soccer goalie showing action bias and investing

Action Bias and Investing (Women’s World Cup Edition)

Yesterday, the U.S. Women’s National Soccer Team advanced to the finals of the World Cup. The heroics of Goalie Alyssa Naeher in saving a penalty kick late in the match against England sealed their fate. Imagine being inside the head of a goalkeeper facing a penalty kick. Your job is to be the last one, standing alone, against an uncontested opponent. Now imagine your best bet, according to science, is to do nothing.  Don’t move. From a goalie’s perspective, the odds are that by standing still in the middle of the goal they have the greatest chance of blocking a shot. This is because, even when they guess correctly on which way to dive, they still only block less than 30% of the shots.

Why does the goalie not stand still all of the time? Expectations play a large part. Place yourself in the position of the raving soccer fan who watches that goalie stand still while the ball is artfully smashed into the corner of the net by the shooter. You wouldn’t care about odds. You would look for effort from the Goalie, right? This is action bias at play. In the pivotal moment, just do something. Because even if it is the wrong thing, at least you tried. Goalies try to make informed decisions, knowing that they have to balance expectations of the crowd and team with outcomes.

Action Bias and Investing

This brings us to the parallels of action bias and investing. Much like a goalie having to justify action, a stock picker or market timer is constantly trying to justify their role by creating a perception of activity. There is urge for someone to do something, anything, when we see a bit of news, or the markets are at a high (or a low).  We might be convinced that some action by ourselves or an all-knowing guru will give us the advantage. We will make more money than we would have otherwise. It just isn’t true. That is why passive indexing has flourished. Science has shown us that buying and holding at a low cost (doing nothing) can improve our odds of success over trying to actively time the market. It is the investing equivalent of not diving for the sake of diving.

An important distinction here: This approach does not mean we win every time. We can guess right and still not have a perfect outcome. It means we place the odds in our favor over the long term. That’s the key to investing success. Admittedly, staring down a penalty kick takes place in a singular moment. The wrong choice on the world stage could be catastrophic, hence the need to make bold moves. We don’t need to make bold moves as investors. Since we can take the long view, we are free to make good, incremental decisions that sometimes amount to doing nothing. We have the luxury of standing still, not guessing, not diving, and letting the ball come to us.