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Join us as we explore the hidden pitfalls of behavioral finance with financial planner Shane Tenny. Discover how cognitive biases like overconfidence, confirmation bias, and loss aversion can derail even the most successful professionals’ financial plans. Shane shares actionable strategies to recognize and mitigate these biases, offering a path toward smarter, more stable financial decision-making.
Shane Tenny is managing partner, Spaugh Dameron Tenny, LLC, and host of The Prosperous Doc podcast.
He discusses the KevinMD article, “Behavioral finance: your mood and your money.”
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Transcript
Kevin Pho: Welcome to the show. Subscribe at KevinMD.com/podcast. Today, we welcome back Shane Tenny. He’s a certified financial planner. Today’s KevinMD article is “Behavioral Finance: Your Mood and Your Money.” Shane, welcome back to the show.
Shane Tenny: Thanks, Kevin. Great to see you.
Kevin Pho: All right. Tell us what this latest article is about.
Shane Tenny: Yeah. So, I’m a financial planner, as you said in the intro. I run a financial planning team in Charlotte, North Carolina. We work with physicians all over the country. And we put together a blog last month called “Behavioral Finance: Your Mood and Your Money.”
I think for a lot of us, it’s easy to ascribe our financial successes or failures to outside forces—the market, taxes, maybe a good bonus—when the truth is that our choices and our decision have a huge bearing on the outcome. In fact, one of my favorite quotes that I often share with clients is that human behavior is far more effective at destroying wealth than the markets ever will be.
So, the study of behavioral finance—which is kind of part of behavioral economics—came to light, oh, maybe 25 years or so ago by Daniel Kahneman, a widely recognized name and author, in looking at the psychology of how we make decisions. And what it began to illuminate, of course, is that we humans are not always rational. We don’t always make the decision that actually makes the most sense; we make the decision that feels right to us based on a variety of factors—our upbringing, our fears, our hopes, our greed, peer pressure. So that’s kind of what behavioral finance is all about.
Kevin Pho: And tell us how some of these biases or some of these traits that physicians grew up with—how does that intersect with some of the stories that you see managing physicians’ money?
Shane Tenny: Yeah, that’s a great question. So, in this field of study around behavioral finance, we find a number of what are called biases, or typical thought or decision-making patterns. And so I do want to highlight a couple of these because there are some that are more prevalent than others, and there are some that we see as a financial planning firm that specifically works with a lot of physicians around the country. There are some of these that tend to be more common among physicians.
As an example, one of the most common is what is called overconfidence bias. Overconfidence bias, as everyone can probably intuit, is the tendency to presume or to be overly confident in your conclusion than perhaps you should be. This shows up amongst many physicians, in some cases, because, of course, you have a very intelligent population who has endured arguably one of the most rigorous educational paths to their profession of anyone in the country. And so, because of that high degree of sub-specialized training in, I’ll say, the human body, we sometimes can think, “Well, because I’m smart in this area, therefore I am smart in this other area.” So that can lead to really inappropriate hubris, or, as we would call it in this topic, overconfidence bias. And so we end up making the wrong decision, not because of facts or rational thought, but because of a misunderstanding of our own capacity.
Kevin Pho: And what would that look like in financial planning? Is it physicians would be overconfident investing in a certain stock? They may think they may know more than they really do. So, what kind of examples do you see of overconfidence in physicians’ financial planning?
Shane Tenny: Yeah, I think you’ve hit the nail on the head. It can show up in a variety of different ways. Let me describe two others, and then I’ll kind of give a little story around it because—and admittedly—these are not all discrete and distinct biases; there’s some overlap here.
But the two others that I thought might be helpful just to talk about would be confirmation bias. So, confirmation bias is a little different than overconfidence bias. Confirmation bias is the tendency that, again, we all have to seek out information that supports a conclusion that we already have. Confirmation bias—there’s no better example than just a social media feed. And so if you look at your Instagram feed or your YouTube feed or Twitter, the articles, the information, the stories that you’re being fed are the ones that are being offered to you through the algorithm, based on what you’ve shown an interest in in the past. And so this leads to, in our office, we’ll have clients that say, “Hey, I’ve been seeing a lot of information about the U.S. dollar losing its status as the reserve currency of the world, and so therefore should we put all our money in euros or a basket of securities?” or something like that. And we have to get in and explain, “Yes, you’ve been seeing a lot of that information. That doesn’t make it true.” So confirmation bias can lead us to wrong conclusions because we are only seeking out or choosing to value information that supports our conclusion.
And then the third bias that I wanted to touch on here is herd behavior. Again, not hard to intuit here, but herd behavior is, “Hey, if everyone else is doing this, it must be a good idea.” And so we often get swept up in that. I sometimes have thought that perhaps there is no greater catalyst for herd behavior than the doctor’s lounge. There is nothing like a bunch of orthopedists sitting around talking about the new strip mall they’re investing in to pull everybody into that vortex, whether it’s a good idea or not.
So here’s a great example. I can remember back in maybe 2018, 2019—pre-COVID—talking with a client along the exact pattern that I said: “A bunch of my partners are all investing in this real estate project, and we went to this presentation, we saw the pro forma, which, by the way, just let me translate for all of you: a pro forma is the business equivalent of a made-up spreadsheet of numbers. And so, I think I want to put, in this case, it was $400,000 into this real estate investment project.”
Well, based on our knowledge of their financial situation and kind of the early level of their career, we advised that this might not be the best fit in their overall profile. They had other goals—children, these sorts of things—and so we pointed out some of the challenges with this type of investment. It’s not liquid, you can’t get out easily, all the numbers were made up, and this is going to require a big chunk of your cash flow to support the way it’s going to work.
Nonetheless, I’m not sure whether it was herd behavior or confirmation bias or overconfidence bias, but they felt confident enough to move in despite at least the third-party opinion that it might not be ideal. Now, the outcome doesn’t dictate whether or not it was a thoughtful and appropriate decision. All of us make decisions; sometimes they work out, sometimes they don’t. In this case, it did not work out well. COVID happened, there was an enormous contraction of the economy. We all know what happened in the medical field, especially with elective procedures—there was an immediate and rapid downturn in income. Projects like this lost tenants, and so it created a significant financial hardship. And again, financial hardships and bad decisions with investments can happen even with the best foresight and analysis. But it is unfortunate when we have a destruction of our wealth from decisions that perhaps were based on inappropriate biases or overconfidence.
Kevin Pho: And that story really highlights how strong some of these biases are, right? Because despite advice from a professional, a financial professional like yourself, that particular physician still went with the biases and had a negative outcome because of that. So, in terms of fighting some of these biases and knowing how strong they are, what are some pieces of advice that you could share with your physician clients in terms of recognizing these biases and then overcoming them?
Shane Tenny: Yeah, that is the question, perhaps—how do I be aware of this, and how do I overcome it? And I want to maybe just pick up on one loose thread at the end of the story, and that is, to your point, the pressures or the tendencies can be strong. Herd behavior, in particular, is something that we do talk about because, as an example, if you’re sitting at a cocktail party or sitting in the doctor’s lounge and everyone else is talking about this project, I might not have a lot of confidence in it, I might not even feel like it’s that great an idea, but I don’t want to be the one doc who’s not in the conversation.
And so there are times when clients will bring up an idea, and we can talk through it and just acknowledge—as much as anything—I’d like to do this for social reasons. And so, in those cases, then, OK, how do we find a way to do that?
So, what are some of the things that we can do to try to make better financial decisions and avoid behavioral biases? Number one is—I’ll just go to some basics here—diversification. So, we kind of know that general concept with our 401(k): the idea of not having all your eggs in one basket. Any decision—any financial decision—that is going to create significant concentration where, quote, “all your money is going into something,” whether it’s a real estate, whether it’s a particular stock, whether it’s a cryptocurrency, often that concentration is just not a good idea. So you can just put a little yellow flag if you find yourself compelled or interested in something that would remove diversification from your financial life.
The second is, at the risk of sounding self-serving, there is no better way to see ourselves than in the mirror of another’s eyes. And so whether it’s a good friend—sometimes it’s a spouse who says, “What are you doing, honey?”—and certainly it can be a professional: a professional financial planner, somebody who knows you, knows your values, knows your fears, and knows your financial situation. That perspective can be really, really helpful.
One of the final things I would say is setting rules for yourself and your own decision-making can be helpful. And so sometimes we see families where we’ll just decide, “You know what, we’re not going to put more than $10,000 into any investment that we don’t both agree on,” or something like that can just create some checks and balances.
Kevin Pho: Now, how often do your physician clients come to you with these preconceived notions, and you’ll have to, quote-unquote, talk them out of it? Is this a common scenario?
Shane Tenny: Great question. I mean, I think we have to be open-handed enough to acknowledge that all of us have behavioral tendencies and have—I’ll call it—financial baggage, including me, and I’m a financial planner. So we all have a perspective and an outlook on money, whether it’s a scarcity mentality because we were brought up without wealth, whether it’s an abundance mentality—whatever. All of that colors our decisions. So it’s not a question of, do we have a financial bias or a financial tendency or behavioral bias? The question is, how strong is that pull, and how strong do we have to fight to counterbalance it? And so for some clients, it’s not as great a struggle or a pull. They tend to be more pragmatic, open-handed, and for others, whether they’re highly socially driven or highly overconfident, things like that, then yes.
And I guess I would maybe quip here at the end that those physicians who have a strong overconfidence bias generally are not in my office, because they’re not looking for outside advice or counsel. They’re pretty well sure of what they’re going to do anyway.
Kevin Pho: We’re talking to Shane Tenny. He’s a certified financial planner. Today’s KevinMD article is “Behavioral Finance: Your Mood and Your Money.” Shane, as always, let’s end with some take-home messages that you want to leave with the KevinMD audience.
Shane Tenny: Take-home message is, I’ll kind of close with what I started with. As physicians, you know, and I know, there’s a tremendous ability to do good in society, both because of your clinical skill set but also because of the wealth you can create. And so the ability to bless your family and your community is profound. Don’t let your own bad choices destroy the opportunity that you’ve been given. Look for ways to get good information, be open-minded, be humble in your decision making, and by all means, hire a financial planner.
Kevin Pho: Shane, as always, thank you so much for sharing your perspective and insight. And thanks again for coming back on the show.
Shane Tenny: Thanks, Kevin.
