The most counter-intuitive part of indexing is the avoidance of action, especially in an effort to beat the market. We generally associate hard work and hours of effort with success, however in investing it turns out to be exactly the opposite. All those costs incurred by action (commissions, bid-ask spreads, and realized capital gains) make beating the market that much harder.
This “action bias” to do something has recently been documented in the decision making of goalkeepers during penalty kicks. Although data shows that they could be more successful by staying in the middle (no action), they still jump to either side (action) over 90% of the time.
The researchers’ explanation is that people may perceive failure after inaction as worse than the same failure after action. So instead of minimizing the objective rate of failure, goalkeepers seem to be minimizing the subjective perception of failure. They’re essentially telling themselves, their teammates, and their fans, “At least I tried.”
The same “action bias” seems to explain our need to take action with our portfolios: trying to beat the market or to avoid market losses through short-term trading. Through thinking rationally and looking at objective evidence, we can overcome our own irrational biases.
“What Can Investors Learn From Goalkeepers?” by Elli Malki