Attribution Bias: What It Is and Why It Is Important in Finance

What Is Attribution Bias? 

Attribution bias is a cognitive error described by psychologists that influences how people perceive the causes of events and behaviors, particularly their own or others. This bias comes in several forms and can lead people to systematically attribute successes to their own abilities or efforts while attributing failures to external factors. At the same time, people may attribute others’ successes to dumb luck or to external factors and their failures to personal flaws.

Attribution bias can significantly impact decision-making, relationships, and performance in various areas of life, including the workplace, business, and investing.

Examples of Attribution Bias

Attribution bias occurs when the causes that lead to certain outcomes are misattributed in ways that promote one’s self-image or self-esteem. This bias can take on many forms and appear in various contexts. Here are some general examples:

Scenario 1

A corporate manager receives a report from an employee that contains several mistakes and errors. The manager attributes the errors to the employee’s carelessness and lack of attention to detail, instead of considering external factors such as time pressure, bad data provided to them, or a lack of clear instructions.

Scenario 2

A salesperson closes a large deal and attributes the success solely to their perceived exceptional negotiation skills, disregarding the fact that the client had a pressing need for the product, which made closing the deal far easier.

Scenario 3

An investor experiences a significant gain in their stock portfolio and attributes the excess returns to their superior stock-picking ability, while ignoring the fact that the overall market trend has been bullish and has lifted most stocks across all sectors—and that many other investors also experienced similar gains.

Types of Attribution Bias

Fundamental Attribution Error

Fundamental attribution error occurs when people overestimate the influence of other people’s personality traits and underestimate the impact of situational factors when explaining others’ behaviors.

For example, when a driver cuts someone off in traffic, someone might assume that the driver is reckless or aggressive, rather than considering external factors such as it being an emergency.

Self-Serving Bias

Self-serving bias is the tendency to attribute one’s own successes to personal abilities and efforts while attributing their failures to external factors or by blaming others.

For instance, an athlete on a baseball team may attribute winning games to their own star performance while blaming their teammates or poor coaching for losses.

Actor-Observer Bias

Actor-observer bias is the tendency to attribute one’s own actions to situational factors, while attributing others’ actions to their personality traits. It can be thought of as taking a piece each from fundamental attribution error and self-serving bias.

For example, a person might blame their own poor performance on a test to a lack of sleep, while assuming that a peer who also performed poorly is simply not so intelligent.

Hostile Attribution Bias

Hostile attribution bias is when people wrongly interpret ambiguous or neutral situations as hostile or threatening, which can result in negative or aggressive responses.

Imagine that a person accidentally bumps into a stranger in a crowded hallway. The person who was bumped into might immediately assume that the other person did it on purpose, out of aggression, or disrespect—even though it was an accident caused by the crowded conditions.

Attribution Bias in the Workplace, in Business, and in Investing

In the Workplace

Attribution bias can create misunderstandings, strain relationships, and hinder teamwork and cooperation. For example, if an employee chalks up successes to themselves in an arrogant manner while blaming co-workers’ mistakes as incompetence rather than considering context or situational constraints, this can result in a toxic work environment, where blame is assigned unfairly, and collaborative problem solving is stifled.

In Business

Business leaders who fall prey to attribution bias may make poor decisions based on faulty assumptions about the causes of success or failure of the business. For example, a company might attribute declining sales to poor marketing efforts, while ignoring broader market trends or shifting consumer preferences. Or, a surge in profits might be misattributed to stellar leadership, when it really had to do with an unexpected increase in demand for products in that sector.

In Investing

Attribution bias can lead investors to make suboptimal decisions by mistaking the true causes of trading gains or losses. Investors might chase returns, assuming that past performance is solely due to the skill of portfolio managers, but neglect the role of luck or broader market and macroeconomic conditions. Likewise, a fund’s poor performance may be blamed on a fund manager’s negligence or ineptitude rather than prevailing bearish pressures.

How to Overcome Attribution Bias

While attribution bias is common and has the potential to affect any of us in a range of situations, steps can be taken to minimize its effects.

• Increase self-awareness: The first step in overcoming attribution bias is being self-aware of one’s own actual skills, knowledge, and abilities. Understand that luck and external forces may also be at play.
• Consider alternative explanations: Be willing to consider alternative explanations for events or actions, some of which may be quite nuanced or complex, rather than defaulting to simplistic or self-serving attributions. Analyze situations objectively, and weigh various factors that may have contributed to an outcome. Avoid jumping to conclusions based on limited information.
• Seek feedback from others: Ask for input from others, especially from experts in a particular field, to gain a more comprehensive understanding of events or actions, and to challenge your own assumptions.
• Empathy: Practice putting yourself in other people’s shoes to better understand their motivations, circumstances, and perspectives.
• Develop a growth mindset: Embrace the idea that failure and setbacks can be opportunities for learning and growth, rather than solely attributing them to external factors.
• Review and reflect upon past decisions: Regularly assess your decision-making processes and outcomes to identify patterns of attribution bias and make adjustments accordingly.

The Bottom Line

Attribution bias occurs when the causes and effects of certain behaviors or events are misattributed. This is often done subconsciously in an effort to maintain a positive self-image or boost self-esteem. This means chalking up successes to your own abilities but blaming others or external factors for failures.

This bias comes in several forms and can significantly impact decision-making processes in the workplace, business, and investing, often leading to suboptimal outcomes. By recognizing and actively working to overcome attribution bias, individuals can make more informed decisions, improve relationships, and enhance overall performance.