I won, I’m right. I lost, I’m unlucky.
Understanding our cognitive and behavioral biases is an important ingredient in maintaining consistent investment performance. The self-serving bias (Miller and Ross, 1975; Sedikides and Strube, 1995) can be particularly insidious, as its purpose is to make us feel good about ourselves, regardless of its impact.
We’re fragile creatures. Maintaining a positive view of self is far more important to our survival and likelihood of having offspring than accepting the truth. The self-serving bias is simply our increased likelihood of attributing good outcomes to our skill and positive attributes, while attributing poor outcomes to bad luck or some external influence. Sound familiar?
When I was trading currencies at BT early in my investment career, I did this all the time. I would often have a well thought out contrarian position (fighting a trend, hmmm), 15 pips in the money, when a news event would cause a sharp move against me. It was easy for me to blame those unforeseen news events for my repeated losses. I persisted with this unproductive and unprofitable way of behaving until my identity as a rising star trader couldn’t absorb any more losses.
The shift occurred one afternoon before leaving the office in late 1998. I had been long USD/JPY for the preceding week anticipating a break of 145.00 My reasons were sound, the trade made perfect sense, it seemed only a matter of time before the market would break higher and I’d be on my way to a profitable trade. Except that I didn’t believe it. A crack had appeared in my façade of confidence and a part of me knew that I had no edge in what I was doing and that I might as well roll the dice instead of pretending that my approach was sound. So I did. I flipped my position from long to short, placed a tight 35 point stop loss above the market, shut down my computer and left the office. I felt like I was having a psychotic break. How could I just give up on my sense of self as a competent, rational trader and be so flippant? I was having an identity crisis. It was visceral and unpleasant. So I went to the beach and had a surf.
By the time I got home, USD/JPY had fallen precipitously. It was trading around 142.00 a full 280 pips lower than where I sold it. Of course I was stoked, but something had changed. I knew I was lucky. I had no idea why I had flipped my position, but for the first time, I felt in my bones that my success on this trade was from luck. It was a crap shoot and I came up trumps.
It didn’t take long for my brain to start thinking again that I was a genius, particularly when I took back my short position two days later at 132. That definitely wasn’t luck, it was skill (I told myself). Amazing. Like childbirth, the pain was so quickly forgotten.
Our brains are wired to keep us on an even emotional keel. Our self-serving bias, taking the credit for positive outcomes whether deserving or not, helps us to feel good about ourselves and keep us confident. But it also obscures our objectivity, making it less likely that we learn from reality as it occurs.
In my experience, it is very difficult to become personally immune from having a self-serving bias. It’s hard wired. Having an awareness of it at least lets me have a giggle at myself when I see it and allows me to implement strategies to mitigate it. Working within a culture of openness and inviting your work colleagues to call you on your blind spots (BS) without fear of judgement, can significantly improve decision making and reduce the negative impacts of self-serving bias.
Miller, D. and Ross, M. (1975). Self-serving biases in the attribution of causality: Fact or fiction?. Psychological Bulletin, 82(2), pp.213-225.
Sedikides, C. and Strube, M. (1995). The Multiply Motivated Self. Personality and Social Psychology Bulletin, 21(12), pp.1330-1335.