CFA Level IPortfolio ManagementMedium
An investor consistently attributes his portfolio's strong recent performance to his own stock-picking skill, while blaming poor-performing positions on 'bad luck' or market conditions beyond his control. He has also begun trading more frequently and taking larger position sizes. This behavior most likely reflects which behavioral bias?
- ARegret aversion
- BAnchoring bias
- CMental accounting
- DSelf-attribution bias leading to overconfidence
Show answer & explanationAnswer & explanation
Correct answer: D. Self-attribution bias leading to overconfidence
Self-attribution bias occurs when investors credit their own skill for successes but blame external factors for failures; this asymmetric attribution reinforces overconfidence, often leading to excessive trading and larger risk-taking, as described.
Why the other options are wrong
- A. Regret aversion involves avoiding decisions that could lead to regret, not attributing past outcomes.
- B. Anchoring involves fixating on an initial reference point, not attributing outcomes to skill or luck.
- C. Mental accounting involves treating money differently based on its source or purpose, not attribution of performance.
Self-Attribution Bias
A cognitive bias where individuals attribute successes to their own skill and failures to external factors, often fueling overconfidence.
- Leads to overconfidence and excessive trading
- Can result in underestimating true portfolio risk
- Common cause of the disposition effect and poor diversification
Memory trick: Win? It's me. Lose? It's the market.