The Four-Letter Word Doctors Fear
“People will choose unhappiness over uncertainty.”
-Tim Ferriss, The 4-Hour Workweek
Key Points:
- Physicians are conditioned to be risk-averse in both their professional and financial lives.
- In the world of business and finance, the ability and willingness to take risks is considered a necessary and even positive skill.
- Through practice and planning, physicians can gradually optimize their risk tolerance and capacity to achieve far more professional and financial wellness in their lives.
It keeps us up at night. We pay thousands to hundreds of thousands of dollars a year to protect ourselves from it. Our hospitals or practices have entire departments dedicated to managing it.
It’s “Risk.”
We physicians love certainty. We like multiple choice questions with unequivocally correct answers. We project certainty to our patients – when you are 95% sure about a patient’s diagnosis, you probably don’t tell the patient there’s a 1 in 20 chance you’re wrong. Patients want certainty too.
Avoiding risk is an inherent part of modern medicine. We practice CYA documentation, ensure our patients sign informed consent forms for everything, and transfer out high-risk patients to centers that have more risk capacity. Every day, we go out of our way to minimize the risk that we’ve missed a diagnosis, that a routine procedure goes wrong, or that someone will sue us because we didn’t do a test for a life-threatening condition with a 0.01% pre-test probability.
Our risk aversion extends outside the clinical realm too. We have been trained to follow clearly defined paths in our careers. By the time we become attendings, we are often afraid to try something uncharted and uncertain. There is too much risk holding us back – the social risk of losing our prestige as a physician, the financial risk of losing our physician income, the reputational risk of humiliating and public failure, and even the ego risk that we are not as brilliant as we think we are.
And so, we stay on well-trodden paths, climb well-defined career ladders, and leading predictable careers, even if there is near certainty that we are settling for less than we deserve or can achieve. We often do the same thing with our money – we are motivated more by the fear of losing money than the opportunity to make far more.
Contrast our perception of risk to that of the business world. Here, the word “risk” has a completely different connotation. A “bold risk-taker” is seen as a positive, even aspirational identity. It is understood that embracing a certain, rational amount of risk is an inherent and necessary part of the pursuit of an even greater reward. Failure is not seen as humiliating or shameful – entrepreneurs often speak about “failing forward” as a proud and valuable learning opportunity from which to move forward.
In the world of finance, risk is embraced as part of every financial plan: the risk of losing principal in an investment, the risk of untimely death or disability, the risk of inflation, the risk of unpredictable tax and student loan policies, and even unknowable risks. When assessing your own relationship with risk, it helps to separate that relationship into two categories: risk capacity and risk tolerance.
Risk capacity is an objective assessment of your ability to withstand unexpected setbacks without becoming financially insolvent. Are your living expenses and/or debt so high that going two weeks without a paycheck would be catastrophic? That’s a good marker of low risk capacity. If on the other hand, you have sufficient savings (and low enough debt) to ride out a 6-month loss of income with no change in lifestyle, you have much higher risk capacity.
Risk tolerance on the other hand, is a subjective, personal attitude toward risk that can be completely independent of risk capacity. You may have low risk tolerance if you’re terrified by the idea of investing in stocks/real estate, starting a side business, or going part-time to combat burnout – even though all those endeavors have very high potential long-term rewards. On the other hand, you may have high risk tolerance if you’re thrilled by the idea of investing, starting a side business, or going part-time even with no guarantee that the endeavors will be successful or sustainable.
Understanding and optimizing both your risk capacity and risk tolerance are critical aspects of both financial and career planning. Let’s look at different combinations of risk capacity and tolerance, and how that might affect a physician’s career or financial planning.
Low Risk Capacity + Low Risk Tolerance:
Example: A physician who is making $300k but has $400k in student loans, a $600k mortgage, $5k in credit card debt and is moonlighting to afford daycare for two toddlers. The physician cannot stomach the idea of investing and losing any money, so any extra money left over is in a savings account.
Potential Strategies to Consider:
- Maximize your income at your current job. Negotiate raises, bonuses, and get any incentives available at your current job – this will improve your risk capacity without leaving the security of your current job.
- Eliminate high-interest debt. Set aside a bit of every paycheck to paying down any high-interest debt (e.g. credit card debt with a 10%+ interest rate). That is the equivalent of investing with a guaranteed 10%+ rate of return.
- Build a reserve fund. Once you have eliminated high-interest debt, set aside that money to build a reserve of money for the sole purpose of ensuring against an unexpected drop or loss of income. A high-yield savings account or market money fund would be a perfect place to save this money. Having 3 to 6 months of living expenses set aside is a commonly used benchmark that will dramatically improve your risk capacity.
High Risk Capacity + Low Risk Tolerance:
Example: A physician with with no debt, $500k in a savings account, and is too scared to leave a toxic job that’s burning him out because the idea of losing a steady paycheck terrifies him.
Potential Strategies to Consider:
- Take baby steps with risk. Slowly build your comfort level with taking smart financial and professional risks with a high potential reward. For example, invest only $100 at a time or take a 2-week unpaid leave of absence to focus on goals that are important to you without upending your career. Like allergy shots, the idea is to gradually desensitize you to small amounts of financial/professional risk that could yield significant rewards in the future.
- Adjust as you go. Pay attention to your comfort level with risk and uncertainty as you take small baby steps to increase your risk tolerance and adjust accordingly. As you build up your risk tolerance, backed by your strong risk capacity, you will gradually develop the power to unlock new, life-changing possibilities.
Low Risk Capacity + High Risk Tolerance:
Example: A physician who decides to invest her reserve fund into an investment real estate property. Three months later, unexpected changes at work make her current job untenable, but she now has no choice but to stay.
Potential Strategies to Consider:
- Build risk capacity first. Create a scenario where life would be manageable if your investments or business endeavors went south AND you simultaneously had an unexpected loss of income. Negotiating raises/bonuses/incentives, paying down high-interest debt and building a reserve fund will all improve your risk capacity.
- Prioritize resilience over returns. You may have to temporarily sacrifice long-term gains for the power to survive an unexpected financial setback. While this may be a tough pill for you to swallow, remember that expected returns are not guaranteed. Boosting your risk capacity will increase the probability that those returns eventually become reality.
High Risk Capacity + High Risk Tolerance:
Example: A physician who has debt controlled, a 6-month reserve fund, a 7-figure 401(k) and is cutting down to 0.8 FTE to volunteer more at her kids’ school PTA while building a short-term rental business.
Potential Strategies to Consider:
- Ensure your risk capacity continues to match your risk tolerance. Some of the happiest physicians I know are in this group. If you are among them, make sure you are intentional about protecting your strong financial position so you can continue taking smart risks on investments or endeavors with high potential long-term rewards.
- Pay it forward. Teach the next generation of physicians how to achieve both the risk capacity and tolerance to build meaningful lives and careers they deserve. That is why DocEmpowered exists.
Georgia O’Keefe once said, “I’ve been absolutely terrified every moment of my life – and I’ve never let it keep me from doing a single thing I wanted to do.” While being risk-averse in medicine helps keep our patients and professions safe, embracing a healthy amount of risk in our financial lives can help us achieve far more personal and professional wellness.
Stanley Liu, MD, FACC is the Founder and Principal Financial Planner of DocEmpowered, LLC. He is also an independent practicing cardiologist, an award-winning medical educator, and the 2024-26 Advocacy Chair of Maryland’s American College of Cardiology Chapter.
Do you want the power to serve your patients, family, and community on your own terms? If you need an evidence-based financial plan to help make that power a reality, book a free discovery call here.
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Blog Feature Photo Credit: Antoine Martin on Unsplash
Additional Photo Credits:
SEO Galaxy on Unsplash
Daniel Velásquez on Unsplash
Daoud Abismail on Unsplash
Veronica Reverse on Unsplash