What is Self-Attribution Bias?

By now most of us Chicagoland residents should have received our company 401(k) retirement plan account and/or investment account quarterly statements.  In many cases reviewing these statements for a brief moment every 3 months is the most engaged a lot of investors ever get with their retirement accounts.

Reaction to the all-time high account balances will fall into what behavioral psychologists call “Self-Attribution bias”.  Self-Attribution bias is the psychological habit of attributing your successful investment outcomes to your skill as a long-term stock market investor.  On the flip side, when the stock market collapses again, you will then blame your stock market losses on bad luck, the economy, Congress, your company, or your least favorite neighbor.

Self-Attribution bias can harm stock market investors in two ways.

First, you will not be able to see the investment management mistakes you made and learn from those mistakes.  Individual investors need to remember that being invested in a rising stock market most times is just plain good luck.  Self-Attribution bias is especially harmful in an individual company retirement plan account or 401(k).  The consistent individual retirement plan contributions along with the company matching contributions can cover up years of investment management mistakes and losses.  It can give you the illusion that you are doing pretty well when in fact you are losing money or performing far below the general market.

Second, when stock market investors credit themselves with investment management success, they become overconfident in their ability to make timely investment management decisions during the next stock market decline.  And let’s not fool ourselves; there WILL be another decline, bear market, crash…. call it whatever you like.  Professional investment advisors keep written records of their investment decisions in their client accounts in order to revisit their thought process at a later date.  Individual stock market investors don’t often have the luxury of a similar investment management decision process.

Break out of your Self-Attribution bias investment management cycle and take more control of your company retirement accounts investment management decisions.  If you have been fully invested in the market in 2013, you have experienced a nice rising stock market.  Don’t think that the same good fortune awaits you during the next great stock market decline.

Cheers,

Ed Downey