Investing

Never underestimate the power of doing nothing.

Posted

– Post from early 2016 –

In soccer, when the defending team commits a foul near their own goal, the attacking team are awarded a ‘penalty kick’. A penalty kick involves an attacking player receiving a ‘free shot’ on goal from 12 yards out, with only the goalkeeper to beat.

Several notable psychological studies have analysed penalty kicks in top leagues throughout the world. They discovered that the direction of penalty kicks are generally evenly spread with the kicker choosing between; left, right and straight down the center. So roughly one-third each.

Therefore, based purely on this information alone, one may hypothesise that goalkeepers, who typically choose a direction before the kick is made, would evenly choose between jumping left, jumping right and remaining in the middle. However, psychologists discovered that goalkeepers choose to jump either left or right over 94% of the time. They then discovered that when the goalkeeper chooses the correct direction when jumping left or right, they still ended up letting the shot in over 50% of the time. However, when they choose correctly by remaining in the middle, they saved the shot nearly every time.

Therefore, statistically, a goalkeeper would have a higher chance of saving more penalty kicks if they simply remained in the middle. Despite this though, they still chose the least optimal option.

Why do goalkeepers typically jump left or right?

Psychologists discovered that if a goalkeeper dove either left or right and was unable to save the penalty, they would not feel as bad as they would if they remained in the centre and failed to stop a kick that was placed on either side of them. Why?

It seems as though we have a psychological bias that subconsciously tells us that it is better to fail while appearing the take action, then to fail while appearing to not take action.

Psychologists have termed this ‘action bias’ and these same psychological biases play out in the investing world every single day.

Many share market investors believe that in order to achieve the best results they need to constantly trade or remain constantly invested. This is the equivalent to the goalkeeper jumping left or right. The Australian share market (not including dividends), is currently down over 13% for the past 12 months. Staying in cash would have been, based on this broad view, a better result than being invested in the market.

We believe that investing is more about human psychology than any other investment related topic. Being cognisant of and understanding what is going through your mind in the moments leading up to a decision will yield better results than a person who succumbs to human biases without realising it. The former is called ‘meta-cognition’ – the art of thinking about thinking. As you look at the property market or the share market today, what are you going to do – jump left, jump right or remain in the middle?