Why your next big move might be doing nothing: The Action Bias in alternative asset investing
ACE Alternatives
Consistently Pushing the Boundaries of How Alternative Asset Vehicles are Operated.
In a world that idolizes action, sometimes the smartest move is to simply stand still. This paradox is vividly illustrated on the soccer field during penalty kicks. Goalkeepers almost always dive left or right, even though staying in the middle statistically speaking would save more goals.
It’s a curious psychological phenomenon with profound implications far beyond the sports arena, particularly in alternative asset investing.
Why does standing still feel riskier than failing?
Israeli researchers analyzed 311 penalty kicks and found a surprising insight: 29% of shots are aimed at the center, yet goalkeepers stayed put a mere 6.3% of the time.
The result?
Missed opportunities—both literally and figuratively. This tendency, known as Action Bias, reveals that doing something (even the wrong thing) often feels better than doing nothing, especially under pressure.
Why?
Because diving gives the illusion of effort to the goalie. In the heat of the moment, goalkeepers and leaders succumb to the expectation of visible action, fearing that inaction might look like incompetence.
But here's the kicker: inaction can often be the most effective, albeit counterintuitive, choice.
What does this have to do with venture capital?
The same bias that pushes goalkeepers to dive infects decision-making in venture capital, startups, and business. Under the relentless pressure to perform, investors and leaders often default to "doing something" deploying capital, closing deals, or pivoting strategies—when the optimal move might be to pause, reflect, and wait.
Sound familiar?
Think about the last time you chased a trend or rushed into an investment, only to realize later that more deliberate due diligence could’ve saved you millions.
What is Action Bias, and why can it be dangerous?
Action Bias is the human tendency to favor action over inaction, even in situations where doing nothing might yield better results.
It’s a psychological comfort zone, being busy feels better than appearing idle.
But busyness isn’t the same as effectiveness. In venture capital, where the stakes are high and the margins for error are slim, Action Bias can lead to avoidable mistakes that waste resources, erode strategic focus, and amplify risk.
The pressure to perform and how Action Bias exploits vulnerabilities
Flash over substance: Portfolio companies and the trap of superficial wins
Portfolio companies often feel immense pressure to demonstrate quick wins to their investors. To meet these expectations, many default to shallow, flashy initiatives like aggressive marketing campaigns, surface-level rebranding, or overhyped feature launches.
While these actions create the illusion of progress, they rarely address core challenges like market fit, operational inefficiencies, or long-term scalability.
Take, for instance, a startup pivoting to a trending industry buzzword (think AI or Web3) without a concrete plan for integration, pricing or sustainable growth. This kind of tactical window dressing may briefly excite investors but can quickly unravel when the underlying metrics don’t support the hype.
It’s a classic case of diving left or right to appease the crowd instead of standing firm and tackling the real issues at hand.
The consequences are twofold:
Short-term momentum without long-term viability: Superficial actions burn cash, time, and credibility while neglecting the deeper, strategic moves necessary for enduring success.
Erosion of trust: When the glitter fades, investors may lose confidence in the company's ability to deliver meaningful outcomes, making it harder to secure future rounds of funding.
The chase for the next big thing: Fund managers under pressure
The pressure to deliver quick returns can also drive fund managers to fall victim to Action Bias, particularly when chasing "hot" startups in overhyped sectors. Venture capital thrives on the promise of identifying and backing transformative ideas, but the fear of missing out (FOMO) on the next unicorn often distorts judgment.
Here’s how it plays out:
Rushing into trendy investments
The latest craze whether it’s generative AI, climate tech, or blockchain creates a frenzy among VCs. Fund managers may feel compelled to jump into deals with limited due diligence simply to show their LPs that they’re "in the game." The problem? These sectors are often overcrowded, overvalued, and rife with speculative noise, leading to higher failure rates.
Prioritizing speed over strategy
In the race to deploy capital and show activity, funds may overcommit to startups without adequately assessing their fundamentals. This can lead to inflated valuations, misaligned incentives, and, ultimately, underperforming portfolios.
Reinforcing hype cycles
By chasing the shiniest objects, VCs perpetuate a cycle of over-investment in a narrow set of trendy sectors, diverting resources away from less obvious but potentially more transformative opportunities. The result? A crowded playing field where returns are diluted, and systemic risk increases.
The feedback loop: When both sides succumb to Action Bias
The interplay between portfolio companies and fund managers can create a self-reinforcing loop of short-termism:
Breaking the cycle: Building a culture of thoughtful decision-making
To escape the pitfalls of Action Bias, both portfolio companies and fund managers need to embrace a disciplined, long-term mindset:
For Portfolio companies
For fund managers
Collaborative accountability
Create an ecosystem where fund managers and startups hold each other accountable for meaningful progress. By aligning incentives around long-term success rather than short-term optics, both parties can break free from the cycle of Action Bias.
About ACE Alternatives
ACE Alternatives (“ACE”) is a leader in managed services in the Alternative Assets sector like venture capital, private equity, fund of funds, real estate, and more. Leveraging a proprietary tech platform and extensive industry experience, ACE offers 360-degree tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.
The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently used by over 45 funds. In 2024, ACE received seven-figure funding from Bob Kneip to expand into new markets. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.
Media Contact: Rhea Colaso
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