There are no shortages of parallels between medicine and investing. A couple of weeks ago I wrote:
There are no easy fixes to our greatest investment problem: behavior. The way forward can’t simply be to tell investors to ‘sin, not.’ Investment solutions need to be more rigorous, testable and ultimately sustainable for the vast majority of investors. Otherwise are we making the same mistakes believing in nutrition solutions that ‘sound too good to be true.’
Both medicine and investing are highly complex systems. Both of which have significant gaps in our knowledge and both have highly fallible people implementing recommended solutions. One of the reasons why so many solutions, both investment and health-related fail, is because we humans are a lazy bunch. Tim Harford writing about Richard Thaler’s recent Nobel Prize in Economics said:
Prof. Thaler realised that most of us are lazy. Most of us don’t want to think hard about our beliefs, or challenges to them. His solution was to make sure those challenges were simply too intriguing to ignore.
Thaler’s research has been used in tangible ways to increase consumer utility like in the Save More Tomorrow retirement programs. However the jury is still out on just how far we can nudge individuals into better behavior. Aaron E. Carroll writing the New York Times notes the challenges for behavioral economics in health care:
The problem is that health has so many moving parts. The health care system has even more. Trying to improve any one aspect can make others worse. Behavioral economics may offer us some fascinating theories to test in controlled trials, but we have a long way to go before we can assume it’s a cure for what ails Americans.
Thaler himself, in the New York Times, writes about why so many Americans are unable to choose for themselves the most affordable health insurance plans on an annual basis. He notes that “inertia, math and deductible aversion” all add up to many Americans paying more and getting less.
With the accelerating rate in which the technology in our pockets is changing, hello iPhone X!, it seems logical that increasing our use of technology could also aid in improving health outcomes. Ezekial J. Emanuel writing in the Wall Street Journal noted the many positive ways in which technology will change the practice of medicine also stated:
There is no reason to think that virtual medicine will succeed in inducing most patients to cooperate more with their own care, no matter how ingenious the latest gizmos. Many studies that have tried some high-tech intervention to improve patients’ health have failed.
You can count me firmly in the camp of being pro-robo-advice. The robo-advisor model is the logical implementation of the rise of a better mousetrap, i.e. the ETF. That being said, there is still a lot of room in the system for human intervention. Vanguard puts the value of “behavioral coaching” for financial advisors at 1.5% a year. Which, if roughly true, is a huge potential value-add. If we stretch the analogy between medicine and investing even farther one-on-one interactions may be the one intervention that work for investors. Emanuel concludes his article:
The only interventions that seem to change the behavior of patients in a lasting way are financial incentives (mainly to stop smoking) and long-term, face-to-face relationships with nurses and health-care coordinators. These interventions are decidedly not high-tech. They are high-touch, and they remain our most effective prescriptions to treat chronic illnesses.
In medicine no one is suggesting we stop looking for “high tech” solutions to our health problems. In investing we have gotten to a point where we have enough “high tech” in our various systems to address the ways in which “high touch” behavioral coaching can make for even better outcomes for consumers.
*The concept of “high tech, high touch” was first introduced in John Naisbitt’s 1982 bestseller Megatrends.