What is action bias? As per Business Dictionary—Action Bias is the propensity to act or decide without customary analysis or sufficient information. In short, it’s ‘just do it or something,’ and think later.
Recently, we shared this quote by Paul Samuelson on our FB page – Investing should be more like watching paint dry or watching grass grow. If you want excitement, take your money and go to Las Vegas.
What this means is that one of the keys to successful investing lies in being patient. But being patient is not easy. It calls for self-control. And human beings are biased for action.
If something is not working, we try to act and do something about it. This is not always a good idea. When it comes to investments, it’s important to understand the value of waiting and watching.
Many investors, while investing, allocate for long term gains and goals, but soon after, they feel the need to react to every market development. This ignores the proven fact that, historically, the market has moved upwards more times than it has gone down. Put simply, what this means is that if you ride out the downturns, you stand to gain in the long run.
This is easier said than done. Anxiety is not an easy beast to tame, especially when it is money that is the cause of anxiety. Concerns about the state ones investments are difficult to tolerate stoically. This results in the bias for taking action, which can be detrimental.
Carl Richard, author of the seminal book ‘Behaviour Gap – Simple Ways to Stop Doing Dumb things with Money’, says, “When you plant a seed, you don’t dig deep every day to check whether roots are growing fine. In fact, doing this is suicidal and will not bear fruit. Instead, our constant actions will hurt the plant and the fruits will be far from sweet or satisfying.”
Keep in mind this, when you carefully decide to invest in a particular style of funds for long term returns, it is essential to give these investments time to grow, stabilise, and bear fruit.
To steer clear from the dangers of action bias, train yourself to ignore the media noise, trust your advisor’s counsel on how certain global developments will, if at all, affect your investments, and take action only when it’s absolutely necessary – more often than not, it’s not. Constantly replanting and digging up a sapling will most definitely stunt growth. This is a scientifically proven fact, when it comes to both plants and investments.
The behavioural finance professors Brad Barber and Terrance Odean proved through intensive research that individual investors pay a “tremendous performance penalty” for active trading. Their analysis of accounts at a large American discount stock broker between 1991 and 1996 found that those trading the most earned an 11.4 percent annual return, while the market returned 17.9 percent.*
We have experienced that our happiest clients have portfolios that have not changed for years. They have benefited immensely from this and we are thankful to them for being mature enough to trust us.
*Research quoted from seekingalpha.com