Self-attribution bias is a cognitive bias that leads individuals to ascribe their successes to their skill or hard work and to blame their failures on outside influences or bad luck.

A certain degree of self-attribution bias is probably necessary to be successful in any entrepreneurial endeavor. It seems to be correlated with confidence. But there are two types of confidence: arrogance-based confidence where someone has just decided they are good, and earned confidence which comes from demonstrated success and knowing it is repeatable. If we don’t also possess a good amount of self-awareness, confidence will get us into trouble.

Talk to an individual investor. They will tell you how they read the Wall Street Journal. They watch CNBC. They find patterns in charts. They might even read company filings. Their success is due to this hard, intelligent work.

But when they lose money, there is a variant of a bad luck story. The company was fraudulent. The Fed is manipulating the markets. High frequency traders are ruining execution and price transparency. Or (a personal favorite) one of the media sources (the same ones that they consume to gain an edge) has led them astray.  They claim credit for success and deflect blame for failure.

Bull markets exacerbate this problem. A bull market is the tide that lifts all stocks.  However, it is very tempting for an investor to attribute his profits to his skill of stock picking, instead of the fact that he was just invested in stocks as they all rose. This can lead to over-confidence and being too aggressive, increasing allocation to stocks beyond the original plan.

We must remember that winning positions depend on many things. There is no one edge that is large enough to beat the market on its own. Successful investing isn’t driven by a “big idea”. It is driven by combining lots of “small ideas”. We currently have 34 predictive variables in our models, and we are always looking to add new things. We don’t need all these things to work all the time, we just need the portfolio of signals to keep aggregating the small edges.

And even though we do our best to own our losses, another benefit of our approach is that we always have plenty of things we can blame (not serious about that last part).

Disclaimer

This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. It is provided for information purposes only and on the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein, any risks associated therewith and any related legal, tax, accounting, or other material considerations. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact HTAA or consult with the professional advisor of their choosing.

Except where otherwise indicated, the information contained in this article is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution of any future date. Recipients should not rely on this material in making any future investment decision.