Here is a good article from a while back. It looks at the medical profession’s struggles with following evidence-based best practices. Many doctors provide treatments and procedures that are not supported by the latest research and data.
The article uses the prevalence of cardiac stents as an example. Turns out, most of the current research around coronary artery disease indicates that most patients would be better off avoiding a stent. Instead, the patient should take medication (such as aspirin or blood thinners) or implement lifestyle changes (diet/exercise or reducing stress).
Here is a quote from the article. It references Dr. David Brown, the founder of an organization called the Right Care Alliance (which is dedicated to evidence-based medical practices):
In 2012, Brown had coauthored a paper that examined every randomized clinical trial that compared stent implantation with more conservative forms of treatment, and he found that stents for stable patients prevent zero heart attacks and extend the lives of patients a grand total of not at all. In general, Brown says, “nobody that’s not having a heart attack needs a stent.” (Brown added that stents may improve chest pain in some patients, albeit fleetingly.) Nonetheless, hundreds of thousands of stable patients receive stents annually, and one in 50 will suffer a serious complication or die as a result of the implantation procedure.
There are likely a few reasons why doctors overuse cardiac stents when the best evidence counsels against it. Money is the first. Cardiac stents are big business. A doctor (and their hospital) no doubt earns more from installing a stent than by prescribing medication. Don’t get me wrong, most doctors are great people and do great work. But a doctor’s (and everyone else’s) thinking and actions are not immune to economic incentives.
Another reason for this issue is that doctors can’t keep up with all of the latest medical research. The volume of new research available far outweighs the capacity of busy doctors to absorb it and implement it in their own practices.
Patients also share some of the burden here. Many cardiac patients would prefer doing something as opposed to nothing when it comes to their cardiac health. Installing a stent offers a concrete action that might help the patient feel better about their overall treatment.
Following the evidence when investing
All of this got me thinking about the financial profession. We also struggle to follow evidence-supported best practices.
When it comes to evidence-based investing, here are the core principles:
- Take a passive approach, don’t try to beat the market
- Risk drives expected returns (i.e. your asset allocation)
- Broad diversification reduces risk and increases returns
- Keep costs as low as possible
- Focus on after-tax, after-cost returns
- Avoid excessive leverage
- Invest for the long-term
There is a slew of academic research going back to the 1950’s that supports these core principles. But many financial advisors and everyday investors continue to ignore them.
From selecting individual stocks, day trading, excessive leverage, or putting 50%+ of your money into “too good to be true” crypto assets many investors just want to do something! They want to feel some control over their own destiny. It can be hard to just sit there and do nothing, especially when the market is crashing. But there is so much uncertainty within financial markets, that often the best course of action is to do nothing. Jack Bogle used to say, “Don’t do something, stand there!”
Thankfully, many people are doing a better job. Assets held with passive investment funds continue to experience massive growth at the expense of actively managed funds. More and more people have started building up their education around personal finance. And the community of financial advisors that embraces evidence-based best practices continues to grow.
If you need help creating a solid investment plan, check this out. Or consult a financial advisor that follows best practices and charges a reasonable fee.
