Self Serving Bias
In the series of 21 behavioural biases we will discuss the 6th
bias “Self Serving Bias”
Self-serving bias defined by science theories as “feels
good” effect and doesn’t seem to be doing any great harm!
Self-serving bias makes one take (un)due credit of
achievements, which leads to an (over)confident personality trait.
We attribute success
to us and failures to external factors/others.
Negative example of
this bias - it can lead a person to depression if he/she feels that all that
went wrong was just because of him/herself. External factors had no role to
play.
Let’s take few examples – If a child does well in exam, it
attributes the same to self and if didn’t do well than blames it to external
factors!! If you have done extremely well in business this year, you take pride
of your hard work, focus, strategy and attitude and blame it to market for your
bad performance. Have you ever heard a person involved in accident takes blames
on self?? I never met anyone who admitted to me that, in that accident, it was
self to blame rather than other party. Am I making sense??
We love to be recognized as I know everything, I am good at
it. Self servicing bias is
defense mechanism to protect your self-esteem. Positive attitude is good but
realistic attitude is best. Realistic person is able to define own competencies
and area of improvements. Recognizing the problem itself is a good beginning.
Similar errors are made in investing also. If your portfolio
has done exceedingly well in 1 year, you tend to feel more proud of your
decision and grip on market rather than your advisor!! In the reverse
situation, you blame all to the advisor. What you did here is used the defense
mechanism to protect your self-esteem. That isn’t right!! If you continue to
blame others for unexpected results than you will find yourself alone in the
end! You will tend to lose good people around you.
In Investment management business, you will find many
advisors or advisory firms, institutions who are victim of self servicing bias.
They do not admit their error and blame it to market or Investors, when there
is loss. At the end these outfits will lose their priced clients.
These outfits serve what is relevant to the mood of the
market and not what is good for 2-3 yrs ahead. They are probably playing on your
recency bias J.
During 2017 and 2018, lot of these outfits were gung-ho on
Small and Midcap space. After crazy losses in investor’s portfolio, they either
disappeared or citing market conditions!! Come on guys, you can’t do this!! If
Investor was smart and could see thru future, he will not seek your
advice!!! Surely, they need not be right
every time but they should have advised basis due research. Currently in low
markets, these outfits are dishing out capital Protection oriented funds and such
products.
I feel they are going to get it wrong even this time. We did
exactly opposite since over 2 yrs. Since Mid ‘17 we moved out of small and
midcap to Balanced Advantage, Equity Savings and Balanced funds. Now since 6
months depending upon horizon and risk appetite, we are building positions in
Small, Midcap or Multicap.
When we decide and act on something, there are invariably 2
possible outcomes- Positive and negative or expected and unexpected. Wise
person is one who accepts both with modesty and humility. We at Wealthcare
Investments also made a few error of judgements in selecting funds. But we
recognized the same and corrected in time. Our Investors appreciated the same!!
Blaming external factors or others only restricts one from learning from that
incident.
What should you do?
1)
Recognize that self-serving leads to
counterproductive results.
2)
Don’t Invest in something that makes you feel
good. Challenge it!! Warren Buffett says” what is comforting is rarely
rewarding”.
3)
Update yourself, regularly, with all
developments. If you don’t have time or ability, sit with your advisor and
understand.
4)
Avoid “I know everything”. Be a student.
5)
Investment should be non emotional activity.
Don’t overdo with your money on pamper and safety. Take some calculated risk
for extra growth. FDs, RDs, Gold, Property and LIC may be good but can’t ignore
equity as an asset class. Start with 10% of Investible surplus and experience
equity investing. If beginner, try Mutual funds over direct stocks.
6)
Write your rationale of Investing, analyse the
same with results and avoid committing same errors in future.
7)
Appoint an advisor. Right advice at right time
can give desired results.
MF Trivia: Your short term Goals like new car or vacations
can be easily planned with Mutual fund investing. You need not have to Invest in
FDs or RDs only.
This article
is written by Bhavesh D Damania founder of Wealthcare Investments.
You can
reach him at 9833778887 and wealthcarein@gmail.com
"Risk comes until you know what, where and why you are
Investing"
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