When it comes to pinpointing the reasons for investment success and failure, being objective is a surprisingly difficult thing to do. Recognising precisely what went right and wrong can help in making better decisions in the future. The trouble is that humans tend to credit their ups and downs to reasons that aren’t always the case. In short, we like to take the credit for success and blame something else for failure. This is a well known flaw called self-attribution bias, and being aware of it could cut the risk of costly overconfidence and lead to a better investment process.
How athletes explain performance
Self-attribution has been studied in a wide range of settings, including investing. But a good place to start in getting to grips with its impact, is sport. Here, psychologists have looked hard at whether winners differ from losers in the way they explain their performances, and it turns out they do...
In his book Sport and Exercise Psychology, cognitive psychologist Aidan Moran says that in contrast to losers, winners in sport tend to credit themselves and the factors they control (like their preparation and practice). On one hand, this is important because it builds confidence in the mind of the athlete. But the problem is that self-attribution overlooks the possibility that the athlete might have won against inferior competitors. As such, the ‘win’ may not be quite as successful as it seemed.
On the flip-side, losers tend to blame external factors and make excuses, which is something you often find with football managers. You end up hearing quotes like: “I personally put our bad start to the season down to the new stadium.” Or perhaps: “It wasn't our fault we lost the game, I thought it was his fault [the ref’s] on a decision he made not to give a free kick.” Moran says this effort to deflect blame is made to preserve self-esteem and present a more favourable image to others. Yet, blaming others misses the point that poor athletic performance or tactical errors may have had much more influence on the result.
Self-attribution in investing
One of the key takeaways from sports psychology is that self-attribution inflates confidence in athletes, even if it’s unwarranted. The same goes for investors. Research shows that successful investors don’t attribute enough of their success to chance or outside circumstance. In fact, the better they do, the…