Early in life we learn that doing things to improve our situation is a positive thing. But it doesn’t work like that in investing. Most of the time, doing nothing is the best approach.
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, may be 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.
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.
READ THE FULL ARTICLE HERE
PREVIOUSLY ON TEBI
Why owning losing stocks doesn’t matter
Style drift — a lesser-known downside of using active funds
Should you go all in on equities?
TEBI ON YOUTUBE
Have you visited the TEBI YouTube channel lately? There’s already a wide selection of high-quality videos on there. Why not subscribe and be one of the first to see our latest content? You’ll also find our videos on Instagram and TikTok.
© The Evidence-Based Investor MMXXIV
