by Kara Lilly, Mawer Investment Management's The Art of Boring
There are few things in life so universally disliked as traffic. My friends and I were reminded of this truth as we recently drove back from Moab, Utah on a sixteen hour road trip. More than once, we muttered expletives as aggressive drivers cut across three lanes in front of us, without signaling, to subsequently sit on the bumper of the car stopped before them. People just seem to go a little crazy when stuck in traffic. It’s like a full-moon hits, turning even the meekest of individuals into road-raging, tailgating lunatics.
It’s easy to understand the urge to change lanes or embark on a much longer detour to avoid feeling stuck. After all, who wants to sit idly in a machine that was designed to race at high speeds down the road? Yet these urges are irrational. Constantly switching lanes while driving rarely gets you to your destination faster and it significantly increases your risk of accidents and fines. So why do it?
Our team calls this urge to act the “Do Something Bias”—the feeling that you need to act, even when the situation doesn’t warrant it. This bias often surfaces when we feel like we are experts in a situation—and feel an undo amount of control over something uncontrollable—or when we face uncertainty and acting is our way to alleviate the anxiety of the unknown. But this bias becomes a problem when the best course of action is to do nothing. And it’s surprising how often this is the case.
Consider the findings by Anupam B. Jena, M.D., Ph.D., Vinay Prasad, M.D., Dana P. Goldman, Ph.D., John Romley, Ph.D. in their study: Mortality and Treatment Patterns Among Patients Hospitalized With Acute Cardiovascular Conditions During Dates of National Cardiology Meetings.1 The study focused on the outcomes of cardiology patients treated before, during and after the dates of two large annual cardiology conferences. With the conferences drawing nearly 25% of cardiologists in the U.S., the study’s hypothesis was that patients requiring treatment during the conference dates would be adversely affected. But to the authors’ surprise, those patients actually fared better.
In fact, Jena and his team discovered that the mortality risk of patients with acute cardiac illnesses dropped by a staggering 8-10% during the conferences. To put this in perspective, well-established and effective treatments for cardiac patients decrease mortality risk thirty days after hospitalization by 2-3%. Thus, when the cardiologists were away, patients had a meaningfully better chance of survival.
Although the study doesn’t pinpoint causality, the authors’ working hypothesis is that less is more. Their theory is that when these surgeons go away, the back-up doctors resort to more conservative treatments. They prescribe fewer invasive surgeries and opt to wait things out until the patient’s actual doctor returns. In other words, they do less—and outcomes improve.
There are similar findings within the investment industry. Investors often believe that more action equals better performance which results in trading more frequently than necessary. Investors can also forget that the ultimate goal isn’t to make trades but to make prudent decisions. And the cost of this excess trading can be significant. When small transactions compound over time, the amount they eat into returns becomes meaningful. This is just one reason why mutual fund investors must be aware of the turnover level in the funds they own: the higher the level of turnover, the greater the cost to the portfolio over time.
In investing, as in other aspects of life, it’s important to realize that action doesn’t necessarily result in progress. There are times when the best move is really just no move at all.
Kara Lilly, CFA
Investment Strategist
1 Jena AB, Prasad V, Goldman DP, Romley J. Mortality and Treatment Patterns Among Patients Hospitalized With Acute Cardiovascular Conditions During Dates of National Cardiology Meetings. JAMA Intern Med. 2015;175(2):237-244. doi:10.1001/jamainternmed.2014.6781.
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