Bad Thinking Can Wreck Your Life

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Cognitive errors are bad to make while choosing investments. But when doctors make them, things can get really bad.

For years a friend of mine was prone to frequent and completely unpredictable attacks of debilitating abdominal pain. She'd go about her day in her otherwise healthy and active life, when wham: She'd be hit with so much pain she could scarcely move.

A series of medical exams pointed her to a nephrologist who diagnosed kidney stones and prescribed a series of treatments. They had no effect. She sought a second opinion, and another kidney expert confirmed the diagnosis of kidney stones and prescribed a different course of treatment. Again, no effect. The attacks continued.

Fortunately, my friend does not take the word of a doctor -- or anyone -- as absolute. She read and researched and sought more opinions, and eventually went back to that second doctor and asked the critical question: What else could be causing this?

Hmm, he said. Maybe gallstones? Tests led to a confirmation that led to surgery -- and she's been fine ever since.

The moral of the story: If you go to a doctor who specializes in kidney troubles, don't be surprised if his first (and second, and third) diagnosis is that kidneys are the source of your troubles.

But don't hold it against him. Our brains are just prone to those kinds of mistakes. And if we're not careful, they can cost us big time.

Those tricky brains of ours
A while back I wrote about my topsy-turvy investment in NutriSystem (Nasdaq: NTRI). The process that led me to buy NutriSystem with lofty expectations nicely demonstrated several cornerstone principles of behavioral finance, the study of why people make certain kinds of mistakes with their money:

• First-impression bias. I read an article suggesting that the stock looked cheap, and that became my starting point for forming an opinion on its prospects.
• Anchoring. I read an analyst's report that gave a price target of $92 (at the time, the stock was trading around $47). I became focused -- anchored -- on that number and saw it as an inevitable goal.
• Confirmation bias. Having convinced myself that the stock would go to $92, I focused only on research that would confirm that bias.

These biases -- all well-researched and documented aspects of behavior -- come into play in all sorts of investment situations. They lead otherwise reasonable, careful people to make errors that look totally boneheaded in retrospect.

Ask the mortgage lenders at Washington Mutual (NYSE: WM) about their subprime portfolio. Ask Toll Brothers (NYSE: TOL) about their decision to keep building their inventory as the housing market started to slip. Or ask MBIA (NYSE: MBI) about their somewhat baffling (in retrospect) standards for issuing bond insurance. See what I mean?

But as my friend's experience points out, doctors make these kinds of mistakes, too. And their mistakes can cost you a lot more than money.

Medical self-defense
In this month's issue of the Motley Fool's Rule Your Retirement newsletter, available online at 4 p.m. ET today, Fool contributor and cardiologist Dr. Michael Cecil takes a close look at ways even the best doctors are prone to certain cognitive errors. 

Dr. Cecil's article draws on his own experience and that of Dr. Jerome Groopman, author of How Doctors Think. It presents several common cognitive errors doctors make, errors that most seasoned investors -- or medical patients -- will find all too familiar. He also offers strategies to help you get the right diagnosis the first time, and, for those who didn't, guidance for finding correct answers and treatment.

The Foolish final word
So don't let bad thinking ruin your health -- or your portfolio. See if you can step back and recognize when first-impression bias, anchoring, and confirmation bias occurs in your daily life.