Action Bias
In the series of 21 behavioral biases we will discuss the 17th
bias “Action Bias”
It’s been said that we must be in action, always!! We are
descendants of the quick respondents. Lightning fast reactions meant to be
survival. If you see fire around, you will run in opposite direction, no matter
how safe you were from that site.
“One should always be in Action” Well that’s right. But with a
rider! Action- where, when and how? That’s million dollar question.
Our actions are triggered by our impulsive emotions. That’s
dangerous. Mindful actions are more rationale and fruitful.
Few examples:
1)
We just saw online sale by the biggest online
marketers in last 30 days. People were in action to find deals and buy them.
While few bought products they really wanted but many indulged in buying due
the hype, Advt/promotions and discounts! Online marketers made you ACT
impulsively with captions such as – Last hour, only few left, XXXX numbers of
orders in last 1 hour etc.
2)
How we react to small incident at home or office
and later regret of that action.
3)
How we react and do what the crowd is doing,
without knowing about it at all. We just copy the crowd.
We prefer action over
inaction. Many times inaction is boon. Current world is different, it
rewards reflection rather than (re)action.
Investors too make the same mistake out of Impulse and herd
mentality.
Since decades, this has been the truth!! Investor take many
decisions out of impulse action bias and end up selling or buying a stock/MF or
any other assets.
Few recent cases that I encountered are:
1)
Seeing good profit in portfolio currently.
Should we sell it?
2)
A scheme is not doing well. Why don’t we exit
and invest somewhere else?
3)
Let’s exit current portfolio and move to Index
funds or schemes doing good in recent past.
4)
Market is about to fall, let’s sell everything
and re-enter at fall.
5)
I will wait till market falls. It’s too
expensive.
These are all classic cases of Action Bias.
How does the Investor know about all this? Social media does
the work besides the punters of market. Generic message (at times from unverified
source) are taken more seriously than anything else.
Action bias is very common for the Investors and (many)
advisors too!! Many times Advisors end up promoting the best performing fund by
redeeming poor performing fund. End result, it ends up into never ending trap
of chasing returns😊
At Wealthcare Investments, we evaluate performance of existing funds
and look for opportunity in newer products/themes. So when we decide to re-shuffle
the Investment, we test our hypothesis before we go to Investors. We put enough
efforts in understanding why we are redeeming a fund and buying another fund.
We do it on both assets, but more on tactical assets.
Little scientific approach in investing can give us great
experience.
What should you do as Investor?
1)
Assess whether frequent action leads to more
pain or gain?
2)
Check the charges, taxation and time loss before
you act.
3)
Examine reaction of your action on your
portfolio.
4)
Ask yourself, if it’s done by someone, should
you also do it?
5)
Frequent action leads to erosion of returns than
otherwise.
6)
Consult your advisor before jumping guns. He is
required to have your issues addressed.
MF Trivia: Because Investors are impatient, Investment
returns and investors return are different. Choose equity MF for long term and
stay committed to the asset class. Change scheme but not asset class.
If you find our blogs helpful, pls do like, share and
comment
Author –
Bhavesh D
Damania
Founder - Wealthcare
Investments
EduPrenuer,
TV show panelist and Blogger
You can
reach him at 9833778887 and wealthcarein@gmail.com
"Risk comes until you know what, where and why you are
Investing"
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