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Dive or stay? Common biases of goalkeepers and portfolio managers


  • Portfolio managers  like goalkeepers  might be better off staying put.
  • To protect the clients capital or defend the goal, resisting the urge to dive might not be easy or popular.
  • But the prudence of inaction could make all the difference between victory and defeat.

In the final minute of the 2014 World Cup, the referees whistle blows for a penalty. On the field in Rio de Janeiro, after 30 days of intense competition among the best players of the beautiful game, the score is tied. Just one last kick could determine the champions, and the goalkeeper has a split second to decide what to do.

Dive left? Dive right? Stay standing in the center between the goal posts?

The odds arent good: Fewer than one in five penalty kicks are ever stopped at this level of play.

We imagine that Brazilian goalkeeper Julio Cesar may feel more expertly qualified than anyone to block the shot. He has 80 caps  or international appearances  including two previous World Cups and numerous personal accolades highlighting his skill. Furthermore, hes playing at home for the country that has spent an estimated $11 billion to host the tournament and is among the favorites to win.

Its likely that Julio Cesar will dive left or right  according to one study, goal-keepers choose to dive nearly 94% of the time.1 In response to the relatively even distribution of kicks between the goalposts, however, and the greater chance of saving those in the middle, goalkeepers who stand and defend the center may experience a better outcome. Simply put, not taking action may be the best course of action.

Due to what behavioral researchers call action bias, a goalkeeper is expected to act. In the case of a penalty kick, the norm is to dive. A scored goal is perceived to be less disappointing when it follows action, which is the norm. Innate self-confidence, years of training and the crowds expectations further contribute to this suboptimal decision. If the goalie dives, then he feels that he did his best to stop the ball, and so does almost everyone else.

On the other hand, a scored goal is perceived to be worse when it follows inaction, which is a deviation from the norm. If the goalie remains in the center, well, try explaining that to 80,000 passionate spectators  not to mention another 700 million around the world watching the broadcast.

Portfolio managers can often fall into the same trap of action bias  trading frequently, with confidence that this action adds value. Armed with abundant financial information, incented by bonuses based on annual rather than long-term performance, and prodded by the self-proclaimed omniscience of financial media pundits, portfolio managers may feel compelled to take action and trade often.

The result is a market thats focused on the short term. In recent years, the average holding period for a stock has dropped to less than six quarters.2

We expect that the confluence of behavioral pressures with the misalignment of incentives will continue to encourage short termism within the marketplace.

Such a short-term bias creates an enormous time-horizon arbitrage opportunity for long-term investors  both individuals and institutions  to capitalize on. Daily, weekly and even monthly market movements are full of noise, and much of what happens is based on luck rather than skill.

By contrast, the dispersion of stock returns is much wider across three-year and five-year periods, so the longer term may provide more potential to add value. This arbitrage opportunity can contribute significantly to long-term performance, which is why we believe that the average holding period for a stock should be lengthened, not shortened.

Portfolio managers can lengthen the investment horizon by avoiding the temptation to trade frequently, choosing instead to hold securities for longer periods. Though portfolio managers  and goalkeepers  are prone to act, an awareness of this action bias may help them recognize that inaction can be an optimal strategy.3 And deciding to hold the position has the potential to result in a better outcome for their clients  and fans.

1 Bar-Eli, Michael, Ofer H. Azar, Ilana Ritov, Yael Keidar-Levin, Galit Schein, Action Bias among Elite Soccer Goalkeepers: The Case of Penalty Kicks, Journal of Economic Psychology, January 2007. According to this study, kickers distribute shots much more equally across the left, center and right thirds of the goal.

The authors suggest that if goalkeepers altered their strategy to stay in the center, then kickers might adjust and send more shots to the left or right.

2 Ned Davis Research, December 2012.

3 Montier, James, Mind Matters: Beware of Action Man, Socit Gnrale, 7 January 2008.

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JUNE 2014