{"id":269275,"date":"2025-06-02T21:23:05","date_gmt":"2025-06-02T21:23:05","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/investing\/the-psychology-of-investing-11-the-most-dangerous-story-is-the-one-you-tell-yourself\/"},"modified":"2025-06-02T21:23:05","modified_gmt":"2025-06-02T21:23:05","slug":"the-psychology-of-investing-11-the-most-dangerous-story-is-the-one-you-tell-yourself","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=269275","title":{"rendered":"The Psychology of Investing #11:\u00a0The Most Dangerous Story is the One You Tell Yourself"},"content":{"rendered":"


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A quick announcement before I begin today\u2019s post \u2013\u00a0<\/p>\n

My new book, Boundless<\/em>, is now available for ordering!<\/strong><\/p>\n

After a wonderful response during the pre-order phase, I finally have the book in my hands and am shipping it out quickly. If you\u2019d like to get your copy, click here to order now<\/a>.<\/strong> You can also enjoy lower prices on multiple-copy orders.<\/p>\n

Plus, I\u2019m offering a special combo discount<\/strong> if you order Boundless<\/em> along with my first book, The Sketchbook of Wisdom.<\/em> Click here to order your set<\/a>.<\/strong><\/p>\n

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The Internet is brimming with resources that proclaim, \u201cnearly everything you believed about investing is incorrect.\u201d However, there are far fewer that aim to help you become a better investor by revealing that \u201cmuch of what you think you know about yourself is inaccurate.\u201d In this series of posts on the psychology of investing, I will take you through the journey of the biggest psychological flaws we suffer from that causes us to make dumb mistakes in investing. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.<\/em><\/p>\n

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One of the most damaging patterns in investing isn\u2019t what we believe about the market.<\/p>\n

It\u2019s what we believe about ourselves.<\/p>\n

So, when we make a winning investment, we often quietly assume we\u2019re a genius, yet when an idea goes sour, we believe we got unlucky and blame the market or some outside factor.<\/p>\n

If you think this has applied to you sometime in the past, welcome to the world of Self-Attribution Bias. This is a common psychological pitfall in investing (and life) where we credit our successes to our skill and intelligence but blame failures on bad luck or others.<\/p>\n

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In simple words, self-attribution bias (a form of self-serving bias) describes our tendency to attribute positive outcomes to our own skill or actions, while attributing negative outcomes to external factors beyond our control. In everyday life, it\u2019s the student who aces an exam and says \u201cI worked hard, I\u2019m brilliant,\u201d but when they flunk a test, complains the questions were unfair. We all do this to some extent: a CEO might credit their leadership for high profits and then blame a weak economy when earnings dip (most management reports smell of this), or a sports coach may laud their strategy after a win and fault the referees after a loss. The pattern is the same: success has me to thank, while failure was beyond my control.<\/p>\n

This bias shows up especially in investing. When our portfolio is up, we pat ourselves on the back for being savvy; when it\u2019s down, we find excuses \u2013 \u201cthe RBI\u2019s policies hurt my stocks,\u201d \u201cthat analyst\u2019s bad tip cost me money,\u201d and so on.<\/p>\n

There\u2019s even a stock market adage capturing this idea: \u201cNever confuse brains with a bull market.\u201d In other words, a rising market can make any investor look like a genius. For example, an investor might enjoy big gains during a broad market rally and attribute those profits entirely to their stock-picking prowess, ignoring that a booming market lifted most stocks across all sectors and that many other investors had similar gains. Later, if their picks start tanking, the same investor might insist \u201cNobody could have seen this coming\u201d or blame market volatility instead of their own decisions.<\/p>\n

But Why Do We Do It?<\/h2>\n

On a psychological level, self-attribution bias stems from our need to protect our ego and self-esteem. Subconsciously, we all prefer to view ourselves as competent and capable. Attributing successes to our talent feels good and reinforces that positive self-image, whereas admitting mistakes or lack of skill feels threatening.<\/p>\n

Psychologists note that we often make these skewed attributions without even realising it as a defense mechanism to maintain a positive self-image or boost self-esteem. In simpler terms, we want to believe we\u2019re smart investors when things go right, and we don\u2019t want to feel foolish when things go wrong.<\/p>\n

Now, this bias isn\u2019t a new discovery; it\u2019s been documented in psychology research for decades. In a classic 1975 study<\/a>, researchers Dale Miller and Michael Ross observed this \u201cself-serving\u201d attribution pattern: when people\u2019s expectations were met with success, they tended to credit internal factors (their own judgment or skill), but when outcomes fell short of expectations, they blamed external factors.<\/p>\n

This bias often goes hand-in-hand with overconfidence. By attributing a few successful investments to our own brilliance, we start to believe we really have a special knack for picking winners. Our confidence grows, sometimes unwarrantedly. We might double down on the next investment or take on bigger risks, convinced that we know what we\u2019re doing (after all, look at those past wins we achieved!).<\/p>\n

Meanwhile, any losses are brushed aside as \u201cnot my fault\u201d, which means we don\u2019t properly learn from our mistakes. Over time, this creates a skewed self-perception where we think we\u2019re better investors than we truly are.<\/p>\n

Even professional fund managers aren\u2019t immune: they too can fall into the trap of believing their own skill explains every success, which can inflate their self-confidence. This is why self-attribution bias is sometimes called a \u201cself-enhancing\u201d bias. It fools us into enhancing our view of our own abilities, often beyond what reality justifies.<\/p>\n

How to Recognise and Mitigate Self-Attribution Bias<\/h2>\n

Awareness is the first step to overcoming self-attribution bias. Here are some practical strategies I can think of that can help you keep this bias in check and make more rational investing decisions:<\/p>\n