People tend to take credit for their successes but blame external factors, or other people, for failures. This is self-serving bias. It allows us to protect our self-esteem, which in turn is good for our confidence. There are regular examples of self-serving bias in sports. The winning team considers they played a very good and skillful game. The losing team blames the referee.

This behavioral bias is more common in Western cultures than in Asian. It is thought to be so because Western cultures are more focused on the individual than the collective. Thus, the greater need to protect self-esteem than in the more collective cultures of Asia. It is also more common amongst elderly people and men.

There are positives to this bias, but not in the investment space. A good example of a positive benefit is where a person loses their job. To take personal responsibility would be a huge burden, making it difficult to get out of bed and look for work. Whereas, by blaming economic conditions it becomes much easier to get out and look for another job.

But this is not so in the investment space. The investor needs to take responsibility for all of their decisions, profitable or not. However, excuses abound when investors are on the wrong side of a trade. For example, it is common to blame management for a share price decline. Management is, of course, irrelevant to an investor’s decision-making. If management is so bad, then why buy the shares in the first place?

Take responsibility for all your buys and sells. Analyze why trades worked or didn’t. This will help improve your performance. Blaming outside factors will not.

Links to the first posts of the series

Investors’ Behavioral Biases: Part I – Recency Bias

Investors’ Behavioral Biases: Part II – Optimism Bias

Investors’ Behavioral Biases: Part III – Loss Aversion

Investors’ Behavioral Biases: Part IV – Confirmation Bias

Investors’ Behavioral Biases: Part V – Herding

 

 

23 August 2016 Markets