Why the risk aversion that makes you a good doctor wrecks your finances [PODCAST]

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The same instinct that makes you a careful clinician may be the one sabotaging your financial future. Cardiologist and fiduciary financial planner Stanley Liu joins this episode to explain why physicians’ deeply trained aversion to risk becomes maladaptive once it leaves the hospital. This episode is based on his article “Physician financial risk: Balancing capacity and tolerance,” published on KevinMD.

You will learn why risk capacity and risk tolerance are two different variables, and why mistaking one for the other quietly drives bad financial decisions. You will hear why the physicians most at financial risk are those with low capacity and high tolerance, and why high-earning doctors with no debt sometimes stay stuck in toxic jobs they have the financial freedom to leave. You will also learn what questions a planner asks to surface the money scripts shaping your choices.

Listen if you have ever wondered whether your discomfort with financial risk is protecting you or holding you back.

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at kevinmd.com/podcast. Today, we welcome back Stanley Liu. He’s a cardiologist and a fiduciary financial planner. Today’s KevinMD article is “Physician financial risk: Balancing capacity and tolerance.” Stanley, welcome back to the show.

Stanley Liu: Hey, Dr. Pho. Thank you for having me back.

Kevin Pho: All right, always happy to talk about that intersection between medicine and money with you. But tell us what this latest article is about.

Stanley Liu: It’s about the four-letter word that we all deal with in medicine, risk, and how our treatment and response to risk in the clinical realm can be maladaptive when you extend it to the financial realm. That’s, in a nutshell, what this article is about.

Kevin Pho: All right, so tell us more because I love how you stratify and give some nuance to that word because how we define risk clinically, of course, is much different than how we use and define risk financially, right? So, tell us what you mean.

Stanley Liu: So, in the clinical realm, risk inherently has a negative connotation. It’s something that keeps us up at night when we’re worried about the outcome that our patient is going to have or the decision that we’re going to make tomorrow in the hospital. We spend thousands of dollars to protect ourselves from liability risk. Our hospitals have entire departments dedicated to risk management.

Risk is bad, and we are taught this from the very beginning, that we want to shoot for certainty. Certainty is always a good thing. Our multiple-choice questions that we took since we were pre-meds all had one unequivocally correct answer. That’s how we were wired.

And if you contrast that to the business world, people in business talk about risk completely differently. It’s almost become a cliché when they are complimented as being bold risk-takers because it’s understood that to accomplish anything great, you have to be willing to embrace some sort of risk. And entrepreneurs will talk about failing forward, meaning making the small mistakes that it takes to build much bigger things in the future. That’s simply part of the process.

And so, when physicians take their risk averseness in the clinical realm and extend it into the financial or business realm, it can be very tragically maladaptive. And that is something I see in the financial planning world.

Kevin Pho: I love that construct because I completely agree with everything that you say, and I understand everything that you’re saying because in the clinical world, of course, physicians don’t take risks because people die, right? If people make mistakes or if what we do is too risky. But certainly, in the financial world, if you don’t take enough risk, it could have some financial consequences.

So, I do think that there needs to be some malleability when it comes to risk tolerance when physicians venture outside of the clinical realm. So, when you say that it’s maladaptive, how so? Give us some examples of why that’s maladaptive in the financial world.

Stanley Liu: Well, in the financial world, there are many cases where physicians, we might make terrible or suboptimal financial decisions because we’re much more motivated by the fear of losing money than the opportunity to make far more when that opportunity is not certain. We almost prefer something that’s certain and suboptimal compared to something that is less guaranteed but has a higher expected return, a better long-term outcome.

So, this averseness to risk can influence the decisions that we make both from a business and a financial standpoint, sometimes even a career standpoint. You might choose a more well-trodden career path even if there’s near certainty that you’re settling for less than what you can deserve or achieve.

Kevin Pho: So, from your physician clients, whenever you give financial advice, are you seeing them go more towards a guaranteed return, something like a CD, for instance, or some type of bond, versus something that would require more risk but greater returns, like a stock or a stock index fund?

Stanley Liu: So, it really depends. When I meet with a physician, too, and we’re talking about risk, I look at this in terms of two different dimensions. One is risk capacity, and the other one that you alluded to is risk tolerance. And I think of these as two different things.

So, risk capacity is more of an objective measure. How well can you objectively withstand a financial setback? So, for example, are your living expenses and debt so high that if you go two weeks without a paycheck, that would be catastrophic to your family? That’s a good example of having low risk capacity. And if, on the other hand, you have plenty of savings or you have multiple streams of income that if you lost one job for six months, you’d be fine, then you have much higher risk capacity.

And this is completely independent to your psychology, your risk tolerance, which is the second part. Risk tolerance is a lot more subjective. This is your personal attitude toward risk. That can be very independent of your actual risk capacity. A lot of times, this can be influenced by your upbringing, your exposure to money, to financial challenges or opportunities as a young person.

So, the idea here might be more what you’re talking about. What’s your attitude toward investing in stocks or real estate, starting a side business, or, let’s say, even going part time to combat burnout? These are all endeavors that have zero guarantee of success but potentially high long-term rewards. And your response to each of those is: Do these ideas terrify you, or do they thrill you? That speaks to your level of risk tolerance.

So, these are two different variables that I look at when I’m talking to a physician about how do we deal with risk in the financial realm.

Kevin Pho: Now, when you talk to your physician financial clients, how do you get them to think about risk differently? Assuming that they only think about risk one way, which is the clinical way that we talked about, how do you get them to evolve their understanding of risk when they venture into the financial world?

Stanley Liu: So, what I think we’re alluding to is if they have low risk tolerance, which is one dimension that we want to deal with. I would approach that differently depending on what their risk capacity looks like.

As an example, let’s say you have low risk tolerance. You’re scared of investing. You’re scared of putting in money in anything other than a savings account, but you make $300,000, and you have $400,000 in student loans. You have a $600,000 mortgage, $5,000 in credit card debt, and you’re moonlighting to pay for daycare for 2 toddlers. That low risk tolerance is actually pretty reasonable given their low risk capacity. I wouldn’t focus on their psychology. I would focus on: How can we find ways to increase your risk capacity so that you can relax a little bit, so that you can sleep better at night?

Now, as opposed to somebody who has high risk capacity, let’s say somebody has no debt. They have $500,000 sitting in a savings account, and they haven’t invested any of it, and they’re also stuck in a toxic job that’s burning them out because they’re too scared to leave a steady paycheck. That’s when I would sit back and talk to the physician and talk more about: Maybe we should look at your ability to tolerate risk because objectively, you’re in a pretty safe place to take some risk that could have some really good long-term returns. What are some baby steps that we could take?

So, it really depends on both subjectively and objectively where they are.

Kevin Pho: So, it sounds like risk capacity is the first thing that they need to address because whether they could tolerate risk directly stems from that first capacity, right?

Stanley Liu: Actually, I’ve seen it go all ways. You can make a two-by-two diagram, and I have seen physicians in all four of those quadrants. Sometimes they’re surprisingly unrelated.

The ones I actually worry about the most are the people who have low risk capacity and high tolerance because they’re the ones who are taking their short-term savings and putting it on some high-risk investment in hopes of getting rich with that, and that can really burn a lot of people. So, it really depends on what the individual situation is.

But I think, for the listener here, this is something that you’ve never thought of. I think it’s a great idea to look at those two variables independently and look at where you are. And yes, to your point, more risk capacity is always a good thing, and I think that is always something that you can try to shoot for.

Kevin Pho: So, assuming that we follow that narrative that a lot of physicians, they’re just not as financially literate as they want to be, and they come to you for the first time, what kind of questions do you ask them to tease out their risk capacity and risk tolerance? What are some basic questions that you initially ask to find out more?

Stanley Liu: And this is especially the case when I’m working with a couple who have very different upbringings and attitudes about money. I always ask, “What’s the biggest financial win that you’ve had that you can remember in the last five years? What’s the biggest financial mistake that you made? And what was money like growing up for you? What did your parents talk to you about money? Where are some cases where you and your spouse might disagree about money?”

Because this gives a better sense of where people are coming from so that when I actually look at their numbers and I see what their accounts are, see how much debt they have, then I can put their risk capacity in context with where they’re coming from culturally, psychologically.

Because if I don’t know that, my prescriptions are going to be off, just like if you are prescribing medicine to a patient and you don’t know their goals of care, you don’t know what their values are, right? You’re not going to meet a patient really where they are. It’s the same thing in financial planning.

I like to start with their culture, their psychology, their money scripts. What does money mean to them? We all deal with this somewhat differently, and many times, there’s not a rational part of it. This is just who we are. Then we can put the objective numbers in context with that.

Kevin Pho: I love that. I talk to a lot of financial planners on this podcast, and I would guess that this is assumed, but you’re explicitly saying that someone’s culture, upbringing, values, how their parents talk to them about money, that really plays outsized importance on how they tolerate risk and how they view money.

That may seem obvious, but I just wanted you to really explicitly state that and really share with the audience how important that is.

Stanley Liu: It really is. It’ll drive some people to excel financially. It’ll drive some people to crash and burn. It has such power behind what a person does with their money, and that can have much higher impact than whatever their bank accounts or their debt accounts or their risk capacity objectively can be.

So, when I’m talking to a physician, I want to see where they are and what are their biggest tailwinds and headwinds, whether it’s a subjective or objective issue, and how do we address that?

Kevin Pho: What if there’s a mismatch? What if there’s tension between a couple where they do have different values, whether it’s cultural or socially about money, and that leads to some type of tension? What do you do in those situations?

Stanley Liu: And a surprisingly large part of financial planning is kind of couples therapy because we’re talking about things like that. A financial plan, we want to shoot for an ideal where people are on the same page.

A lot of times, what I will see is in a couple, one person is sort of the money person, and they will kind of take the reins. And it’s usually the person who’s a little more financially literate, has a little more knowledge about it, and the other person just doesn’t want to deal with it.

And while that’s probably more common than it should be, what I always talk to a couple about is I say, “Well, what happens if the more financially literate person dies or gets sick? What will the other person do? Do you have a plan to take care of them?” And then one of the best ways that you can insure against that is that you make sure you’re all on the same page. And that sometimes means a lot of compromising.

You want to make sure you have a situation that’s both objectively good in the short term and long term and lets a couple be able to sleep at night and all feel OK psychologically about where they are and where they’re going, without feeling cheated, without feeling unappreciated. These are all real issues in financial planning that you don’t see in the numbers.

Kevin Pho: We talked earlier about physicians that you’ve seen that have low risk capacity and high risk tolerance. What are other red flags that you see from your perspective of a financial planner when it comes to physicians and risk? What are things that they shouldn’t do? What are some red flags?

Stanley Liu: Well, let’s say somebody has low risk tolerance and low risk capacity, like the really financially burdened doctor we talked about. You kind of have to work on both, right? We want to find ways to buy them more breathing room. But then we also have to psychologically evolve.

Once you have more breathing room, now you’re not just in a scarcity mindset in survival mode. Now you can afford to think a little bit more long term. You can take some risk, which may be very, very uncomfortable if you spend a very, very long time just trying to hold on, just trying to get through the day, and you’re treading water, and now suddenly you can think ten years into the future. That is often not a difficult mental shift.

It’s also tough when you grew up in a situation where money was never an issue, and then now you are in a situation where money is an issue, and you want to reproduce the lifestyle that you grew up with, but you don’t have the risk capacity to do that. That can be a very difficult situation, too, when you have that mismatch, and it can be very painful, very psychologically painful.

Kevin Pho: Now, we always talk about physicians needing more financial literacy during training, during medical school, whatnot. Now, when it comes to risk, how do you recommend physicians learn more about that?

Stanley Liu: I think a big part of medical school is finding out who you are. We do this when we’re trying to figure out what specialty we go into, and I think your risk tolerance becomes part of that. If the idea of someone dying under your care terrifies you, you may not go into critical care or emergency medicine, right? You sort of learn your own ability to tolerate risk.

Can you live with bad outcomes? Because even if you’re the best surgeon in the world, you are going to have some bad outcomes. We all know this, right? That, I think, is a really good glimpse into your inner psychology.

Now, I think medical school is also a great time financially to think about that because it tends to be a very stressful time because you have high tuition, especially if you’re taking on debt, and paying a lot of tuition, and thinking about student loans. When you are facing that situation, especially as you transition into repayment, that is also when I think that you see the truth come out about how well people are tolerating risk, and how do they manage that?

So, I think, personally, some just-in-time training in fourth year of medical school, right before Match Day, would be a great time to talk about this because by now, students have had some insight into both their approaches to risk clinically, and they’re hopefully thinking about transitioning from paying tuition to earning some money or repaying loans, and that psychology is fresh in their head. This, I think, would be a great time to start teaching.

Kevin Pho: We’re talking to Stanley Liu, the cardiologist and fiduciary financial planner. Today’s KevinMD article is “Physician financial risk: Balancing capacity and tolerance.” Stanley, as always, let’s end with some take-home messages you want to leave with the KevinMD audience.

Stanley Liu: Thanks so much, Kevin. Let’s end with those two variables and just review what they are.

Risk capacity, this is what a third-party objective observer would say, looking at your finances, and say, “How well could this person tolerate a financial setback or a temporary loss of income?” Obviously, the more the better, and that is something that a financial planner can help you figure out.

The second is risk tolerance. This is much more psychologically based, may be impacted by your childhood upbringing, and can be different from your spouse. This can also have an outsized impact on your financial future, and when you are making a good financial plan, you want to be acknowledging both risk capacity and risk tolerance when you are making your decisions for both short-term and long-term prosperity.

Kevin Pho: Stanley, thank you so much for sharing your perspective and insight. Thanks again for coming back on the show.

Stanley Liu: Thank you again for having me.

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