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It wasn’t me – the 'self-serving bias' of the financial sector

Wednesday 9th July 2014

By Guido Baltussen, Senior Quantitive Investment Strategist at ING Investment Management
Investors who make big profits like to slap themselves on the back, but as soon as they start making a loss they all too often point the finger at unfavourable market conditions and bad luck. In psychology, this behaviour is known as the self-serving or self-attribution bias. People have the natural tendency to attribute successes to personal skills and negative outcomes to external factors. So what impact does this bias have on our investment decisions? 
The self-serving bias implies that we are more than happy to take credit for positive outcomes, but do not feel like taking the responsibility for negative outcomes. We tend to ascribe positive outcomes to personal factors, such as our skills, personal traits and efforts. However, we often ascribe negative outcomes to external factors, such as action that has or has not been taken by others, bad luck, bad (weather) conditions and the state of the economy amongst others.
We come across this behaviour in many situations in our daily life. Employees for example often tend to attribute promotions to their hard work and exceptional skills, but blame their failures on ‘unfair’ bosses. This behaviour is often seen in the sports world. For instance, most athletes take personal credit for good performances, but are less willing to do so, when things go less well. When confronted with our driving behaviour we are also inclined to blame the weather, the condition of the car or road or other people’s poor driving skills when things don’t go our way. On the other hand, we do tend to attribute positive driving behaviour to our alertness and our competency in traffic.
Things are not much different in the financial sector. Here, we attribute good performances to our investment skills and disappointing performances to the markets and factors beyond our control. Recent research by Arvid Hoffmann and Thomas Post (2014) of Maastricht University demonstrates such behaviour among a group of Dutch investors. Over a period of three months, they put the following statement to a group of investors who were investing, on average, more than €50,000: “The recent performances of your investment portfolio gives an accurate reflection of your investment skills. Please indicate the extent to which you agree with this, on a scale of 1 (agree entirely) to 7 (disagree entirely)”. The low scores indicate that investors take no responsibility for their recent investment performances. Figure 1 shows the average score for this question (unbroken line) compared with the average performances (in yield) of their portfolios (dashed line) and of the AEX (dotted line).
It turns out that, on average, people more often disagreed with the statement in the months in which they achieved a lower yield (for thorough statistical substantiation, please refer to Hoffmann and Post’s paper). Furthermore, the investors in the top 50% of performances, in that month, more often agreed with the statement than investors in the lower 50% of performances. In short, if these investors perform less than expected, they feel that their performances correspond less well with their investment skills. To put it another way, good performances are more likely to be attributed to our investment skills, while poor performances are often associated with other factors: the self-serving bias.
The big question is: Why are we susceptible to this self-serving bias? Psychological research cites various causes. For example, the self-serving bias is good for our self-image, which often subconsciously leads to the tendency to be self-serving. We are convinced that desired outcomes are due to how good we are, which enhances our self-image. Undesired outcomes, on the other hand, are believed to damage our self-image, which we subconsciously attempt to avoid.

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Editorial Contact Details - Conor Shilling
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