July 25, 2023

Jargon Busters: What is self-attribution bias?

By George Cliff

Self-attribution bias is a cognitive bias – a thought process caused by our brain’s tendency to view new information and experiences through a lens (or filter) of our previous learning and experiences. It is the tendency of individuals to attribute their successes to internal, personal factors and failures to external, situational factors.

Self-attribution bias influences how we perceive and explain our behaviour and what happens to us. When we experience success, we are more likely to attribute it to our personal qualities, skills, or efforts.

For example, if you receive a promotion at work, you’d likely say this was a result of your intelligence, hard work, and competence. This internal attribution enhances our self-esteem and gives a sense of control over our own lives. When we encounter failure, however, we tend to attribute this to factors beyond our control – bad luck, poor timing, or other people’s behaviour and/or actions, or even nepotism and scheming.

What are the outcomes of self-attribution bias?

By attributing failures to an external cause, we protect our self-esteem and maintain a positive self-image. This can be a valuable tool for people who must make important decisions regularly (like those working in the emergency and uniform services). However, it is important to be aware of this bias to ensure a more accurate understanding of factors that influence our achievements and setbacks.

Self-attribution bias can lead to distorted perceptions of reality and biased judgments, while learning honestly from our mistakes can prevent them from happening again.

Does self-attribution bias impact investment decision-making?

Self-attribution bias can have significant implications for investment decision-making. Here are 5 ways it can impact your investment choices:

1. Overconfidence:

Self-attribution bias can cause investors to overestimate their skills and underestimate the role of luck or external factors like economic growth, industry trends, regulatory changes, market sentiment, interest rates etc.

When investors attribute successes solely to their own abilities, it can lead to overconfidence in future investment decisions. In turn, this overconfidence can result in excessive risk-taking and poor portfolio diversification.

2. Failure to learn from mistakes:

Self-attribution bias can make it difficult for investors to learn from their mistakes. When faced with poor performance, it is easy to blame only external factors, rather than examining the decisions and investment strategies that may have played a part. This mindset can hinder the ability to identify and correct errors, leading to repeated mistakes.

3. False sense of control:

Investors who are influenced by self-attribution bias are at risk of developing a false sense of control over their investments. Under the impression that their actions have a greater impact on outcomes than they actually do, investors can be drawn into excessive trading and too-frequent portfolio adjustments as well as higher transaction costs – all of which can negatively impact overall returns.

4. Confirmation bias:

Self-attribution bias can also contribute to confirmation bias, where investors seek out information or opinions that support their self-perceived investment abilities and downplay contradictory evidence. This can limit their exposure to diverse perspectives and objective analysis, potentially leading to biased investment decisions.

6. Inability to spot patterns

Another risk of self-attribution bias for investors is that it can blind them from spotting (and benefitting from) the real causes of success. When an investor believes their own decision-making is the only reason for success, there is no push to investigate other causes. This means they can miss out on the benefits of pinpointing patterns within the markets that might indicate a future investment opportunity.

 Self-awareness for better or worse

To mitigate the negative impacts of self-attribution bias on investment decision-making, it is important for investors to cultivate self-awareness, remain objective, and seek external feedback and analysis.

Conducting thorough research, diversifying portfolios, and regularly reviewing investment strategies can help counteract the negative effects of this bias. This approach is imperative in both good times and bad.

 How Clever can help you:

Our quantitative in-house and outsourced investment services are designed to minimise risk and help financial advisers avoid the many pitfalls of human behaviour that can impact financial decision-making, including self-attribution bias.

We don’t follow the herd, leap on bandwagons, or get swayed by gut feelings. Instead, we rely on the only thing that really matters – the data.

Meet the Author

George Cliff

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