Tempted to trade when times get tough? Don't do it!
The risks of short-term attempts to time the market outweigh the expected long-term benefits
As tensions grow over multiple macroeconomic, geopolitical and fundamental issues, many investors are tempted to do something. In general, we all prefer to do something at times of stress and uncertainty rather than doing nothing. In behavioural finance they’ve dubbed it the “action bias”. A great example can be found in football. Imagine you are the goalkeeper facing a penalty kick. What do you do? Dive right? Dive left? Stand still? A 2007 study looking at how goalkeepers reacted in the face of a penalty kick found an “action bias” – they jumped to the left or to the right significantly more often than was useful in blocking goals. They moved to the side an overwhelming 94% of the time – meaning they stayed in the middle only 6% of the time. In comparison, the shot went towards the centre 29% of the time. The insight is that the goalkeeper is motivated by the fear of regret rather than the fear of failure. To have dived and failed feels better than standing still and failing. Divi...
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