation, deflation, devastation and confiscation.
Unicorns are magical, mythical creatures that captivate the attention of all who hear of them.
Roaches are distasteful, but their carapace, protective instincts and scavenger abilities make them likely to survive the most austere conditions.
When I was younger, I wanted to be a unicorn. As I consider Black Swans more seriously, I take lessons from the roach because I'm not looking to fly so much as to survive.
Comments 5
It’s interesting to watch your evolution.
When we invest what we actually do is take bets. We put our money on red and hope it pays off. If it pays off we think we did something. If it loses, we chalk it up to bad luck. The probability of red on a roulette wheel is .4737, the probability of black is .4737. In American roulette 2 other options exist 0 green, and 00 green. The probability of either 0 or 00 green is 1/35 or .0263. Notice this defines the black swan. 0 green is at one tail of the distribution and 00 green is at the other tail. 2 black swans exist in the distribution at opposite ends. In roulette if you bet red and drew 0 green, 00 green or black you would loose, If you draw red you win. Normalcy bias is to misunderstand winning. In the above example you loose 52.63% of the time and win only 47.37% of the time but you think if you win the odds are in your favor. This is normalcy bias. You replace the true odds with a delusion.
When you buy an investment what you actually by is risk. You place a bet. Risk is what you own. Your situation is no different than betting on red. If you buy a lot of risk (crypto for example) your situation is betting on 0 green or 00 green. The wheel spins and what you do in the mean time is tell yourself a story, a narrative (a delusion). Believing the narrative is normalcy bias. The problem is in reality you actually know the true odds, you just choose to ignore reality in favor of the narrative. Risk management is coming to terms with your delusion.
Author
Gasem,
Delusions are a perfect description. We are the ape that seeks patterns and tells stories, and those narratives serve some important role in navigating our lives. Vestigial evolutionary remnant? Regardless of the etiology, it’s important to acknowledge how the narratives influence us.
My mind gets blown every time I see how many stories suggesting conflicting conclusions are imposed on the same data set. I keep trying to ensure my chosen model succeeds under the least favorable stories I can conceive of. I value dialogue with people who disagree with me, because it increases the odds of my perceiving a less distorted reality.
Appreciate you,
CD
The goal is not the least risk (00 green) or the most risk (0 green). Both are black swans despite the narrative. Too little risk is as undesirable as too much. The goal is to own risk that produces a rational return.
I bought into an actively traded MF that is designed around 8.5% return, with 6% volatility. I put about 400K into it as an experiment to see if it works. It charges 1.25% so the real risk/reward is about 7.25/8.5. Because it’s actively traded, when the crash comes the fund goes to cash and defensive stocks ACTIVELY sidestepping the down side. In good times return is maximized, in bad loss is minimized. The are a host of technicals and flow models that predict with high probability when to do what based on the fractal math. Wealth accumulation is a series of consistent base hits with very few strikeouts. The game is played on an inning to inning basis and play is adjusted sequentially according to the conditions on the ground. This money is in a TIRA, and my goal is to switch back and forth between about a 33K drawdown in good times, and a minimum RMD drawdown in bad. RMD increases every year so in bad times the withdrawal keeps up with inflation. In good times I take out an amount greater than RMD, that keeps the principal around 400K. This keeps my tax burden in the 12% bracket including our SS income. In down years I may need to borrow a little back from the years I paid myself 33K to keep my base inflation adjusted income relatively constant.
No way you are a vicim of normalcy bias. In fact its highly abnormal, but rather clever, to use a metaphorical roach in a post. Well played!
Author
Steveark,
Appreciate your kind words.
Fondly,
CD