A Wendy’s Wednesday Whimsy
One of the best lessons from last fall’s Evidence-Based Investing Conference in NYC didn’t take place at the conference itself. It happened in the train station, where I met up for a couple of hours with “Annie,” a high school friend I hadn’t seen since the late 70s.
Had Facebook existed then, maybe we would have been better at staying in touch. It didn’t, and we weren’t. Fortunately, the bear hug Annie gave me when we reconnected promptly eliminated any time and distance between us. We jumped right back in where we left off, talking about nothing in particular and everything at once.
One of the things we talked about was this “evidence-based investing” jones that had brought me to the East Coast to begin with. Annie, who is a palliative care senior social worker at a major medical center, said something at the time about the comparative challenge of evidence-based medicine, controlled studies and practical treatments.
What she said puzzled me, but before I could learn more, the conversation shifted. (We had a lot of catching up to do!)The comment stuck in my head, though. It was still there a couple of weeks later when I happened across this piece by “Nonsense” author Jamie Holmes in The New York Times, “Flossing and the Art of Scientific Investigation.”
Dots connected. Holmes wrote about how, last August, the Associated Press reported that 25 studies compared brushing with and without flossing, and found only weak evidence that flossing helped.
Does that mean we should now ignore the advice of nearly ever dental professional on the planet? At a quick read, one might think so. But Holmes exposed a chink in the logic. He pointed out these studies had not included what was considered “the gold standard” of evidence-based medicine: randomized controlled trials. As he explains: “It’s unlikely that an Institutional Review Board would approve as ethical a trial in which, for example, people don’t floss for three years.”
In short, not all of the evidence had really been accounted for. The wisdom of flossing is such a given, nobody would aggressively discourage it for the sake of academic curiosity. As Holmes says, “It’s considered unethical to run randomized controlled trials without genuine uncertainty among experts regarding what works.”
Then, at least according to Holmes, along came a culprit called evidence-based medicine:
“The opposition between randomized controlled trials and expert opinion was fueled by the rise in the 1990s of the evidence-based medicine movement, which placed such trials atop a hierarchy of scientific methods, with expert opinion situated at the bottom.”
He provides a powerful illustration of what he’s talking about by pointing out, tongue-in-cheek, “We don’t know if parachutes really work because we have no randomized controlled trials of them.”
So, that’s what Annie must have been talking about. Evidence-based medicine appears to have generated a controversy about which matters most: The evidence from randomized control trials? Expert opinion? Whatever has worked well so far?
At least in healthcare, Holmes endorses a relatively even balance among these. “Expertise and systematic evaluation are partners, not rivals,” he says. “A strong demand for evidence is a good thing. But nurturing a more nuanced view of expertise should be part of that demand.”
But should we apply this same, even balance in evidence-based investing?
It does seem there are times when practical implications (think: costs) outweigh academic theory. That’s one reason there is room for never-ending debate among us as to what THE best investment strategy may be. That said, I think robust, academic evidence should be given more weight in evidence-based investing than may be warranted in evidence-based medicine.
In medicine, the study groups are human beings, and I believe the data is often gathered in real time. How will one treatment’s outcome compare to others?
In financial economics, we study capital markets and, typically, their historical financial data points. How have various markets performed under various conditions?
So, I still think too much “expert” evaluation may cause more harm than good in evidence-based investing. Evidence-based medicine and investing share common ground, but they are not identical.
Has the evidence been peer-reviewed? Is it free from bias? Repeated and replicated? Has it proven out over enough time? This last one seems especially important in our incredibly impatient world – especially when it comes to adding new techniques and tactics to what’s already been serving evidence-based investors well for decades.
To me as an individual investor, these are the questions worth focusing on before I make any changes to my own holdings.
Oh and, by the way, I intend to keep flossing. Every day.