Action biases: When we act crooked

Some biases distort what we see. Others distort what we do. Here are four.

First: loss aversion. Losing one hundred euros hurts more than gaining one hundred euros pleases.

How much more? Kahneman and Tversky's work gives about twice. An order of magnitude, not a law.

Test yourself. Heads, you lose one hundred euros. Tails, you win one hundred and fifty. Do you play?

On average, this bet earns twenty-five euros. Yet most people refuse. They often need nearly double the loss to accept.

On the stock market, this means fear of selling at a loss, which makes you hold too long. And fear of buying after a fall.

Second: overconfidence. We think we are better than others. Almost everyone does.

In nineteen eighty-one, a study asked American drivers to rate themselves. Ninety-three per cent put themselves in the better half.

By definition, only half can be in the better half.

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On the stock market, overconfidence makes you trade too much. Two economists, Barber and Odean, studied tens of thousands of American accounts.

From nineteen ninety-one to nineteen ninety-six, the most active earned eleven point four per cent a year. The market: seventeen point nine.

Third: the illusion of control. We think we influence what is down to chance.

In nineteen seventy-five, the psychologist Ellen Langer handed out lottery tickets. Those who chose their ticket resold it for much more.

The ticket had no better chance of winning. Choosing only gave a feeling of control.

On the stock market, watching prices all day, moving your orders: it all gives this feeling. The market does not see you.

It is the pedestrian crossing button that, in some cities, no longer controls anything. People press it anyway. It reassures.

Fourth: status quo. Doing nothing feels neutral. But doing nothing is also a decision.

Keeping an inherited investment, an old contract, an account you no longer look at: these are choices, even without a signature.

In the United States, companies enrolled their employees in retirement savings by default. They were free to opt out.

In a study published in two thousand one, participation went from about a third to more than eight in ten. Nobody was forced. The default decided.

These biases push in opposite directions: acting too much, or not enough. But always for bad reasons.

The simplest defence: rules written in advance, when you are calm. How much, when, and what would make you sell.

Then automate what can be. A standing order puts the status quo on your side.

You do not get rid of your biases. You organise things so they get fewer chances to decide.