A friend once told me a story about a friend of his who was facing some tough decisions in his life. He was seeing an analyst and, at one of their sessions, he explained that he felt under pressure.

The analyst listened to the various choices he was facing and how hard it was to make up his mind. Then he paused and asked: “Well, have you considered doing nothing?”

I thought of that story, which always seemed to me to have relevance for a lot of us - including corporate executives - when I read in the New York Times on Saturday about a study of goalkeepers and how they react to penalty kicks.

The study confirms earlier work by behavioural economists which found that humans have a bias towards action rather than inaction, even when we would actually be better off doing nothing.

There are various psychological reasons for that. If something goes wrong, we feel better for at least having tried to do something about it, instead of waiting to see what happens. Other people also tend to criticise us more for inaction in the face of uncertainty than action.

In the case of goalies, the study found that waiting until the ball is kicked before deciding which way to jump is a better tactic than leaping to the right or left pre-emptively. Yet goalies rarely wait to jump.

The study examines the parallel with investor decision-making and the tendency for people to switch their money around in stressful situations rather than leaving it where it is. I am reminded of Warren Buffett’s dictum than the ideal holding period is forever.

Similarly, there are huge pressures on corporate executives to be seen to act decisively and bring about rapid change. They do not get the top job unless they promise to do something big and it is difficult to explain to investors why the best course is steady as she goes.

But in practice a lot of corporate upheavals are either a waste of time or merely reverse another restructuring that occurred a few years before. The company benefits more from continuous improvement than a big bang shake-up.

In some ways, chief executives are in a similar position to goalkeepers who face penalties. They have to choose a strategy in difficult situations in front of expectant crowds. That often leads to them making rash and irreversible moves for the sake of being decisive.

March 3rd, 2008 in Finance, Management | Permalink