Self

(Attribution)
Serving Bias
IF IT WAS GOOD, I DID IT. IF IT WAS
BAD, IT WAS A FLUKE (FAKE).
A self serving bias is a tendency in behavioral finance to attribute
good outcomes to our skill and bad outcomes to sheer luck.  Put
another way, we choose how to attribute the cause of an outcome
based on what makes us look best. Certainly, most of us can think
of things that we’ve done and determined that when everything is
going according to plan, it’s clearly due to our skill. Then, when
things don’t go according to plan, clearly we’ve just had bad luck.

- WRITTEN BY CFI TEAM

Self (Attribution) Serving Bias
You’ll recall, if you think back to one of the previous
behavioral finance biases, that one of our buckets
was self-deception bias. The self serving bias, an
error of overconfidence and misattribution of causes,
is in that bucket. The key thing to remember is that
biases limit our learning or our ability to learn.
How to Limit the Self Serving Bias

This is a dangerous limit to our learning because in practice it

can lead to bad investment decisions and repeating such bad
choices. There can be a whole host of reasons why we’ve had a
particular success or failure in the financial markets. How can
we avoid the self serving bias, this limit to our learning? One of
the most effective ways is by actually recording and recognizing
what actually happened, documenting the reasoning behind
your decisions and the outcomes that followed.
How to Limit the Self Serving Bias
Think about keeping an investment log/trading journal. Reviewing a
well-kept trading journal can help you easily identify strengths and
weaknesses in your trading. It can also help you identify – and thereby
be able to correct – mistakes that you continually make. On the
positive side, it can help you to identify when and why your analysis
was correct. You also might pick up on some things that you might
never otherwise have noticed. For example, some traders find that,
for whatever reason, the majority of their profitable trades are
initiated at a certain time of day or on a certain day of the week.
How to Limit the Self Serving Bias
It’s important to acknowledge when we have followed faulty reasoning
that led to a bad outcome. It is only through admitting and examining
our mistakes that we can learn from those mistakes. And it’s only
through recognizing when we’ve fallen victim to things such as the self
serving bias that we can learn to avoid such thinking traps in the future.
Billionaire George Soros, along with many other famously successful
investors, touts the value of recording, reviewing, and analyzing our
investment decisions.
Hindsight
Bias
"I KNEW IT ALL ALONG"
Hindsight bias is the misconception, after the
fact, that one “always knew” that they were
right. Someone may also mistakenly assume
that they possessed special insight or talent in
predicting an outcome. This bias is an
important concept in behavioral finance theory.

- WRITTEN BY CFI TEAM

Hindsight Bias Example
Consider the 2008 financial crisis of the late 1990s. If you talk
to many people now, they may state that all the signs were
there and everyone knew it was coming. However, if you
examine the history, you learn that analysts or investment
professionals who were screaming that there was a problem
at the time weren’t listened to, in fact, they were laughed at
and investors largely ignored their warnings.
How to Avoid Hindsight Bias
In the other behavioral finance articles, we’ve talked about the need to keep an investment
diary. We need to map the outcomes of our decisions and the reasons behind those
decisions to learn from both our wins and our losses. An investment diary also helps
mitigate against the bias of self-deception, which again limits our ability to learn.

Hindsight bias prevents us from recognizing and learning from our mistakes. We talk about
it as a limit to our learning because we tend to believe after the fact that we knew about
something all along.

So, how do we guard against this bias? An investment diary, comparing outcomes to the
reasoning behind our investment decisions, is a good way to keep this hindsight bias in
check.