In a paper, 'Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks' published by a team of Israeli scientists, they concluded that even though the best course of action for a goalkeeper during a penalty kick is to stay in the middle, most of them dive either to the right or left. This is mainly because the goalkeepers want to be seen as doing something. Most people would criticise a goalkeeper who stood in the middle and allowed the goal. Similarly in case of personal finance, we want to take some action considering all the news, views and events around us. We feel that we should take some investment decision to improve our portfolio or reduce risk in it even though the best course of action might be to stay put. This behaviour can affect our portfolio in a negative manner -
- Taking action on our investments does not necessarily improve our returns or reduce risk. In volatile markets, people tend to buy or sell in haste or panic and regret the decision later on.
- Buying or selling investments based on tips or rumours might make you feel like you are acting immediately on information but it may not be in your best interests.
- People constantly trade in the market thinking that they can take advantage of the market. This often leads to losses.
How is Inaction Better Than Action
Saving – When you are saving money, you are actually doing nothing. You are not using the money but letting it lie in your bank account. Regular savings add up to a sizeable kitty further aided by compounding.
Long Term Investments – If you invest in the right products, the benefits of long-term investing outweigh the benefits of short-term investing.
We are NOT saying that inaction is the best course of action always. But one should act only after gathering information, understanding the data, analysing it and selecting the best course of action.
Doing SOMETHING feels better than doing NOTHING but that does NOT mean it is BETTER.
1) Think Before You Act – If you are tempted to take action on your portfolio, ask yourself why you have made this decision. Think through the pros and cons and then decide the best course of action.
2) Analyse Success Stories – We all know investment experts who made a fortune and get tempted. But before you make a random investment decision, remember that there are many people who lost money making the wrong investment decisions. These stories are not circulated as much.
3) Invest As Per Your Requirements – Invest based on your financial goals, your risk profile, your current financial capacity and prevailing market conditions. If you have a financial planner, check with her before deciding on a course of action.
Protect your financial portfolio from your action bias by being patient and investing smartly.