Personal Finance Essentials
Action Bias
The Psychology of Investing > Action Bias
“Don’t just stand there – do something!”
That common refrain causes people to act when they shouldn’t. Investors are notorious for trading in and out of their investments with great frequency. They claim to be long-term investors, but they’re really short-term traders who have been doing that for a long time. Market performance data shows that returns are best obtained by maintaining a long-term perspective. Said another way: “Don’t just do something – stand there!”
The Soccer Goalkeeper Study
Action bias is well documented outside of finance too. Researchers studying elite soccer goalkeepers during penalty kicks found that the optimal strategy – staying in the center of the goal – is chosen only 6.3% of the time, even though the ball is kicked to the center or to either side in roughly equal proportions. Goalkeepers almost always jump left or right because they fear looking passive. Action feels better than inaction, even when inaction would produce better results.
The same pattern plays out in investing. During market volatility, investors feel compelled to do something – sell, switch funds, move to cash. But research consistently shows that the more you trade, the worse your results. The investor who stays put while everyone else scrambles often ends up ahead.