Scoring financial goals: Wisdom from Women’s World Cup goalkeepers

Brett Surman is a Financial Adviser with Gilkison Group.

Imagine for a moment that you are Mackenzie Arnold, goalkeeper for the Australian women’s national soccer team.

You find yourself in the quarter-final of the World Cup, standing on the goal line, about to face the first of a series of penalty shootouts with the French team. The outcome of this match could propel your team into the semi-finals for the first time in history.

You have three options to make the save: dive left, dive right, or stay in the middle.

Having examined the statistics, you are aware that the probabilities are most in your favor if you remain stationary. So, what do you do? You opt to dive to the left or the right.

Why?

Because if you don’t and the penalty taker scores, it will seem as if you didn’t even try. Not only will you feel worse, but the fans won’t be pleased – they would have expected you to put in some effort!

This inclination towards action isn’t exclusive to goalkeepers; it’s a substantial issue for most investors. We just can’t resist the urge to do too much.

The example of a penalty kick is taken from a 2007 academic paper exploring the concept of action bias. An analysis of 286 on-target penalty kicks from first-division professional games showed that approximately 32% of kicks went left, 39% went right, and 29% went straight. Surprisingly, despite nearly one-third of penalty kicks going straight, goalkeepers only stayed in the middle 6% of the time.

Whether we exhibit a bias towards action or inaction largely depends on prevailing norms. If there’s a strong expectation for action in each situation, not taking any action will likely be viewed more critically.

For investors, there’s an undeniable and prevailing assumption that we should always be in motion. Why is this idea so pervasive?

Markets are dynamic, so our portfolios must adapt: The constant volatility and noise of financial markets mean that there’s always a new theme, story, or paradigm that demands our reaction. We find it challenging to stand still while everything around us seems to be shifting.

Behavioural biases push us towards action: Our emotions (fear or greed) often drive us to act. We also tend to overemphasise the significance of current events, and we’re influenced by others who are making more money. The market’s fluctuations trigger some of our worst behaviours.

Underperformance is uncomfortable: All investors, regardless of experience or intelligence, go through painful periods of underperformance, no matter their strategy. Our tolerance for these periods is shorter than we think, so we tend to take action.

While various factors compel us toward action, several reasons advocate for avoiding it:

Predictions are unreliable: The more changes we make to our portfolios, the more we’re engaging in short-term market predictions. It’s reasonable to assume that the average individual (or even above-average individual) struggles to forecast economic events and the market’s reactions. We need to be right twice, and most of us stumble at the first hurdle.

Diversification has its purpose: One primary reason for diversification is our inability to predict the future. If we could predict it, we’d invest in only one thing. A well-diversified portfolio survives diverse environments. The right level of diversity should enable us to do less.

Negative compounding effect: Excessive investment activity leads to the potent force of negative compounding, where trading costs (a combination of fees and making incorrect choices) become a substantial long-term drag on returns.

It may seem counterintuitive to suggest that reducing our activity could enhance investment outcomes. However, as always, the simplest concepts in investing come with significant behavioural challenges. These challenges aren’t insurmountable; we just need to figure out how to do less in a system that that incentivises and encourages us to do more.