Self-attribution bias. Not all successful trade ideas are thanks to your genius, and not all failures are due to external risk factors.

Self-attribution bias leads individuals to attribute success to internal factors and failure to external factors. It can result in overconfidence, poor learning from mistakes, excessive risk-taking, and lower investment returns. Discover whether you are prone to a self-attribution bias and the extent to which it affects your investment decisions with PRAAMS BehaviouRisk.

Behavioural science. What is self-attribution bias?

This phenomenon describes a person’s inclination to account for successes with internal reasons such as talent and intelligence and to attribute failures to external risk factors such as bad luck or poor economic conditions. For example, an employee with a solid self-attribution bias will ascribe his recent promotion to his hard work and deep experience in his field. At the same time, when not promoted for several years, the same employee will attribute it to the short-sightedness of his boss and poor corporate culture.

Self-attribution bias is a cognitive bias, i.e., a mistake in decision-making. These biases can be effectively corrected with education.

What are the consequences and portfolio risks?

Self-attribution bias is widespread among both experienced traders and beginner investors. It usually takes the following forms: “My investment went up because I am good at investment research, I can crunch financial figures, and I can tell good investment decisions from bad ones”, or “My investment portfolio shrank a lot because of unexpected high market volatility and unpredictably poor macroeconomic conditions.” Portfolio management success belongs to me, while investment failure is due to someone else.

This attitude, if pervasive for a long period or present after a period of good investment returns, deprives investors of opportunities to learn from past mistakes and makes them falsely overconfident in their ability to forecast the future. In more practical terms, unjustified overconfidence leads to excessive risk appetite and much more frequent trading, resulting in poorer risk-return relationship. Furthermore, it may also result in low portfolio diversification, one of the forms of excessive risk-taking. 

What can I do to make my portfolio optimal? 

Good advice regarding self-attribution bias is to be as objective as possible. Apart from your skill, your investment gains are also thanks to luck and many unobservable risk factors. Aside from market complexity, your investment losses are also potentially due to your incomplete risk analysis. Proper investment analysis includes an assessment of the reasons behind gains and losses. The key to success is the constant (and ideally, written) analysis of which initial guesses were correct and what was unexpected. The adverse effects of self-attribution bias can be relieved by objective analysis before and after your investments.