A quick announcement before I begin today’s post –
My new book, Boundless, is now available for ordering!
After a wonderful response during the pre-order phase, I finally have the book in my hands and am shipping it out quickly. If you’d like to get your copy, click here to order now. You can also enjoy lower prices on multiple-copy orders.
Plus, I’m offering a special combo discount if you order Boundless along with my first book, The Sketchbook of Wisdom. Click here to order your set.
The Internet is brimming with resources that proclaim, “nearly everything you believed about investing is incorrect.” However, there are far fewer that aim to help you become a better investor by revealing that “much of what you think you know about yourself is inaccurate.” In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.
If there’s one thing the stock market is good at, it’s making us restless. When prices go up, we worry that we’re missing out. When prices fall, we fear we’re losing everything. And when prices do nothing at all, we grow impatient, wondering if we should be doing something to “make our money work harder.”
This constant swing between fear, greed, and boredom creates a discomfort and a nagging itch that tells us we shouldn’t just sit and watch. That maybe we need to act or intervene to feel in control of what’s happening.
But the irony of all this is that in investing, the urge to act is often the very thing that leads to poor decisions. Our instinct to step in and “fix” things at the slightest sign of discomfort is not always rooted in logic, but in something far older and deeper within us.
Psychologists call this tendency Action Bias, which isthe impulse to take action even when it’s unnecessary, or worse, harmful. It’s a reflex shaped by thousands of years of survival instincts.
In the uncertain environments our ancestors lived in, hesitation often meant danger. If you heard a rustle in the bushes, it was safer to assume it was a predator and run than to stand still and risk being wrong.
But what once kept us alive can quietly work against us in the modern world, and especially in investing where success is often determined not by how much you do, but by how much unnecessary action you avoid.
Now, the problem is not that we act. It’s that we act without necessity, driven by emotion and not reason. In investing, where inactivity is often rewarded and impulsiveness is punished, this bias leads to poor decisions, unnecessary costs, and long-term underperformance.
One of the clearest illustrations of action bias outside investing comes from an unexpected place—football. In a 2007 study by Michael Bar-Eli and colleagues, researchers analysed 286 penalty kicks in top leagues and championships worldwide.
They discovered that goalkeepers had a higher chance of saving the ball by staying in the centre of the goal rather than diving to the sides. Yet, goalkeepers dove left or right almost every time. Why? Because a goal scored yields worse feelings for the goalkeeper following inaction (staying in the centre) than following action (jumping). It looks like they aren’t trying. And no one wants to look like they’re not trying, even when doing nothing is statistically better.
Investors face the same dilemma every day. When markets are volatile, media is screaming, and your portfolio turns red, doing nothing feels irresponsible. But very often, doing nothing is exactly what wise investing demands.
How Action Bias Destroys Investor Returns
One of the most damaging outcomes of action bias is overtrading. The belief that constant monitoring, tweaking, and shuffling of your portfolio improves performance is deeply seductive. Yet, it’s deeply false. Academic research confirms this.
A landmark study by Brad Barber and Terrance Odean, published in 2000 and titled Trading Is Hazardous to Your Wealth, examined trading records of 66,000 U.S. households over a six-year period. They found that the most active traders significantly underperformed both the market and their less active peers. Specifically, the average active trader underperformed a simple buy-and-hold strategy by 6.5% annually.
A recent study by SEBI in India also revealed that between the financial year FY22 and FY24, more than one crore Indians “tried their luck” with derivates trading, and about 93% of these traders made an average loss of Rs 2 lakh each, amplified by high costs, such as brokerage fees and taxes.
Now, such underperformance isn’t due to lack of intelligence or access to information. It is a direct result of excessive trading—buying and selling based on emotions, short-term predictions, or sheer habit. Every trade invites transaction costs, taxes, and more importantly, mistakes.
But why do people keep trading despite this evidence? Because doing nothing feels like surrendering control. Activity creates the comforting illusion that we are steering the ship, even if the waters are beyond our control.
Anyways, another manifestation of action bias is the instinctive urge to sell during market downturns. When the market crashes, our evolutionary brain screams: “Get out! Cut your losses! Do something!”
Action bias feeds on fear. It convinces us that doing something, even the wrong thing, is better than sitting on our hands. But in investing, premature action can turn temporary paper losses into permanent financial damage.
Why Inaction is So Difficult
Understanding action bias isn’t enough to overcome it. This is because the problem isn’t intellectual, but emotional. Inaction feels irresponsible. It feels like laziness, indifference, or recklessness.
This discomfort is amplified by the world around us. Financial news channels, brokerage apps, social media, and even well-meaning friends encourage activity. Brokerage firms—even the zero commission ones—profit from your trades. Media thrives on market drama. And, as a result, investors are bombarded with messages that doing something (anything!) is better than staying still.
There’s also the deeper psychological element of the illusion of control. We like to believe we can influence outcomes, even when the system is largely random. So, when we click buttons to place our orders, rebalance our portfolios, or react to news, all of this creates a false sense of control in an environment governed by luck, time, and factors beyond our influence.
Behavioural economist Dan Ariely, in his book Predictably Irrational, notes how people engage in suboptimal behaviours simply to relieve the discomfort of uncertainty. In investing, this leads to the tragic irony: the actions meant to make us feel safer often make us poorer.
How to Overcome Action Bias
The solution to action bias is not willpower. Left to their own devices, even experienced investors can succumb to it. The real solution is to create systems and rules that take emotions out of the equation.
Here are a few practical ideas I can think of that can help you minimise the impact of too much action in investing:
1. Automate your investing: Automatic monthly investments, such as SIPs, remove the decision-making process entirely. When investing becomes a habit, there is no need to check the news or time the market. You invest because it’s the rule and not because of how you feel (though, interestingly, please also try to act a lot even with their SIPs!).
2. Reduce how often you check your portfolio: The more frequently you check your portfolio, the more you’ll feel the need to do something. Behavioural studies show that investors who monitor their portfolios daily are more anxious and more likely to trade unnecessarily. Checking your investments quarterly, or even just once a year, can improve both your returns and your peace of mind.
3. Practice “inactivity by design”: One of the most effective ways to counter action bias is to deliberately build periods of inaction into your investing approach. This means accepting that, most of the time, the best thing you can do for your portfolio is to leave it alone.
Think of it like planting a tree. You don’t dig it up every few weeks to check if it’s growing. You prepare the soil, plant the seed, water it occasionally, and let time do its work. Investing works the same way. Your goal is not to win every day or outsmart the market at every turn, but to resist the itch to constantly interfere.
Conclusion: The Wisdom of Stillness
Action bias is one of the most dangerous psychological traps in investing. And that is not because it is hard to understand, but because it is hard to resist. It shows up as responsibility, diligence, and intelligence, when in reality, it is often a reaction to fear, discomfort, or ego.
The markets will always fluctuate. News cycles will always scream urgency. Your mind will always look for patterns, threats, and opportunities. But the difference between a successful investor and an unsuccessful one is rarely about knowledge. It is about behaviour.
Every time you feel the urge to tweak your portfolio, sell in panic, or jump into the next hot stock, pause and ask: Is this action improving my long-term odds, or is it simply relieving my short-term anxiety?
Remember, the greatest challenge in investing is not learning how to do more but learning how to do less. And thus, mastering the art of intentional inaction may be the most profitable skill you can cultivate as an investor.
I will close with a passage I often return to, from Pico Iyer’s book, The Art of Stillness:
In an age of speed, I began to think, nothing could be more invigorating than going slow. In an age of distraction, nothing could feel more luxurious than paying attention. And in an age of constant movement, nothing is more urgent than sitting still.
This is as true in life as it is in investing. Sometimes, the wisest thing you can do is nothing at all.
Take care and keep learning.
The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life.
This is a masterpiece.
– Morgan Housel, Author, The Psychology of Money
Disclaimer: This article is published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund investors have to go through a one-time KYC (Know Your Customer) process. Investors should deal only with Registered Mutual Funds (‘RMF’). For more info on KYC, RMF & procedure to lodge/ redress any complaints, visit dspim.com/IEID. Mutual Fund investments are subject to market risks, read all scheme related documents
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