Laissez-Faire: When Is It Okay to Do Nothing?
I suspect we have a “bias for action.”
Imagine a soccer game that has gone into overtime. Each team has 5 penalty kicks. For several, remaining in the center of both posts, the goalie does not move. Statistically, her behavior is smart since the kicks are pretty much evenly distributed–30% to the middle, to the left and to the right. However, most goalies feel compelled to act. Standing in the middle only 6.3% of the time, they usually and heroically dive to the left or right.
Next, think of a recessionary US economy. The GDP is plunging and unemployment is soaring. What to do? Explaining that our market system takes care of itself, classical economists say leave it alone. They tell us that when government acts, it creates perverse incentives that impede an expansion.
Politically, though, it is unwise to do nothing. Think back to George H. W. Bush and the 1992 election. In 1990, at 1%, growth was sluggish. Still though, saying “…there’s not a single piece of legislation that needs to be passed in the next two years,” his chief of staff, John Sununu expressed a laissez-faire approach that might have guaranteed his boss’s defeat in the next presidential election.
Finally, imagine an investing philosophy that recommends “do-nothing.” Some of the best investors, including Warren Buffet, buy a sound portfolio of stocks and bonds and then hold on, no matter what the economy does. By contrast, most of us feel compelled, like the soccer goalie and the politician, to act.
Sources and Resources: Hat tip to the NY Times “Bucks” column for the discussion of a “bias towards action” in soccer and investing and to the American Experience notes on Bush 1 for the Sununu quote.
Please note that the title of this post was slightly edited.