Medicine: A Lesson In Efficient Markets

The market for medicine is incredibly interesting. Almost every day we learn something new about a treatment that we thought would work but does not, or about a treatment that we didn’t think would work but does. Beyond the particular fascination, I think that the medicine market can also teach us important lessons about rationality, economics, and by analogy, also about the stock market.
Let’s look at some general facts about the medicine market: We spend about 19% of GDP on health; many people are involved, many of whom are experts; and there are many natural opportunities for learning (journals, patients, and repeated treatment opportunities). Together these large financial motivations and the many opportunities to learn suggest that we would have achieved an optimal outcome in the medicine market.

But, any serious examination of this market’s reality makes it crystal clear just how much we don’t know. This lack of knowledge is evident for old and established treatments, not only for new ones. For example, after about 30 years of giving young kids cough syrup for cold symptoms, we recently realized that this is a bad idea and the FDA announced that we should stop. Or, as another example, after giving people in Africa iron supplements we learned that being anemic is actually helpful in terms of fighting different diseases. These are of course only two of many examples.

How can it be that with all this energy, time, and money the medicine market remains so primitive in terms of its ability to learn about the optimal outcome? I suspect that one answer is that learning is much harder than we imagine, leading us to misguided intuitions about what works and what does not.

What about economics? Why do we believe that the stock market is rational but at the same time recognize that the medicine market is full of mistakes? I think it is not because one is more rational than the other, but because we have a lot of data about outcomes of different trials and experiments in the medicine market, but almost no experimental data about the stock market. The FDA, and medical testing in general, makes it impossible for us to believe that the medicine market is rational. At the same time, lack of evidence about the stock market makes it easy for us to believe that this market is rational.

So, can it be that the stock market is as flawed as the medicine market? I think it is very likely, and maybe if we studied it in more systematic and experimental ways we might find evidence that supports this point of view.