The "Just Do Something" Fallacy - Old Peak Finance

The “Just Do Something” Fallacy

March 22, 2016

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The “Just Do Something” Fallacy

March 22, 2016

When the markets suffer one of their periodic drops, many investors believe the right response is to "just do something". That "something" can be to sell and buy a "safer" investment, or to move into cash, or buy a fund that didn't drop, or ... (you get the idea).

In fact, the evidence shows clearly that sitting tight -- doing nothing -- is usually the right response. Sadly, most investors can't take the inaction. It's not in our nature. We're creatures of action.

There's a great study that illustrates this irrationality. It comes from professional soccer -- specifically, penalty kicks.

To block a penalty kick that's not down the middle, the goalkeeper must dive right or left just as the shot is taken -- not after. There's not enough time.

Here's where it gets interesting. In a study of 300 professional league penalty kicks, researchers found that shots went 1/3 of the time each to the left, middle and right. Yet keepers almost never stay in the middle. They almost always dive right or left. Worse, the keeper's chance of a save is much lower when diving. It's easier to block a shot if you're on your feet than if you are airborne.

Why do goalkeepers almost never stay in the middle? Behavioral scientists conclude that the keeper prefers action, even though he reduces his chance of success.

In the world of investing, the bias toward action is equally counter-productive. You are usually making an emotional, not rational, decision. You incur transaction fees and often create a tax bill. Worse, you are throwing your long-term plan out the window.

It might feel better to "just do something", but it's usually best to avoid the acrobatics.

This article is not intended to provide tax, legal, accounting, financial, or professional advice. Readers should seek advice from qualified professionals who can review their specific circumstances. Old Peak Finance endeavors to provide information that is accurate and current. However, we cannot guarantee that this information has not been outdated or otherwise rendered incorrect by new research, legislation, or other changes. Old Peak Finance has no liability or responsibility to any individual or entity with respect to losses or damages caused or alleged to be caused, directly or indirectly, by the information contained on this website.

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