Taking Control of Action Bias

According to the good folks at https://thedecisionlab.com/biases/action-bias “Action Bias describes our tendency to favor action over inaction, often to our benefit. However, there are times when we feel compelled to act, even if there’s no evidence that it will lead to a better outcome than doing nothing would. Our tendency to respond with action as a default, automatic reaction, even without solid rationale to support it, has been termed the action bias.”

The article, in our estimation, expertly tackles this issue and goes on to suggest, appropriately so that; Prioritizing action over inaction, without sufficient reasoning to support it, can lead to mishandling of a situation. It’s an automatic response, based upon impulse instead of logic. Since it’s a decision made without taking all possible information into consideration, the action bias can cause us to go down a less effective route, which can compromise the outcome of the situation.”

Wow, does this pack a punch or what? Investors who do not have a disciplined philosophy and strategy tend to react precisely in this manner in that whenever they perceive that they are “missing out” on something, no matter what is, some “action” is needed. Investors who succumb to “F.O.M.O.” (Fear of Missing Out) based decisions on emotion rather than plausible data. Our belief is that the Financial News Media bombarding investors with a plethora of information 24/7, fosters this belief and boxes investors into a corner suggesting that; “You must do something.”

The Decision Lab uses a very good example of why as a society we react in such a fashion. They go on to suggest that; “We equate taking action and keeping busy with productivity, another quality we assign significant value to. However, a lack of action often proves to be more productive than taking action. Imagine being in bumper-to-bumper traffic on a highway. You might find yourself frustrated at the fact that you’re moving at a snail’s pace, and consider getting off at the first exit to take another route to your destination. This could wind up taking even longer than staying on the busy highway would have, and could cause you to use more gas. While logic tells us that staying on the highway is more efficient, we feel that getting off of the highway is the more efficient decision. This is because, when we sit in traffic, we feel like we’re getting nowhere, while on the other route we’re able to drive at a reasonable speed. Here, taking action is actually less productive than deciding to stay put, even if it doesn’t feel that way.”

In investing terms, if the stock we bought declines in value we recoil at seeing red numbers on our statement, so we sell because we feel we have to do something. We retort, if the fundamentals of the business have not changed, then we either need to do nothing, thus letting the price recalibrate, or possibly consider buying more shares, if appropriate at lower prices. Our point is that doing something for “something’s sake” is usually a faulty option that is based on emotion and not sound logic. It ultimately comes down to Clarity and knowing what you own and why you own it — that should be the ultimate determinant in decision-making rather than emotion.

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