I've been to Las Vegas twice (two times more than necessary).
My first trip was a success, leaving with more money than I arrived with. This felt great. I couldn't help feeling that I used skill and intuition to come out ahead. That was the story I told myself.
The second trip was a disaster. I lost everything I set out to wager, ventured to the ATM, and squandered that, too. This hurt. It was all bad luck, and the casino preying on my emotions. That was the story I told myself.
I know this is an absurd way to think, but it's how I felt.
It's also common.
There is a theory in psychology called "self-serving attributions."
It's simple: "In experiments, people readily accept credit when told they have succeeded, attributing it to their ability and effort," psychologist David Meyer wrote. "Yet they attribute failure to such external factors as bad luck or the problem's 'impossibility.' The question 'What have I done to deserve this?' is one we ask of our troubles, not our successes."
Everyone suffers from self-serving bias to some extent. But it's rampant in investing.
Robert Rubin, a former Treasury Secretary, joined Citigroup in 1999 as chairman of the executive committee. He was paid $126 million over the next eight years for his experience and wisdom to guide the bank's management toward success.
When the bank nearly collapsed in 2008, Rubin pled ignorance. After writing a 2003 memoir largely devoted to explaining how extreme circumstances ruin banks, Rubin explained in 2009 that he "did not recognize the serious possibility of the extreme circumstances that the financial system faces today."
Nine-figure pay on the way up; a fluke and someone else's problem on the way down.
Tom Maheras, another former Citigroup executive, was paid $97 million in the three years before Citigroup imploded, ostensibly for his skill. After a division he oversaw hemorrhaged losses from subprime mortgages, Maheras told Congress that his division's fateful decisions were "based in part on a careful study from outside consultants." Even as markets unraveled, "I continued to believe, based upon what I understood from the experts in the business, that the bank's [mortgage] holdings were safe," he said.
Ninety-seven million in pay on the way up; someone else's fault on the way down.
CEOs will take credit (and a bonus) when their earnings top expectations. When they fall short, they blame it on Congress causing uncertainty, or the weather, or -- a recent favorite -- the weak euro.
It's easy to call this a show of egos. And that's probably an adequate answer.
But there's more going on here.
Most of us have a bias toward optimism. We have to think the actions we take throughout the day will help us achieve our goals. If we didn't, we wouldn't have any motivation to be productive.
Minds also follow the path of least resistance. "People often stop well short of examining all possible explanations for an outcome, accepting instead the first logical explanation that comes to mind, a search strategy that is satisfying in that it requires the least amount of effort," wrote James Shepperd, Wendi Malone, and Kate Sweeny, psychologists at the University of Florida.
Since you want to believe your actions will lead to the outcome you're looking for, the easiest explanation for a positive result is that it occurred thanks to your own skill. The same is true the other way around: Since you want to believe your actions were worthwhile, it's hard to think of a bad outcome being caused by anything you did. The easiest explanation is that it was caused by something (or someone) else.
That's a shame, because so much of becoming a better investor requires learning what not to do. And you learn those lessons when things don't go according to plan, which is when we're most likely to blame others.
After the market crashes, people blame Wall Street, the government, and the Fed. If you're busy blaming others, you'll miss that the only way to lose money when the market crashes is if you're forced to sell, either due to your own emotions or because you need to the cash to live off of.
Whenever there's volatility, people blame high-frequency traders, hedge funds, and speculators. If you're busy blaming others, you'll miss that volatility only matters to those who care about short time horizons.
If you own stocks that have performed terribly, you may be busy blaming your stock broker, the guy on TV, or the cousin who turned you onto the company. But you'll miss that some of the best investors in the world lose money (or underperform) on half or more of their picks. The key is to have a few big winners make up for the losers.
A trait you'll see among the world's best investors is the willingness -- even desire -- to talk about their mistakes. They analyze what went wrong, why they were mistaken, and how they can learn from their errors so they don't repeat them.
Everyone makes mistakes, but they seem to grasp what most of us have a hard time admitting: It's your (and my) fault.
- Why you never learn from your investment mistakes.
- So, you think you're rational?
- How to be less stupid at investing.
Check back every Tuesday and Friday for Morgan Housel's columns.