In this post, we will be discussing ACTION BIAS.
This will be more on the practical side than on the theoretical side and related to investing.
As the name - ACTION suggests, humans tend to do something or other to keep themselves busy.
We human beings are in a constant state of action. We think ACTION = LIFE. Well, that is true as far as the definition of living beings go. But TOO MUCH of anything can be detrimental.
Now here is one perfect example of Action Bias.
‘ In soccer penalty kicks, goalkeepers choose their action before they can clearly observe the kick direction. An analysis of 286 penalty kicks in top leagues and championships worldwide shows that given the probability distribution of kick direction, the optimal strategy for goalkeepers is to stay in the goal’s centre. Goalkeepers almost always (i.e., in 93.7% of the kicks) jump to the right (44.4%) or left (49.3%) instead of staying in the centre.
The reason for this obviously non-optimal behaviour by goalkeepers was an "action bias ".
In simple words, Goalkeeper will look like a fool if he stays in the centre rather than diving on either side.
Below is the link for the study.
In investing, this is very well captured in a Warren Buffet quote -
'The stock market is a no-called-strike game. You don’t have to swing at everything – you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, “Swing, you bum!” ’
We Indians LOVE Cricket. Here I can think of a perfect example of not falling prey to ACTION BIAS is The Wall - Rahul Dravid
He had the immense PATIENCE to let go of all the dangerous off-side balls. This frustrated the bowler who invariably used to start bowling on different lines & lengths and then Dravid used to be on top of that bowler.
Similarly in investing, here is what Charlie Munger says -
And our excessive activity aka Action bias can lead to other biases also. Few Examples.
When you fall prey to the latest SM frenzy, the FOMO sets in and this action bias pushes you to buy into the overheated stocks.
And the “ITCH” for further action will force you to either apply STOP-LOSSES or worse do the averaging down / coming out of the great business for a meagre 10 /20% profit.
In my personal experiences, I have fallen prey to action biases so many times that I have simply lost count. Today’s digital age makes it very difficult to stay away from the SM noise and so from Action Bias.
The solution again is not easy as always.
But a few things can be considered.
1 - Sleep Over that idea.
Whenever you come across a new stock idea, take some time, apply some check-lists and then only buy it. This will avoid the FOMO & the subsequent Action Bias.
2 - Avoid Social Media Noise
Be very selective in what you read on SM. Pick only useful groups on Whats app & Telegram. Follow a few selected Twitter Handles. Read selected websites and research reports only. The less the SM Noise, the less will be ACTION BIAS.
3 - Avoid watching your portfolio too frequently.
This is easier said than done. But this is so obvious. The more we see our portfolio, the more we will get the ‘ITCH’ to do something.
“Looking at your portfolio frequently can make you feel like it’s performing worse than it actually is, and the less likely you’ll invest correctly for long-term success,” Egan says. Excessive monitoring of short-term returns can lead to knee-jerk reactions and impulsive decision-making that doesn’t lend itself to letting your money grow over time.
One simple trick that I do myself ( sometimes, not always) is to simply buy a few quantities of say stocks of core portfolio companies / some ETF units on Monday Morning itself. This can reduce the ACTION BIAS in the subsequent weekdays.
That’s all for ACTION BIAS.
Hope you people liked it.
dr.vikas