If you had asked me in January what epidemiologists study, I might’ve guessed insects (entomologist) or the history of words (etymologist), or maybe even the outer layer of skin (epidermis). I still struggle pronouncing it, but after spending a few months reading, watching and listening to experts in the field, I not only understand what they study, I can also relate to some of the struggles they face. There are more similarities than you might expect between the fields of financial planning and epidemiology, so I thought I’d explore a few lessons that apply to both.
Planning for the future isn’t about precision
When we help clients plan for their financial future, there are many variables that go into our analysis. Small changes in future rates of return or inflation assumptions can have a big impact on the results. Big changes in the client’s situation, like a loss of a job or an unexpected inheritance, can completely alter their plan. We often tell clients the planning we do is a compass to help point them in the right direction, not a GPS that will tell them exactly what path to take.
This New Yorker article on the difference between Seattle and New York’s handling of the COVID-19 pandemic offers a lot of great insights on epidemiology. As the article states, “Epidemiology is a science of possibilities and persuasion, not of certainties or hard proof.” In other words, just as we can’t predict exactly what path our clients’ future might take, an epidemiologist can’t predict exactly what path a deadly virus might take.
While it’s always frustrating to deal with possibilities instead of certainties, there is still great value in understanding those possibilities. “Being approximately right most of the time is better than being precisely right occasionally,” the Scottish epidemiologist John Cowden wrote, in 2010. “You can only be sure when to act in retrospect.” We won’t ever be able to perfectly model a client’s future, or make all the "right" decisions in advance, but going through the planning to come up with an approximately right vision of the future will help them make the best decision they can.
It’s important to admit what you don’t know
In some professions, there are relatively few unknowns. Ask a plumber why there is water in the ceiling and he'll find the leak and fix it. Ask a dentist if you have a cavity and he’ll look at your tooth and tell you. But the fields of epidemiology and financial planning are full of unknowns.
If someone asks how the market will do next year the only correct answer is “I don’t know”. There are too many factors driving market prices for anyone to predict the future, but many so-called “experts” will give you an answer anyway. The reason they give an answer is that it’s uncomfortable to admit what we don’t know. Back in March everyone wanted epidemiologists to tell them how many people would be infected with COVID-19, but unfortunately the answer was they didn’t know. They gave us models and estimates, but there were so many unknowns it was important for them to admit what they didn’t know.
Predictions need to be revised when the underlying data changes
One of the reasons it’s hard to predict what will happen in the future is that our models rely on the current data, which could change at any time. If you stick to a budget and spend a certain amount of money each year, adjusted for inflation, we can assume that will continue into the future. But if you are diagnosed with a medical condition and suddenly your expenses jump by 20% a year, our models for the future will change. This is why we always stress the importance of regular updates to our planning. We don’t develop a static financial plan for clients, we actively plan for the future and adjust the plan as your situation or the world around you changes.
Likewise, epidemiologists are constantly revising their predictions based on changes to the underlying data. When they first started making predictions at the beginning of this pandemic, they lacked data because this was a new virus that hadn’t been thoroughly studied yet. They didn’t know how contagious it was, or how many people might be asymptomatic. They also couldn’t predict how different countries would react and what restrictions they would put in place. As they’ve learned more and watched the reactions around the world, they updated their models. This caused many to question the original predictions, but it shouldn’t have, if everyone understood what those predictions were based on and what we didn’t know at the time.
We need to understand and believe in probability
Have you ever cancelled outdoor plans because meteorologists were predicting a 70% chance of rain, then have a sunny day with no rain? You probably said a few choice words about the meteorologist, but were they wrong? They did tell you there was a 30% chance there would be no rain. As Morgan Housel writes in this article, “The idea that something can be likely and not happen, or unlikely and still happen, is one of the world’s most important tricks.”
When there is no definitive answer to a question, we have to rely on probabilities. As Morgan writes, “most people understand probability, but few actually believe in it”. In both financial planning and epidemiology, we don’t have definitive answers so we rely on probabilities. We might be able to tell you there is an 80% chance your money will last the rest of your life, but if the 20% happens, you will need to make adjustments to get back on track. You might think you understand probability, but can you believe in it?
Sometimes it pays to be overly cautious
Looking back on the past few months, many people feel the complete lock downs imposed in many locations were overreactions. They look at the numbers and see far less infections and deaths than some epidemiologists predicted might happen. What they fail to see is the alternative universe where the lock downs didn’t happen. The predictions at the time didn’t factor in a complete lock down of society for months, would they have been right if we didn’t take that course of action?
Unfortunately, nobody can answer that question, because we can’t see the alternative reality. In financial planning we often help clients make difficult decisions where it might make sense to be overly cautious. Insurance is a perfect example of this. If you pay for term life insurance for 30 years but don’t die, you might look back and think you wasted all that money for years paying for insurance you didn't need. But what if you had died and your family was taken care of because you paid for that policy? The alternate reality is important to consider.
We make the best decisions we can with the information we have available at the time. Looking back on those decisions and learning from them so we can improve our decision making in the future is important. However, we should refrain from beating up on ourselves if we look back and think an alternative path would’ve worked out better.
Be scared, but don’t be afraid
I wrote about this in April in my first quarter market commentary, and it is just as relevant now. One of our most important roles is to help clients prepare for difficult times so they are able to stay calm and get through them without panicking. Throughout the recent bull market we reminded clients the market goes through cycles and eventually we would hit another downturn. While nothing can prepare you for the kind of market decline we saw in March of this year, if you understand the risks you are facing you are better able to respond when it hits.
Epidemiologists similarly need to make it clear to the public the dangers posed by a pandemic, and in some sense even scare people into action. This is very counterintuitive to our human nature so in the beginning of the outbreak most public officials tried to calm our fears rather than provoke panic. From the same New Yorker article above “The effort was blocked over fears that it might create a panic, but such alarm might have proved useful. After all, the official told me, panic is pretty effective at getting people to change their behavior.”
It’s natural to be scared when the market crashes and a virus is spreading across the globe, but understanding the danger will help you avoid living in fear. As Shane Parrish writes, “making people feel less safe can actually improve behavior”. He uses the example of serious car crashes being rarer when roads are icy even though minor incidents are more common. Understanding the risks we face can force us into making smarter decisions.
Just as an epidemiologist needs you to understand the possible danger of a virus to get you to wear a mask or practice social distancing, we need you to understand the risks to your financial plan so you take the appropriate actions. There is no need to live in a constant state of fear, either of the virus or of the investment market, but it’s important to recognize and understand the potential risks.
If you’d like to learn more about how we help clients, feel free to reach out to me at firstname.lastname@example.org.
-Chris Benson, CPA, PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
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