Our Bias Toward Action

Behavioral Finance
Patrick A. Labbe, CFA

I often make the case that investing lessons can be found most anywhere.  Soccer, specifically the penalty kick, is a good example.  For a penalty kick, the ball is placed 12 yards directly in front of the goal, and the goalkeeper attempts to stop a single shooter one-on-one.  Penalty kicks may arise during the normal course of play or through a series of alternating kicks used to resolve ties.

As you probably guessed, penalty kicks offer a huge advantage to shooters and result in goals about 80% of the time.  With less than a quarter of a second to react, the pressured goalkeepers nearly always attempt to guess where a shot will go, and jump aggressively in that direction, hoping to stop the shot.  Shooters, on the other hand, have many options—high, low, left, right or center.

While watching the World Cup and wondering if guessing was the best strategy for goalkeepers, I came across some research by Dr. Michael Bar-Eli of Israel’s Ben Gurion University.  Dr. Bar-Eli studied nearly 300 penalty kicks and found that the goalkeeper jumped left or right about 95% of the time.  However, he also found that the distribution of shots was spread almost evenly across the goal, with 30% of shots kicked at the center.  Dr. Bar-Eli estimates that goalkeepers could double their chances of stopping a shot by simply standing still about half the time.  So why haven’t goalkeepers adopted such a strategy?

Dr. Bar-Eli hypothesizes that a “bias toward action” explains this behavior.  This bias describes the tendency for people facing uncertainty to take action even when doing nothing is a very reasonable, if somewhat uncomfortable, option.  In this case, diving left or right gives the appearance of effort, allowing the goalkeeper to avoid criticism that he failed to act.  In fact, according to surveys, the vast majority of goalkeepers feel worse if a goal is scored when they remain centered than if they dive.

So what does this have to do with investing?  Well, many investors also display a bias toward action.  Faced with daily price changes and a constant news flow, some investors find it nearly impossible to stick with a proven strategy.  Instead, they quickly trade one investment for another, chasing last year’s winners, or they change their investments based on every piece of economic or political news they hear.  While all this activity will likely do little to produce their desired investment results (and may actually harm them), like a diving goalkeeper, investors of this type will never stand accused of not trying.

It’s easy to get the impression that investing is all about active trading, market timing, or anticipating Mr. Market’s next shot.  In fact, many investment firms have worked hard to convey such a message, perhaps to take advantage of peoples’ natural tendency toward action.  However, history shows us that successful investing is not about trading or timing the market, but rather the amount of time in the market with a proven investment strategy.