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How 1 Common Mistake can Affect Investment Performance

You must have confidence to be able to achieve your most ambitious goals. No one ever succeeded by limiting themselves. This is especially true in the world of investing. Every prudent investor should know how to trust him or herself to implement financial strategies effectively and boost investment performance.

However, as human beings, we tend to form idealistic pictures of ourselves. Positivity has many proven benefits, but if you only see your positive attributes, there will be negative consequences. Others may find you difficult to work with if you can’t recognize your own mistakes. Also, by reaching conclusions that don’t address the varied aspects of a situation, you miss out on the growth opportunities that come with self-evaluation. That’s why you should always be assessing yourself objectively to determine whether you are being overconfident.

The tendency of your brain to avoid recognizing your flaws is a form of self-protection. You would rather not experience the discomfort of self-criticism and the effort of self-correction. In social psychology, this cognitive phenomenon is known as ‘self-attribution bias’. It can be explained as the tendency to credit positive outcomes to your own character and attributing negative outcomes to external factors – clearly a one-sided approach.

How does this bias affect investors?

Self-attribution bias causes investors to become overconfident and make miscalculated investment decisions. In some cases, they hold onto a certain investment simply because they are emotionally attached to it. This psychological principle also comes into play during sudden declines in the stock market. Many investors fail to see the big picture and instead look for something or someone to blame, which is counterproductive. When these things happen, many investors lose their sense of personal accountability, a necessary factor for success.

How will I correct this if I find myself overconfident?

Not to worry, self-attribution is a bias that you can resolve easily if you are mindful. With your finances, having an extensive knowledge of how the investment landscape behaves is essential to your success. Learn what works and be open to new strategies so you can familiarize yourself with trends and to make sure that your strategies work long-term. From time to time, undesirable outcomes could not have been avoided will arise; be mature enough to study them from a balanced perspective, so that you learn from those experiences. These tips may sound simple, but they take time and effort to implement. Therefore, seek advice from an experienced financial expert to bring much-needed experience, knowledge, and perspective to your portfolio.

Ultimately, it is all about your attitude and perspective. Keep your eye on the big picture and avoid being distracted by a single area. When you encounter negative events, avoid fault-finding and blaming. Instead, take the opportunity to learn new things and better yourself.

Do you want to know more about self-attribution bias in investing and how not to fall for it?

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At LexION Capital, our priority is to make our clients’ financial goals a reality by providing hands-on advice, backed up by science-based insights into the financial industry. We help you maintain well-diversified investment plans.