How The Self-Serving Bias Can Suddenly Spoil Your Good Returns
“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”― Benjamin Graham
It is natural for humans to see their accomplishments in a positive light, and an optimistic mindset can do wonders for one’s continued success. However, too much self-affirmation can easily gravitate into hubris.
In social psychology, this is recognized as the “self-serving bias,” a cognitive bias where people attribute positive events to their own skills, while blaming failures on factors beyond their control. Studies confirm that nearly all of us have the tendency to fall for this bias as an act of self-protection.
Recent research from Maastricht University studied a group of investors in a span of three months. Participants were asked to rate how much they agreed on the statement “The recent performance of your investment portfolio gives an accurate reflection of your investment skills.” Due to the self-serving bias, investors who had good performance strongly agreed, while those with disappointing performances pointed the finger to external factors.
In the current bull market where benchmarks like the S&P 500 are continually hitting new highs, this self-serving bias can prove to be dangerous as investors who have stuck to a smart, long-term investment plan tend to become irrational through an inflated sense of their skills. As a result, their minds can trick them into straying from the plan that brought them profits in the first place.
Often, they attribute great returns to their ability to connect the dots, and overestimate their ability to pick more investment “winners.” However, choosing a single investment or asset class can be akin to gambling, because it’s impossible to predict with certainty which investment be a winner in the near-future.
Morningstar, a reputable investment research firm, found that investors lose more than two and half percent on their returns every year due to similar attempts. They end up making emotional bets and buy when those investments are already soaring, while eventually selling during their drop.
As a wise investor, the best defense against this cognitive bias is to equip yourself with a rational, long-term investment plan that isn’t swayed by emotions. At LexION Capital, we can help you avoid the self-serving bias (amongst other biases) and achieve that through a rigorous investment process that focuses on the math and science of the markets.
If you’d like to learn more about our rigorous approach to investing, please contact us today.