Self-Attribution Bias Clouds Investor Reality

Scott Russell |

Some, stockbrokers, stock analysts, investment gurus and individual investors will have you believe that investing is an art, requiring nuanced skill and timing based on information that only they possess. So, it’s not surprising they are very quick to attribute any successes they have to their individual abilities. However, when things don’t go their way, they are just as quick to defend their abilities by attributing their failures to bad luck or, generally, events beyond their control. Such is the mindset of those with “Self-Attribution Bias,” and it can be a very dangerous behavioral flaw for investors.

Self-Attribution Bias is the term behavioral psychologists now apply to investors and business executives who habitually attribute their success to their own abilities. What that also means, is that they will, without hesitation, blame their failures on just about anything else – the economy, macro-events, politicians, or their choice of ties. Of course, mutual fund managers, who are very well paid, earning upwards of 2 percent annually from pools of investor money that can top a billion dollars, must defend their unique ability to identify, analyze and select winners from the vast universe of stocks that will generate returns ordinary investors could only hope to earn on their own.

Does picking winners require skill or unique abilities? Just ask the blindfolded monkey which, in 100 contests sponsored by the Wall Street Journal, beat the experts 39 times. While winning 61 contests might be considered a validation of the experts’ abilities, consider the fact that the experts were only able to beat the Dow Jones Index in 51 contests. So, without any skill or active management, an investor who simply invested in the Dow Jones Index would have done just as well as the stock-picking experts nearly half the time.

To Overcome Self-Attribution Bias Know Your Limitations

This isn’t to disparage stock pickers or professional money managers who work hard to ply their trade. Rather, it is valuable lesson for individual investors who may rely too heavily on their ego and less so on rational thinking in their investment decision-making. Few investors are able to pick the winners – be they stocks or mutual funds – consistently enough to gain any significant advantage over an investor who simply buys and holds the S&P 500 index. The sooner investors realize that being invested in a rising stock market is more a matter of circumstance than skill, the sooner they can avoid making the costly mistakes of trying to pick winners or timing the market.

Self-attribution bias can prevent investors from realizing and learning from their mistakes. Riding a 401k plan to historic market highs can delude investors into thinking they can do no wrong. Yet, when most 401k investors bailed near the bottom of the 2008 stock market crash, they blamed their losses on the crash or the recession, even though they made the decision to join the herd and sell at the lowest point. Not acknowledging and learning from their mistake, they are bound to repeat them.

Individual investors can take some valuable lessons away from the experiences of the best investors of our time, such as Warren Buffet and George Soros. While they both apply their abilities to pick winners and time the market (they have much more experience the most of the rest of us), they are also very proactive in keeping themselves high above the self-attribution cloud. Instead of self-aggrandizement, they exercise an extreme level of control, discipline and patience in adhering to a strict investment philosophy and strategy. Any investment decision is recorded and applied to a strict criterion that squeezes any emotion and “luck” out of the equation so they can later determine if their success (or failure) was based on their reasoning. More importantly, it enables them to avoid repeating mistakes.

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