What is Action Bias?

One of the most detrimental biases that can hinder investment returns is the tendency to act for the sake of acting. I have personally experienced the effects of action bias in my business, investing, and personal life. To illustrate the concept of taking action when it is unwarranted, I will share how it has impacted my own behaviour.

Firstly, what is Action Bias?

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Definition: Action bias is the tendency to prefer taking action over inaction, even without evidence of better outcomes. It is an automatic response, similar to a reflex, and not based on rational thinking.

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The inclination towards action and activity is prevalent in the investment world, perhaps more so than in any other domain. Even when this action does not ultimately improve results, there is a pervasive belief that taking action can somehow enhance outcomes.

The human need for a sense of control plays a significant role in this phenomenon. We often feel uncomfortable in situations where we perceive a lack of control. The fear that things might spiral out of control if we don’t act compels us to take action. It brings a sense of satisfaction to have done something, anything—often seen as better than doing nothing.

In today’s fast-paced society that glorifies busyness and equates it with success, the ability to be idle and embrace inactivity is often labelled as “laziness.” The famous line “If you want to be successful, ask someone who is busy” is the epitome of this.

🖼️ As reflected in the cover image the stock market is an incredibly overactive place with a lot going on at all times.

✈️ My most recent “Action Bias” highlight…

A few weeks ago, I took a flight to Hanoi, Vietnam 🇻🇳. Travel has a way of bringing out anxiety in all of us. Even though we have been flying for years, the need for action always lingers.

The moment we landed, the travel behaviour kicked in. We rushed to the check-in counter, even though we were 3 hours early for a domestic flight with hand luggage. We got our tickets and headed to the security line, feeling the need to take action.

After passing through security, we rushed to the gate number on our ticket, arriving 2 hours and 45 minutes early. There was a sense of urgency, a race against… who knows? And we had won.

While sitting at the correct gate, I couldn’t sit still. I approached the counter and asked if the flight was on time, a question that every person at an airport must dread. The response “Yes” brought me calm.

Moments later, another thought crept in – “Are we at the right gate?” I roamed around, checking other terminals and screens, and asking questions. My overactive need for action, my constant questioning, all based on irrational thinking, did not provide any evidence of an earlier plane landing. My reflex to try to gain control was futile.

I couldn’t sit still, I needed action. I chose to do something when the correct course was to do nothing at all.

Later that day, as I sat back and sipped on a whiskey, I chuckled at how silly I had been. I’m aware of the bias, of how it leads nowhere, yet I still participate.

Investors suffer from this Action Bias and the need to act…

We are taught that “sitting idle” is negative. In this modern society of continuous momentum, it is frowned upon when someone appears idle. There is so much noise currently that we can be paralyzed by it all. There’s noise about markets, what other investors are doing every day of the week, and we are tuned in 24/7.

Anxiety surfaces because we are watching the activity of others; we have the feeling of missing out, thinking that others may know something we don’t. We’re not encouraged to be inactive. We are encouraged to trade, to have high turnover, rebalance, and to watch every quarterly and every fed or reserve bank hike. We are always aware of everything.

This makes it incredibly hard to be inactive. Inactivity in long-term investing is a challenging skill to master. We must be confident in our ability to sit out, let others stay active, and let them make a few perceived percentage points more.

The industry wants you to be active, to take action, that is how they make money. Never forget YOU are the product.

The “Do Something Bias” at work.

Action bias, is also known as the “do something” bias. The tendency for investors to act immediately in response to an event or market fluctuation, without fully considering the potential consequences or alternatives.

The “Do Something Bias” usually leads to impulsive decisions driven by emotions such as fear, greed, or regret.

Some Characteristics of Action Bias:

– Impulsive decision-making: Investors act quickly without fully evaluating the situation or considering alternative options.

– Emotional response: Action bias is often triggered by strong emotions, such as fear or excitement, rather than a rational assessment of the investment.

– Lack of consideration: Investors may overlook important factors, such as risk, market trends, or long-term goals, in favor of taking immediate action.

Some Examples of Action Bias:

– Selling a stock after a sudden decline, without considering the underlying fundamentals or potential for recovery.

– Buying a trendy stock based on recent news or hype, without conducting thorough research or evaluating the company’s financials.

– Panicking and liquidating a portfolio during a market downturn, without having a well-thought-out plan for rebalancing or adjusting the investment strategy.

Sitting idle can be your ally.

Investing is a practice where inactive and sitting idle can be your greatest ally. Not all actions lead to positive outcomes. It’s important to remember that patience and sitting out is still a decisive action.

The industry often emphasises being active and taking action. However, much of the promoted activity is biased. There are hidden incentives beneath the surface; the financial media, analysts, and funds don’t prioritise YOUR wealth.

Sometimes, choosing to be inactive and letting the chaos unfold without your involvement is a wise decision. Exercising the discipline to resist unnecessary activity is a valuable investment strength. If I’m unsure about an investment or the market doesn’t make sense to me, I refrain from acting impulsively.

While I’m always on the lookout for opportunities, I don’t engage in activity just for the sake of it.

Going against the crowd and choosing not to be swayed by their activity demonstrates independence. I’ve seen many belittle those who choose to sit back and observe, using arguments like “you missed out on a fortune.” However, most of the time, the activity eroded the profits over time.

Making investment decisions, trades, or buy-and-sell choices simply out of restlessness is unwise. This doesn’t mean doing no work. There’s always something to do, learn, understand, research and analyse.

It’s about taking meaningful actions and not continuously tinkering or trying to “Tweak’ the portfolio, without a sound strategy. Inactivity is often the missing edge. I understand the struggle with inactivity—I’ve been there.

Action Bias is a lot more common when you start investing…

When I first started investing, I was consumed by information overload. I subscribed to countless websites, news outlets, and investment blogs, and downloaded numerous apps.

I was determined to absorb everything about investing, harbouring fantasies of becoming a Wall Street sensation (in my mind, at least, as I’m nowhere near the US). However, I eventually questioned the usefulness of the sheer volume of information. I decided to cut back by 99% and found that I still obtained the essential information required for making investment decisions.

There were days when I lacked the desire to invest or had minimal ideas about where to allocate capital, but the incessant stream of notifications prodded me to take action, so I wouldn’t miss out on potential gains.

It then struck me that I hadn’t embarked on this journey to be glued to screens or spend my time waiting for the market to open in my brokerage accounts.

This level of activity wasn’t what I had in mind. Moreover, it hindered me from conducting in-depth research on potential investments because after wading through a hundred market-related emails, I had little energy left to read an annual report.

The solution to Action Bias and overactivity?

I don’t have an exact solution, however, I have found it very helpful to control the flow of information I receive. Controlling the environment is very important for investors. If you struggle with inactivity, then don’t subscribe to or watch anything that promotes activity.

Filter your investment world down to the most essential pieces of information and news flow.

The question you need to ask before all decisions is:

“Will this action or activity produce a better result or outcome than if I were to sit still and do nothing at all?”

If you are being rational most of the time, the answer is no, or the outcome won’t really make all that much of a difference to the objective.

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Hasty work and premature decisions may lead to penalties out of all proportion to the issues immediately involved.

Winston Churchill

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Unsubscribe from anything that does not align with what you are setting out to achieve. Keep your mind focused on the strategy. The psychological tendencies are strong, and FOMO or the powerful pull that greed has that causes us to act is hard to avoid.

Pause and think, “What is causing me to act?” or “Do I need to take any action here at all?”

What helps me the most is to understand what sparked the “Action” or the thought of activity? Was it brought on by some anxiety about something I saw or heard? Get to the root of what is causing it.

Am I being impatient? These days I pause a lot before decisions, letting the feeling pass.

Sometimes, of course, action is warranted and needed, but the decision should still be based on whether the evidence will produce a better outcome.

🔑 The Key Takeaway.

Biases like this are incredibly hard to combat. They are always there; I don’t think you can truly shake them. Awareness of them is the key and then implement the right processes and systems to improve your decision-making.

As private investors, time allocation and applying your energy to the essentials are important. If you must be active, spend your days studying companies, reviewing opportunities, and not listening to Mr. Market and what all the other investors are doing. I love the markets and am deeply committed to stock investing, so I understand it can be hard to sit idle.

When we are observing and soaking up all this media, notifications, subscriptions, just think: Is this bit of material going to help me make better decisions? Will it help me succeed? If not, cut it.

Don’t be active for the sake of it.

This is not to suggest at all to do nothing. Inactivity and idleness born from the lack of confidence or analysis paralysis are not great either. It is about analysing the situation, using your 2nd order thinking and inverting your thought process. Will this action produce a better outcome than doing nothing? If you take action without even going through a rational thought process, then it is definitely reactive and a case of Action Bias.

So, it is not the action in itself that is bad, it is the action without THINKING that is bad, or the action that has no impact on the outcome.

🚦Like sitting at the traffic lights, an impatient driver toots their horn, hoping that somehow the traffic will move faster. The action was not thought out, it may feel better for a moment, relieving their anxiety, but it is pointless. Think about this the next time you get “Itchy” to take action.