“Don’t believe anything your teachers tell you!” I used to tell my economics classes this in the beginning of each semester. Usually one or two students would respond with, “Wait, can we believe that?” “Good question kid. If you believe it, you can’t believe it.” I use this paradox as a starting point for the students to see that critical thinking and questioning are integral parts of life.
But, the other point about this statement is the importance of questioning those who are seen as experts in their field. Before believing an expert, we need to know what their incentives are when giving us advice, and whether their incentives and our incentives line up.
As a social studies teacher, my incentive may have been to convince hundreds of young adults to vote for my political party. (Aspiring political activists, keep the teaching field in mind.) On more than one occasion I had students ask, “Why would you lie to us? you are a public school teacher!” I appreciated their confidence in me, a government employee, but I was not too sure that made me a dependable source of information. After all, if the government had your best interest in mind, would they try to sell you lottery tickets?
The point of this article isn’t to make you suspicious of what the government or its employees tell you. (You already should be.) Its goal is to make you suspicious of what all experts and authority figures tell you. Now it’s best, before I offend the vast majority of the readers, to clarify some things. I am not saying that because somebody is an expert in their field, their advice is dangerous. However, we do need to make sure that their incentives and our incentives are aligned before believing what they have to offer us. In many cases, we accept professional advice from people whose incentives are not aligned with ours. If I ask my insurance agent which life insurance I should purchase, I need to be aware ahead of time that he will get paid about three times as much if he sells me whole life as opposed to term insurance. Is he strong enough in his ethics to sell me what is best for me, even if it could cost him hundreds of dollars?
I recently went to the doctor for my annual check up, and she suggested I try Breo, a new inhaled powder, for controlling my asthma. I already take Advair, a bad-ass, life-changing inhaler, created by GlaxoSmithKline, the same drug company that makes Breo. She gave me a free sample and told me the drug company was giving out one free year of the medicine for new subscriptions. I took the sample home and researched my new miracle drug. I generally like to spend some time doing in-depth research when taking a new medicine. I was also suspiciously curious as to why GlaxoSmithKline was so interested in giving me a free year of their new meds when I was already spending the equivalent of the average Russian income on another of their inhalers. Upon researching the new drug, I found that it wasn’t actually ideal for my type of asthma, that it would increase my risk of death, and that the inhaler I was already using is a better fit for me. Interesting, I thought. Why would GlaxoSmithKline want me to switch drugs? Then I saw it, Advair, the inhaler that has changed my life, is losing patent protection in 2016. Now that competition will drive down profits from this miracle drug, the drug makers are trying to push me into something less ideal for me, but more profitable for them.
I’m not sure what the doctor’s incentive would be for me to start the new medicine. I believe drug company kickbacks go against the doctor’s ethical code. (Can any doctors clarify this for me?) Maybe she believed that the new medicine would be a good deal for me and didn’t suspect the nefarious end goal of the drug company. Lesson learned, it pays to do some background digging when an expert gives a suggestion.
I hope you haven’t forgotten the housing bubble of ten years ago. “All” the experts said we needed to go out and buy a house. They said housing prices always go up, and your home is your best investment. Well, the truth is, home prices often go up (on average only slightly faster than inflation), and your home isn’t an investment. It is a place to live. So who were these “experts” and why were they telling us to go buy a home? Well, professionals from a variety of fields had incentives to lie to us. Real estate agents have been the biggest scapegoats. Their incentive to talk up the benefits of real estate is obvious. More sales at higher prices mean a bigger paycheck.
But there were way more “experts” promoting this lie than just the real estate industry. Banks clearly had incentive to push us into buying and refinancing homes. The housing bubble was practically a money printing machine for them. Mortgage brokers, construction companies, and industries all the way down the line were incentivized to encourage excessive spending on houses. Even industries completely outside of housing promoted the idea of ever increasing home values. Data has shown that when we feel our houses have appreciated in value, we are more willing to spend on other goods such as cars, entertainment, travel, etc. All these industries, with the financial incentive to do so, promoted the lie as well. So, what are we to do? How are we to make an informed decision when we are bombarded from all sides with biased and dangerous “expert” advice?
Can we depend on the government to protect us? During the housing boom of the early 2000s governments were a big part of the problem. Encouraged by the Community Reinvestment Act, and with the help of Freddie Mac and Fannie Mae, our national government encouraged millions of people to make terrible home buying decisions. The Federal Government continued to incentivize first-time home buyers with additional tax credits between 2008 and 2010, when prices were still falling across the nation. Was buying a house to get these tax credits beneficial for the first time buyers or the government? The government benefited from a more stabilized housing market. Whether the buyers benefited or not, that depended on the specific situation.
We probably wouldn’t go to a car dealership looking for advice on whether or not we should buy a car. Why do we get house buying advice from the man selling the house, insurance advice from the woman selling insurance, retirement advice from the retirement account salesman?
For some reason, possibly because few schools teach anything having to do with personal finance, we often end up making our financial decisions based on advice of biased, self-interested “experts”. As far as financial advice goes, retirement advice is quite important. How many retirement “advisers” are actually sales people trying to sell you their high cost mutual funds or life insurance? Often their advice is good advice, but not the best advice for you. Their products aren’t fraudulent, but not the most ideal investments either. Investing in their fund is better than spending it on Moscow Mules at your local hipster bar, but not necessarily the best option for you. It is the best option for them however, that’s why they are selling it to you.
The White House says we earn about 1% less than we could be earning in our retirement accounts because of conflicts of interest between advisers and clients. This issue is what prompted President Obama to implement the new fiduciary law, which legally requires retirement advisers to put their client’s best interest ahead of their own profits. So, if I am selling you a retirement account, and one option pays me more while another is cheaper for you the client, I would be legally required to sell you the lower cost option. While the intent of this rule is good, I do expect some unintended consequences. For one, the new rules don’t apply to non-retirement accounts. Will “retirement” advisers switch to “investment” advisers? As more accounts change their fee structure, account holders with less retirement savings might have a harder finding advisers willing to work with them. Will the new law decrease options for these investors? Will there be costs with enforcing the new rule, and will complying with the new rule increase costs of investments? In time we will know.
So is Obama’s new rule the answer for dealing with the issue of disparate incentives between experts and the rest of us? Should there be a fiduciary law for cell phone salesmen and car dealerships? Is it the Federal Government’s job to help us make better financial decisions? Do you trust an organization that is $19,000,000,000,000 in debt to act in your best financial interest? What strategies do you use to make sure your interests are aligned with those for whom you seek help? How do you know which advice to follow? For those of you who don’t need sleep, you could spend the time researching every topic in-depth, and eliminate the need for all professional opinions. For the rest of us, when dealing with a professional or an adviser we should ask questions. We should ask how they are being compensated. Without being insulting, we need to ask if they are compensated differently based on what choice we make.
We all act in our own self-interest. There isn’t anything wrong with a salesman making money on a transaction. But, we need to make sure our incentives, and those of the experts we deal with, are aligned so that they can get paid and we get the most bang for our buck every time.
By the way, don’t ever trust financial advice from a random internet blogger!
“Do you trust an organization that is $19,000,000,000,000 in debt to act in your best financial interest?”
Preach it brother, preach it!
Overwhelmed by the sheer numbers of new drugs and studies related to them, doctors often partially rely on the pharm companies themselves (and their highly compensated sales force) to wade through the information. My guess, a pharm sales person approached your provider with a new study (funded by pharm company) that showed the benefits of the new inhaler. This, coupled with a year free, probably seemed like a great deal for her patients already paying through the nose for a similar Rx. I’d give your provider the benefit of the doubt on this specific situation, however, GREAT advice to always ask questions and do research.
That makes lots of sense., thanks for the explanation. I actually don’t know how a general practitioner could possibly keep the thousands of drugs straight in their mind.
I want to add that even if your doctor has your “best interest” in mind, and is an entirely moral person, unless you have that conversation about whether you both have the same “best interest” in mind, you still might not get the results you want. Those of us with little medical expertise are in a tricky situation, since our lack of knowledge inclines us to trust our medical professional. This is true in other areas of expertise, too. My favorite kind of professional is one who takes the time to listen to and attempt to answer my many questions, and never treats me as though I have asked a stupid question.