Become a better investor – with the help of a 19th-century Hungarian physician

A 19th-century Viennese hospital may not seem like the most obvious place to begin when looking for practical ways to be a better investor.

Yet, in the mid-1800s, the backlash to a new theory developed by a Hungarian physician working at the Vienna General Hospital, spawned a behavioural bias that would later bear his name.

In the 1840s, Ignaz Semmelweis developed a theory that he believed would save the lives of thousands of young children. Despite the evidence he supplied, peers ridiculed his research, and he later suffered a nervous breakdown and died in an asylum aged just 47.

This tragic story ends in triumph, however, when his findings were later proved correct and accepted by the medical community that once ostracised him.

This tendency to reject new ideas because they contradict previous beliefs – despite evidence in their favour – has become known as the “Semmelweis reflex”.

Read on to find out more about this remarkable man, and how being mindful of the behavioural bias that bears his name can make you a better investor.

Identifying the causes of a high mortality rate in Vienna’s maternity clinic

While working in Vienna in the 1840s, Semmelweis observed that, among women in the first division of the maternity clinic, the death rate from childbed fever was two or three times as high as among those in the second division.

Semmelweis started eliminating all possible differences between the two clinics. He found that the only discernible difference was that medical students treated some patients in the first clinic, while midwives only worked in the second.

The physician concluded that students carried “cadaverous particles” on their hands from the autopsy room to the patients they examined in the first clinic. Essentially, their hands carried the infection from mothers who had died of the disease to healthy mothers.

As a result, he ordered the students to wash their hands in a solution of chlorinated lime before each examination. The result was that the mortality rate in the first clinic declined by 90%.

Semmelweis was ridiculed for his ideas, despite falling mortality rates

While the younger members of staff in the hospital recognised the significance of Semmelweis’s discovery, senior doctors and clinicians were critical.

The “germ theory of disease” had not been accepted in Vienna and so Semmelweis’s ideas were largely rejected or ridiculed. In fact, the editor of the Wiener Medizinische Wochenschrift wrote that it was “time to stop the nonsense about the chlorine handwash”.

He was dismissed from the hospital and, despite years of trying to gain acceptance for his theory, was eventually committed to a lunatic asylum, dying just two weeks later.

Of course, his theory was ultimately proved correct. More than 20 years later, Louis Pasteur’s work offered a theoretical explanation for Semmelweis’s observations: the germ theory of disease.

The tendency to ignore new evidence because of strongly held prior beliefs has become known as the “Semmelweis reflex”.

Beware of the Semmelweis reflex when investing

When investing, the Semmelweis reflex could lead you to cling to preconceived ideas about your investments and discount information that contradicts your beliefs.

For example, you may have chosen specific assets to invest in because you use the business regularly and you want to “support” them. However, as a result of your loyalty, you may reject evidence that suggests investing in those equities may not be as suitable for you as you think.

With that in mind, here are three steps you can take to overcome the Semmelweis reflex when investing.

Examine your own beliefs

It’s likely that you have some strong beliefs when it comes to political or religious views or philosophical positions.

While you may have good reason for sticking to some of these beliefs, it’s important to be self-aware enough to know these dogmas exist, and to understand that they affect the way you consider new ideas or evidence.

“I believe in the benefits of free markets” is an example of a dogmatic belief. It can seem innocent, but it will affect your willingness to explore new discoveries.

Seek out new knowledge

Knowledge is a key aspect of overcoming the “Semmelweis reflex”. The more you understand about financial markets and investing, the more sources of information you have from which to form an opinion.

It can be worth proactively seeking out opposing or alternative opinions on any potential investments, even if those may seem uncomfortable to you at first. Give new information a chance by trying to really understand it.

Critically consider any evidence

When you have sought out new evidence, it’s important to critically assess this. Take into account your existing beliefs and whether this new information should change them – or if more research is needed.

For example, your belief might be that you should invest in your own country. You may be more familiar with the shares and funds and feel more comfortable with investing in entities you “know”.

You may then have read our article on the dangers of “home bias” and why it can hinder your progress towards your goals. Having critically assessed the viewpoints, you have two choices:

• Let the Semmelweis reflex take over, ignore new evidence, and stick with your established way of doing things – even if that isn’t the best thing for you.

• Make changes based on new information.

The more information you have available, the more confident you will be in your decision-making and the less likely you’ll be to just go with the familiar.

Get in touch

One of the benefits of working with a financial planner is that you can benefit from evidence-led advice. It gives you a different perspective on investing, helping you to make more informed decisions based on facts.

We can also act as a sounding board, helping you to overcome common behavioural biases such as the Semmelweis reflex.

To find out more, please contact us at info@blackswancapital.eu and we’ll be happy to help.

Please note

Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.