30 Aug Don’t Jump: Finance Lessons from Goalkeepers
Picture the scene; it’s the finals of the Premier League tournament and your favourite team is locked in a penalty shoot-out with the other side. Your side has taken all their 5 penalty kicks and missed 1. The other side has taken 4 of theirs and missed none. So, it’s a draw and the other side is about to take the final penalty. All rests on your goalkeeper but what are his odds of making a save?
Sadly, not very good. The penalty shooter has an area bigger than a cargo container to aim; he has ample time to decide what direction he’s going to kick the ball. On the other hand, your goalkeeper has to make a decision in split second as to whether to dive and in what direction or stay on the same spot.
An analysis of penalty kicks in elite matches across the world shows that goalkeepers save more penalties when they stayed in the centre than they do when they jumped left or right. Notwithstanding this, keepers are more likely to jump than simply stay on the same spot.
Researchers believe that this is due to a reversed manifestation of what psychologist call the omission bias; our natural tendency to judge harmful actions as worse, or less moral than equally harmful omissions. In this case, goalkeepers feel greater regret at standing still, if they let a goal in. If they jumped, they are likely to feel less bad, even if the ball ends up in the back of the net!
So what’s this got to do with investing. Well, this activity bias – the need to do something, anything, particularly in times of uncertainty – isn’t unique to goalkeepers. Most of us have moments when we fall victims of the urge to something, for the sake of doing something. Investors for instance feel the need to trade and move their portfolio around in the face of new information, even if they are not very clear the full meaning of the information. This can be very dangerous and explains why most investors tend to do underperform the markets.
Research after research tell us that that a ‘buy and hold’ strategy is by far the most effective way to generate long term returns. In his attempt to dissuade investors from knee jack reactions in the face of extreme market events, legendary investor Jack Bogle famously admonished investors ‘don’t just do something. Sit there’.