Self-attribution bias is a long-standing concept in psychology research and refers to individuals’ tendency to attribute successes to personal skills and failures to factors beyond their control. Recently, this bias is also being studied in household finance research and is considered to underlie and reinforce investor overconfidence.
According to Michael M. Pompian, author of Behavioral Finance and Wealth Management “the effects of Self-attribution Bias can cause the following investment mistakes:
- Self-attribution investors can, after a period of successful investing (such as one quarter or one year) believe that their success is due to their acumen as investors rather than to factors out of their control. This behavior can lead to taking on too much risk, as the investors become too confident in their behavior.
- Self-attribution bias often leads investors to trade more than is prudent. As investors believe that successful investing (trading) is attributed to skill versus luck, they begin to trade too much, which has been shown to be “hazardous to your wealth.”
- Self-attribution bias leads investors to “hear what they want to hear.” That is, when investors are presented with information that confirms a decision that they made to make an investment, they will ascribe “brilliance” to themselves. This may lead to investors making a purchase or holding an investment that they should not.
- Self-attribution bias can cause investors to hold under diversified portfolios, especially among investors that attribute the success of an company’s performance to their own contribution, such as corporate executives, board members, and so on. Often, the performance of a stock is not attributed to the skill of an individual person, but rather many factors, including chance; thus, holding a concentrated stock position can be associated with self-attribution and should be avoided.
Let us help you eliminate this bias. Professional advisors with disciplined systems of investing tailored specifically to your investment goals will allow you to overcome many of the obstacles inherent in our very nature. At DWAM, we can help.