My wife doesn’t sit and wait. She’s a take-action type of person.
The other day we were driving home from an appointment as rush hour traffic was building on I-95 — a nightmare — when she checked Google maps and told to me we could save three minutes if we abandoned our I-95 route and juked over to the turnpike instead, though it would take us more westward than we needed to go, away from the beach where we live.
Funny, though, she didn’t want to take either I-95 or the turnpike route. “Both have red sections, let’s get around them.” And she recommended to me a third route that involved cutting eastward on a smaller road lined with traffic lights, then taking the coastal U.S.-1 south.
I complied. But when we finally made it home, I checked my watch for a final tally and announced, “We lost 23 minutes on your route.”
Her quip back was quick, instinctual, triumphant: “But we were moving!”
One definition of action bias I like is:
“Action bias pushes us to act in order to feel good — usually, to act improperly, or at least to act before the right time comes.
In the business world, action bias can lead eager managers to develop solutions for problems that don’t yet exist, or for problems that aren’t fully understood. “Taking action” feels like the right thing to do — almost as a default behavior — even in situations where a methodical, rational analysis may give “do nothing” as the best solution.
One of the most interesting, poignant, and now oft-quoted examples of the action bias comes from a 2007 article in the Journal of Economic Psychology, which showed how an analysis of 286 penalty kicks revealed the optimal strategy for a goalkeeper to employ in defending them.
That optimal strategy turned out to be: Stay in the center. Don’t dive left or right.
But guess what… goalkeepers, in reality, tend to act. They either dive left, or they dive right. They rarely stay put in the center of the goal.
The paper’s authors offer a simple explanation for this (in my words): If the goalkeeper fails at blocking the penalty kick, he will feel less worse about himself if he at least made a dive attempt. Staying in the center and failing to block the kick creates the worst of all feelings for the goalkeeper.
And if you think about it, that’s probably how the crowd of fans would react to a goalkeeper who merely stayed put in the center and missed the block, too. “Do something!” we’d yell at him.
Or as my wife would say, “Move!”
I recently wrote about action bias to my 10X Profits readers, since it’s been nearly a year since we made our last “switch” trade.
I explained how our lack of action might have been seen as unacceptable if I had promised them “two trades a month,” or similar. But instead of that arbitrary action-based goal, our primary objective is to maximize profits during both major bull and major bear moves. And considering we’re now up more than 70% on our current risk-on trade — in the super-charged “bull” ETF I shared with you last week — we’re clearly meeting that goal.
How Much “Action” Is Right for You?
One of my favorite things about the pursuit of investing is that it’s a personal endeavor. What’s best for me isn’t always what’s best for you, and vice versa.
The amount of time you have available to devote to investment research… whether your goals are short-term or long-term in nature… whether your goal is to earn the absolute highest return, or the best risk-adjusted return…
These variables are personal to you and will affect your choice of investment strategy, and therefore how much “action” you’ll be required to take in the markets in a given week, month or year. And this is why I’m so excited about my new Millionaire Masterclass, I put together to help simplify investing and provide you with one of my favorite investing strategies.
For some folks, my relatively inactive 10X Profits model may do just the trick. Our goal is to catch the meat of major bull market rallies and bear-market crashes, even if we simply ending up passively riding one of those trends for a long while.
For others, a more tactical and hands-on approach may be more fitting. In Cycle 9 Alert, we’re adding new positions every few weeks, constantly rotating through a four- to six-position portfolio of option contracts that we hold for two to three months at a time.
I’d say it’s “goldilocks” active — just enough, but not too much.
And then there’s my Green Zone Stocks newsletter, where I run both a monthly rebalanced portfolio of major market ETFs and a weekly “Hotlist” email of poised-to-perform stocks and ETFs… often with 50 or more tickers that are worth looking into.
In the end, you should always choose an investment approach that is well-suited to your individual needs and preferences. It’s certainly OK to be a so-called “active investor,” but you shouldn’t merely make a number of trades just for the sake of action.
While you might be motivated by action bias and the thrill of the hunt, in the end your profitability is dependent on you taking the right actions at the right times.