Dear reader of this blog post – you have made it to the third and final installment of my analogies between dentistry and financial planning; congrats! You may be sad to find out that this mini-series of sorts is in its final stanza. But there is a reason to rejoice: you haven’t gotten to the content yet. Let’s dive in.
Both dentists and financial planners struggle with cognitive dissonance, a key concept in behavioral finance. Cognitive dissonance describes when newfound information contradicts a client or patient’s preexisting understanding and therefore someone only registers information that affirms the status quo. For example, if a patient has had solid oral health over the years (no cavities, gum disease, etc.) but continues to avoid flossing even though their hygienist and dentist have repeatedly encouraged regular flossing. The patient has already made up their mind that brushing alone will lead to sound oral health. Even with the “new” information that the hygienist or dentist has provided (flossing decreases the risk of gum disease), the patient has already come to the conclusion: brushing daily = oral health. Although brushing is critical, it alone may not set the patient up for optimal success. Patient education is a must, but is may not affect behavior. Dental practices can be an accountability partner for the patient by sending an email or text as a reminder to floss. An interactive message could be as simple as “Have you been flossing daily since your appointment with Dr. Smith?”. If the patient responds ‘yes’, have some sort of incentive or reward for them. If ‘no’, encourage them to start and include a quick reminder why it is in their best interest. Automate these interactions!
What about an example of cognitive dissonance with respect to finances or investments? Historically, financial theories assume that investors behave rationally (spoiler alert: they don’t!). And cognitive dissonance is one way that this happens. For instance, a client owns Sears stock because it performed so well in decades past; however, Sears has become too large of a part of the client’s portfolio and exposes him to significant single company risk and this would place his future plans at risk. The advisor suggests that he diversify his portfolio, but the client refuses. Suddenly, “new” information comes out that Sears is going to declare bankruptcy. The investor’s portfolio declines precipitously and “work optional” lifestyle goals are pushed back for several years. Financial planners are capable of preventing this problem in the first place. Through a combination of a thorough risk analysis of a client’s portfolio, client education during their review meetings, and monthly rebalances of their portfolio, this scenario could be mitigated. However, many investors out there do not have or follow a financial plan and could very well find themselves in a similar situation as the Sears example.
Thanks for reading my three posts on dental practice and financial planning analogies. When it comes to dentistry and finances – proactive planning, incremental changes, and utilizing what we know about human behavior can lead to impressive outcomes. Please feel free to send me a note or comment on any of the material discussed.
Mitch DeWitt