No one else to blame? Self-attribution bias happens when individuals very readily credit positive outcomes to their own skills, but put the blame for poor outcomes firmly on external factors.
Why do traders succumb to self-attribution bias?
In trading there is a tendency for individuals to attribute success to their own actions and abilities, while also refusing to accept that poor trading results might be their own fault.
This matters because it means investors and traders will neither learn from their mistakes and reflect on their experiences nor acknowledge the need to be better informed.
Picture the scenario: an investor places a trade on a tech company but, soon after, its stocks begin to fall. They blame the friend who told them about the company, its CEO for not managing it correctly and even the market itself for going down.
This instinct means they fail to look at the bigger picture. They may have neglected to take into account market trends, or the latest financial updates from the company showing redundancies for instance.
So, who is the one to blame? It is the trader, of course. Individuals are responsible for making their trading decisions and the financial consequences.
Now let’s reverse the scenario. Say the company is successful and the stocks do start to grow. To whom does the trader attribute these gains? The answer remains the same. This time the trader believes that they always knew the company would be a good investment. The company’s success becomes the trader’s success.
In the long run this self-attribution bias is a negative phenomenon which can lead to skill deficits and failures.
Who was the first to describe the self-attribution bias?
Attribution bias is a long-standing concept in psychological research,with the theory first explored in the late mid twentieth century. Austrian psychologist Fritz Heider found that in ambiguous situations people tended to make attributions based on their need to maintain their viewpoint and self-esteem.
In 1975 psychologists Dale Miller and Michael Ross studied the issue further, arguing that self-attribution bias is rational and is not dependent on the individual’s need for self-esteem. They found that if an outcome corresponds with an individual’s expectations, they attribute it to internal factors. If, on the other hand, the outcome contradicts the individual’s expectations, they tend to attribute it to external factors.
Self-attribution in trading and investing
Many investors and traders hold the view that investing is a kind of art which requires sophisticated skills and knowledge. It is not surprising that they tend to credit any success in their trading experience to their own individual skills and abilities.
However, when things go wrong, they want to “defend” their abilities as trading professionals by putting failures down to external events beyond their control, or simply to bad luck. They might blame the economy or even politicians.
This is a dangerous behavioural pattern. Traders must avoid the trap of falling prey to their own ego rather than insisting on rational thinking and decision-making.
Few traders are able to pick the winning stocks consistently and gain a significant advantage over those who simply invest in the S&P 500 index. Investing in a rising stock is a matter of not only skill, but also of circumstances. Accepting this can help traders avoid costly mistakes and missed lessons.
How to avoid the self-attribution trap
The answer is to have a realistic view of yourself as a trader or investor. Placing the blame on others or on circumstances is not productive in trading just as it is not productive in daily life.
Build your success with self-analysis and emotional intelligence. Know your strengths, accept your weaknesses and grow with them. By learning more about yourself first, you will be able to recognise which strategies you can use to become a better trader.