Don’t just do something, stand there.
There are times people have an impulse to act in order to gain a sense of control over a situation and we focus on the benefits of action and ignore the costs. This term has been named Action Bias.
Reasons for Action Bias:
There are times when thoughtful inaction is statistically the correct choice, but prior research has found the urge to take the dramatic action approach can trick us into bad decisions that are justified by saying, “Well, at least you tried.” Doing nothing during times of uncertainty is extremely hard for us because it goes against our instinct to take action. In our minds, it is better to try something and lose compared to doing nothing and losing the same amount. Financially, we may feel personally responsible to take action to protect our savings for our loved ones.
Action Bias is particularly likely to occur if we do something for others or others expect us to act a certain way. This can be illustrated by the tendency for soccer goalkeepers to jump to the left or the right of the goal during a penalty kick attempt even though statistically they would be better off if they stayed in the middle of the goal. The likely reason for this is the effort of jumping to make a save looks better than standing in place.
Action Bias may also be more likely among overconfident individuals or if a person has experienced prior negative outcomes or subsequent action would be a failure to do something to improve the situation.
Way to combat Action Bias:
Periods of uncertainty can be scary for anyone, but there is no reason our fear and anxiety should get in the way of our financial plans. Use the listed techniques to make more logical decisions and stay the course.
- Make a plan
- Set realistic expectations
- Educate yourself on the types of biases
- Pre-commit to the actions you will and not will take
What to do during the time of crisis
- Refocus on your goals
- Slow down
- Take a step back from your emotions
- Redetermine what really matters
- Focus on the positive
- Look to help others
- Play the devil’s advocate
- Remember events from the past
- Determine if your financial plan is still on track to meet these goals.
Take action where it counts
- Increase your savings rates
- Look for tax saving opportunities
- Capitalize on low interest-rates
What to do after
- Perform a post-mortem and determine if the steps you put in place were sufficient during the time of crisis. If not, assess where improvements can be made in your preparation for the next time.
We must remember our biases are fundamental to who we are, all we can do is be aware of the types of biases we personally exhibit ahead of time and plan accordingly.
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