Common Mistakes of Financial Advisors and Goal Keeper

Mindset of Players

Traditionally, admiration for games in India has been mostly confined to cricket. Recently, however, I've noticed that many young Indians are becoming serious about soccer. Most teenagers seem to support one or two teams, which piqued my curiosity about the game.

Although I don't play soccer or cricket well, I love listening to players speak after the game. Their mindset and psychology fascinate me. I always enjoy hearing how champions stay focused under high pressure. I believe we can all learn a lot from champions of different games about staying focused on our tasks, despite the cheers and expectations of the audience.

Goalie and Penalty Kick

There are many soccer stories that provide great analogies, but one that stands out is the plight of the goalkeeper during a penalty kick. A penalty kick is taken from a distance of only 11 meters and can travel at approximately 125 miles per hour, reaching the goal post in just a quarter of a second. The goalkeeper must guess the direction of the ball and try to stop it. Penalty kicks are crucial, as they have a high chance of resulting in a goal.

If the goalkeeper saves it, he is praised; if not, he is blamed.

For example, goalkeepers often dive to either side of the goalpost before the kick and sometimes miss the save because they jumped in the wrong direction. I've always been curious about what goes through a goalkeeper's mind moments before a penalty kick and why they choose to dive to one side.

Research on Penalty Kicks

A quick Google search reveals that I'm not alone in my curiosity. Some behavioral scientists from Israel conducted a detailed study on this topic in 2005. They analyzed about 286 penalty kicks across top leagues and concluded that the best way for a goalkeeper to stop a penalty kick is by standing in the center of the goal. However, in almost 92% of cases, goalkeepers jump to the right or left in an attempt to save the goal. Despite knowing this statistic, goalkeepers still tend to jump to either side.

Action Bias

The reason for this is that staying in the center is perceived as a lack of action. If a goal is scored and the goalkeeper hasn't even tried to jump, it looks worse. But if the goalkeeper dives and misses, it appears more sympathetic. People will say at least he tried.

A dive to the right or left creates the illusion of taking decisive action, even if the ball goes in another direction. Staying in the center and not diving makes the player look indecisive and incompetent, even though this is false. This behavior is known as action bias. Even when we know that staying still is the best option, we often take action to avoid criticism.

Action Bias in Our Profession

This behavior is similar to what financial advisors do. They constantly try to predict the next market move and keep reshuffling portfolios, even though timing the market is nearly impossible. Fund managers often churn portfolios just to show they are trying, even if doing nothing would be better for the client’s portfolio. Humans dislike doing nothing when faced with uncertainty.

In tough situations, ask yourself, “Do I have the data I need, or am I letting my bias for action drive the decision?”

Often, we take action without knowing that staying still is the best choice, due to our action bias. Performing our duties and convincing others that we are performing our duties are two different but interdependent tasks.

The role of a financial advisor is similar to that of a goalkeeper. We know that doing nothing might be better for a client's portfolio, but clients expect us to take action to grow their investments.

How to Control Action Bias in Investors

In this scenario, you must play a psychological and counseling role rather than just a financial advisory one. Explain to your clients why staying static in certain situations is more prudent than constantly churning their portfolios. Use the goalkeeper analogy and provide supporting data to show why sometimes it’s wise to stay still.

Constantly explain the rationale behind the portfolio positions and their alignment with the client's goals. Keep communicating to prevent clients from falling prey to action bias. Create strategies to show clients that you are actively managing their portfolios without unnecessary changes.

Doctors often prescribe placebo pills to patients who don’t need medicine, to make them feel better. This strategy can be used to reassure clients while maintaining a stable portfolio.

In the end, remember: “There are better ways to do things.”