Do you ever find yourself moving from one queue to another in a supermarket, or changing lanes on a congested motorway, only to realise you should have stayed in the one you were in? Or do you interrupt your workflow and respond to emails when a more considered response, or none at all, maybe more appropriate?
If the answer is Yes, you’re not alone, because human beings have an in-built bias towards action.
Action bias, or the Do Something Syndrome as it’s sometimes known, is the term behavioural psychologists use to refer to people’s preference for doing something over doing nothing, even when inaction might lead to a better outcome. It can be driven by a range of psychological factors — the desire for control, for example, social pressure, fear of regret or the illusion of productivity.
We think we’re making things better
Investors display action bias in all sorts of ways. An obvious example is the compulsion you might feel to sell when markets fall sharply, thereby turning paper losses into actual losses. Similarly, you may notice that markets have risen and feel the need to buy straight away to benefit from further gains. Another example is buying, say, a stock or a cryptocurrency because you’ve just read in a newspaper article or heard from a colleague at work that it could be about to rise in value.
We tend to think that, just by doing something, we’re somehow improving our chances of a successful outcome. Most of the time, in fact, investors are better off doing nothing at all.
“I am always hearing that people should be more engaged with investing,” economist Tim Harford recently wrote in the Financial Times. (1) “And up to a point that is true. People who feel ignorant about how equity investing works and therefore stick their money in a bank account or under a mattress, are avoiding only modest risks and giving up huge potential returns.
“But you can have too much of a good thing. Twitchily checking and rearranging your portfolio is a great way to get sucked into poorly timed trades. The irony is that the new generation of investment apps work the same way as almost any other app on your phone: they need your attention and have plenty of ways to get it.”
Boys will be boys
Some investors are more prone to action bias than others. Men, particularly younger men, are more susceptible than women. One reason for this is that men are more likely to be overconfident. Another factor is testosterone, which, according to the neurologist-turned-investment author William Bernstein, reduces fear and increases greed. “(Testosterone) does wonderful things for muscle mass and reflex time,” says Bernstein, “but doesn’t do much for judgment.”
In one well-known study, professors Brad Barber and Terrance Odean found that although women also trade more than they should, men trade even more frequently. (2) Between 1991 and 1997, they found that this increased trading reduced men’s net returns by 2.65% per year, compared to a hit of 1.72% for women.
Warren Buffett, the owner of Berkshire Hathaway and the world’s most successful living investor, has been a consistent advocate of patience and discipline. Buffett once said: “The trick is, when there is nothing to do, do nothing.” He famously described “lethargy bordering on sloth remains the cornerstone of our investment style.”
Buffett’s business partner, the late Charlie Munger, agreed that the less investors do, the better their returns tend to be. "Our job,” Munger said, “is to find a few intelligent things to do, not to keep up with every damn thing in the world.”
What to do about it
So what can investors do to curb their action bias? The first thing is just to acknowledge it; feeling the need to act is part of being human.
Remember too that even if action is required, you almost certainly don’t need to act straight away. So whenever you feel you need to do something, take time out. Try going for a walk, or better still, sleep on it. If you’re still not sure, speak to someone about it, and actively seek out evidence to support not taking action.
Something else you can do is to keep your investment strategy simple. Every year, Morningstar publishes a study called Mind the Gap, which compares the returns that funds produce compared to the returns that investors in those funds actually achieve. (3) Time and again the researchers find that the investors who find it hardest to resist the temptation to trade are those invested in narrowly focused funds. Investors in broadly diversified funds are far more likely to ignore the noise and stay the course. (4)
It might seem counter-intuitive, but a final suggestion is simply to pay less attention to investing and the markets. Don’t keep checking the value of your pension: once or twice a year is quite enough. You don’t need to check the FTSE 100 or the S&P 500 either. And if you find that reading the money section of your weekend paper only makes you more inclined to act, just put it in the recycling.
As Tim Harford says, ‘the more attention we pay to our investments, the more we trade, and the cleverer we try to be, the less we will have at the end of it all.”
It really is true: the less you do, the better off you’re likely to be.
This article is produced by us for Financial Advisers who may choose to share it with their clients. Timeline Planning and Timeline Portfolios do not offer direct-to-consumer products.
Robin Powell is a journalist, author and editor of The Evidence-Based Investor.
References:
