Through this course, you will learn how individuals and firms make financial decisions, and how those decisions might deviate from those predicted by traditional financial or economic theory. We will explore the nature of these biases and their origins, using insights from psychology, neurosciences and experimental economics on how the human mind works. From these biases, you will be able to examine how the insights of behavioral finance complement the traditional finance paradigm. We also look at the micro and macro biases. Finally, we will explore how these insights describe more complicated topics such as fat tail events and financial crises.
6. Self-Attribution Bias
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From the course by Indian School of Business
Behavioral Investing
92 ratings
Indian School of Business
92 ratings
Course 3 of 5 in the Specialization Financial Markets and Investment Strategy
From the lesson
Behavioral Biases in Finance - Part 1
This module discusses the common behavioral biases experienced by individuals. All the biases are divided into 3 parts. After completing this module you will be able to explain different biases such as Overconfidence, Base rate neglect, Anchoring and adjustment, Cognitive Dissonance, Availability, Self-Attribution and Illusion of Control Bias.
Meet the Instructors
Vaidya NathanLecturer
Finance
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Learning outcomes.
After completing this video, you'll be able to explain what self-attribution
bias means, differentiate between self-enhancing bias and self-protecting
bias, describe the self-attribution behaviors that cause investment mistakes,
list the ways in which one can overcome self-attribution bias.
Self-attribution bias.
Self-attribution bias can be best described by the adage,
heads I win, tails it's chance.
Self-attribution bias or self-serving attribution bias refers to
the tendency of investors to ascribe their investment successes to innate aspects
such as talent or foresight or aptitude, while often blaming
investment losses on outside influences such as bad luck.
As a professor I know that when students do well in an exam,
they credit their intelligence or work ethic for their doing well,
but when they don't do well they might actually cite unfair grading.
So self-attribution is a cognitive phenomenon by which investors attribute
failures of their investment decisions to situational factors,
or market factors, or economic factors, and
successes to dispositional factors such as their own skill or intelligence.
Self-serving bias can be broken down into two constituent tendencies or
subsidiary biases.
Self enhancing bias basically represents an investors propensity to
claim an irrational degree of credit for their investment successes.
And self-protecting bias represents the corollary effect which is
the irrational denial of responsibility for investment losses.
Because investors intend to make profits, there are no outcomes that are in
accordance with that intention, to make money is perceived, as a result,
of investors acting to achieve what they have originally intended.
Investors then naturally access more credit for
their investment successes than losses.
Because the initial action was to essentially intended to make money.
Now since they intend to make money, rather than to lose.
Self-predicting bias can be explained from an emotional perspective.
Investors need to maintain self esteem, and
that need directly affects distribution of investment outcomes because investors
will protect themselves psychologically in an attempt to comprehend their failures.
Because this cognitive and emotional explanations are linked,
it can be a bit difficult to ascertain which form of bias is at work,
in a given investment situation.
Irrationally, attributing investment gains and
losses can impair investors in two primary ways.
First, investors who aren't able to perceive mistakes they have made
are consequently unable to learn from those investment mistakes.
Second, investors would disproportionately credit themselves when they do
make money or they make a profit and can become judgmentally over confident
in their own market savviness or market skills.
It's been observed that periods of general prosperity in markets are usually followed
by periods of higher than expected trading volume, a trend signifying
the impact of over confidence on investment decision making.
And during periods of over confidence, our trading volume tends to increase and that,
in general, lowers average profits because of trading costs.
Traders, who are both young and successful tend to trade the most and
demonstrate the most overconfidence.
Self-attribution investors can, after a period of successful investing,
such as say, one quarter or a year, believe that the success is due to their
aptitude rather than factors that could possibly be out of their control.
This kind of investment behavior can lead to taking on too much risk as
investors become too confident in their investment skills.
Self-attribution bias also often leads investors to trade
far too much than what may be considered prudent.
If an investor believes that successful investing or trading
can be attributed to his own 100% skill and 0% luck,
you know that the investor will begin to trade too much.
Which we know is hazardous to one's own 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 they have made.
They will ascribe brilliance to themselves.
This may actually lead investors to make a purchase or
hold on to an investment that they probably should not.
They'll probably purchase a stock or
just hold on to the stock that they're better off by not holding.
Self-attribution bias can cause investors to hold under diversified portfolios,
especially for investors who attribute their success or attribute
the fact that the portfolio is making money to their own skill.
And holding a considerable stock position can be associated
with self-attribution and you know should be generally avoided.
It's helpful to recall one of the old Wall Street adages that perhaps that, you know,
kind of provides the best warning against pitfalls of self-attribution bias.
The adage says that, don't confuse brains with a bull market.
Often times, when financial decisions pan out well,
investors like to congratulate themselves on their skill.
When things don't pan out well, don't turn out profitably,
they console themselves by concluding that someone or something else,
maybe market forces, maybe economic forces, or some political events,
were at fault.
In many cases, neither explanation may be entirely correct.
Good investment outcomes are typically due to a number of factors.
Bull market is the most prominent among them.
And stocks decline in value.
And stocks declining in value can be equally random and complex.
And one of the best thing investors can do is view both winning and
losing in the financial markets as objectively as possible.
However, most people don't take the time to analyze the complex confluence
of factors that help them make profits or
to confront the potential mistakes that aggravated a loss.
Post-analysis of trading and investment is one of the best learning tools for
an investor especially a young investor and it's understandable.
But, ultimately it's quite irrational to fear examination of one's own
past mistakes.
The only real grievous error in investment is to continue to succumb
to over confidence, and as a result to repeat the same mistakes again and again.
Investors should also perform a post-analysis of each investment, and
the post-analysis can go along the lines, such as, you could ask yourself,
I could ask myself the question, where did I make money, where did I lose money?
I can mentally separate my good money-making decisions from the bad ones
and then review the beneficial decisions and try to discern,
what exactly did I do correctly?
Did I purchase a stock at a particularly advantageous time or
was the market in general on an upswing?
Similarly as an investor I should review the decisions that
I would probably categorized them as poor.
So I should analyze what went wrong.
Did I buy stocks with poor earnings?
Did I buy stocks with poor fundamentals?
Were the stocks trading at or
near their price highs, the peaks when I purchased them?
Or did I pick up stocks as they were beginning to decline?
Did I basically purchase the stock aptly and
simply make an error when it came to selling,
or was the market in general undergoing a correction phase?
So when reviewing unprofitable decisions, I can look for
patterns or common mistakes.
As an investor I should be aware of any such tendencies and
try to remain mindful of such tendencies.
For example, I could brainstorm past investment decisions and become conscious
of the rules that can help me overcome any bad habits that I may have acquired.
As a trader, and
can also reinforce my reliance on strategies that have served me well.
So as an investor, I just need to remember that admitting and
learning from past investment mistakes,
is the best way to become a smarter, better, and more successful investor.
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