When There is Nothing to Do, Do Nothing

Do you ever find yourself switching queues at the supermarket or changing lanes on a congested motorway, only to realise you should have stayed put? Or perhaps you interrupt your workflow to respond to emails when a more thoughtful response, or no response at all, might be more appropriate?

If so, you’re not alone. Humans have an in-built bias towards action, often referred to by behavioural psychologists as action bias, or the "Do Something Syndrome." This term describes our preference for doing something over doing nothing, even when inaction might lead to a better outcome. This bias can be driven by various psychological factors, such as the desire for control, social pressure, fear of regret, or the illusion of productivity.

The Illusion of Improvement

Investors often display action bias in various ways. For instance, you might feel compelled to sell when markets fall sharply, turning paper losses into actual losses. Conversely, noticing that markets have risen might prompt you to buy quickly, hoping to benefit from further gains. Another example is purchasing a stock or cryptocurrency based on a tip from a newspaper article or a colleague.

We tend to believe that by taking action, we’re improving our chances of a successful outcome. However, most of the time, investors are better off doing nothing at all.

As economist Tim Harford recently wrote in the Financial Times, "I am always hearing that people should be more engaged with investing. And up to a point that is true. People who feel ignorant about how equity investing works and therefore stick their money in a bank account or under a mattress, are avoiding only modest risks and giving up huge potential returns.

“But you can have too much of a good thing. Twitchily checking and rearranging your portfolio is a great way to get sucked into poorly timed trades. The irony is that the new generation of investment apps work the same way as almost any other app on your phone: they need your attention and have plenty of ways to get it.”

Who is Most Prone to Action Bias?

Some investors are more susceptible to action bias than others. Men, particularly younger men, are more prone than women. One reason for this is overconfidence, which is more common among men. Another factor is testosterone, which reduces fear and increases greed. William Bernstein, a neurologist-turned-investment author, notes that while testosterone does wonders for muscle mass and reflex time, it doesn't do much for judgment.

In a well-known study, professors Brad Barber and Terrance Odean found that although women also trade more than they should, men trade even more frequently. Between 1991 and 1997, they discovered that this increased trading reduced men’s net returns by 2.65% per year, compared to a hit of 1.72% for women.

Patience and Discipline: The Buffett Approach

Warren Buffett, the owner of Berkshire Hathaway and one of the world’s most successful investors, has long advocated for patience and discipline. Buffett once said: “The trick is, when there is nothing to do, do nothing.” He famously described “lethargy bordering on sloth remains the cornerstone of our investment style.”

Buffett’s business partner, the late Charlie Munger, also believed that less action leads to better returns. Munger stated, “Our job is to find a few intelligent things to do, not to keep up with every damn thing in the world.”

How to Curb Action Bias

So, how can investors curb their action bias? The first step is to acknowledge it; feeling the need to act is part of being human.

Remember that even if action is required, you almost certainly don’t need to act immediately. Take time out whenever you feel the need to do something. Try going for a walk, or better still, sleep on it. If you’re still uncertain, speak to someone about it and actively seek out evidence supporting inaction.

Another strategy is to keep your investment approach simple. Morningstar’s annual study, "Mind the Gap," consistently finds that investors who resist the temptation to trade and invest in broadly diversified funds tend to achieve better returns than those in narrowly focused funds.

Less is More

Finally, consider paying less attention to your investments and the markets. Don’t keep checking the value of your pension—once or twice a year is sufficient. You don’t need to check the FTSE 100 or the S&P 500 regularly. If reading the money section of your weekend paper makes you more inclined to act, skip it.

As Tim Harford advises, “The more attention we pay to our investments, the more we trade, and the cleverer we try to be, the less we will have at the end of it all.”

In summary, when it comes to investing, the less you do, the better off you’re likely to be.