Action Bias

I’m certain that I can’t add much new thought to the current situation.

We are all draw on recent past circumstances to guide our emotions and actions at this time. I generally get pretty skeptical of an analysis suggests that this time is different.

However, in many respects this time does offer some differences. This is a health driven – supply and demand economic issue. We have not faced this type of economic situation before.

The health concern is very real and very challenging. It is not however, unthinkable [just think about some of the Science Fiction movies from the 1950’s and 1960’s]. Some of the images of people in their PPE’s spraying who knows what.

In my investment experience for times like this, the best course has been to suggest that doing nothing is the best option.

Not surprisingly, I don’t know if this is actually the best or right advice at this time. Without doing the math, asynchronous returns make the ride very challenging. Not only hard on the stomach, but perhaps even more so on the emotions. The following is from Morningstar this morning.

 Advisor Insights Combating Action Bias We want to act, but should we?

Samantha Lamas
Mar 23, 2020

During times of market volatility, when investors feel that they are hemorrhaging money, a natural instinct is to stop the bleeding–to take decisive action instead of riding out the storm. Though taking action in the face of difficult times often works out well in everyday life, when it comes to investing, acting on that desire won’t necessarily help. To help ourselves and investors overcome this tendency, let’s better understand what’s happening.
A Bias for Action
Action bias is our tendency to take action for reasons that are generally valid, but not in the specific situation, especially when we focus on the benefits of action and ignore the costs. In our minds, even if acting and not acting result in the same outcome, that outcome feels so much worse when we didn’t take action.
The ongoing market volatility we’re experiencing will create a vicious cycle, where suffering losses because we didn’t make a change will be more emotionally taxing than experiencing losses after we made a change. In our minds, at least we tried to do something. Following are a few reasons many investors might be experiencing action bias right now.
Experience can’t always save us. A tendency toward action bias is something we appear to all suffer from, even those who are experts in their field. Even though investors may know they should stick to their financial plan, they may still feel pressured to act.
Seeing an impact now is more salient. When we take action in our current situation, we can immediately see the impact. If we ride out the storm, we won’t likely reap the benefits of this decision for months to come, which can make it even harder to resist action bias.
Investors are struggling under the weight of responsibility. Many of us may feel personally responsible to take action to protect our savings for the sake of our loved ones. Research finds that people who are in a role–either familial or professional–that makes them responsible for an outcome are more prone to exhibit action bias.”