Be Worried If Your CEO Says The Word 'I' Too Much

"If you can meet with Triumph and Disaster, and treat those two strangers just the same" ... Rudyard Kipling

Problematic Pronouns

We all probably know someone who believes that their successes are entirely down to their own levels of skill and whose failures are someone else’s fault. To some extent most of us will meet them in the mirror each morning. This is self-serving bias in action. As Donelson Forsyth explains it:

“Those told they failed attribute performance to such external factors as bad luck, task difficulty, or the interference of others, and those told they succeeded point to the causal significance of such internal factors as ability and effort.”

Now, what do you think will happen to a corporation if you put someone with a bad case of self-serving bias in charge? Beware the CEO with a bad case of the personal pronouns, that’s what I say. And let's not talk about global warming.

Driven To Fail

Apocryphally most drivers believe that they’re above average, a statistical impossibility. In fact, as Ola Svenson showed in Are We All Less Risky And More Skillful Than Our Fellow Drivers? it appears to be a rare apocryphal "fact" which happens to be true:

“In the US sample 93% believed themselves to be more skillful drivers than the median driver and 69% of the Swedish drivers shared this belief in relation to their comparison group. “

Generally we have an unduly positive image of ourselves, and we gravitate towards activities at which we’re naturally good, rather than those which we’re bad at; which reinforces our self-perception. Self-serving bias (otherwise known as self-serving attribution bias, or SAB) would seem to arise quite naturally from this bias to the positive. And, frankly, given all the crap we have to put up with most of the time if we don’t believe in ourselves we’d probably drown in misery.

Normal, Sad and Dangerous To Know

Unfortunately a perfectly natural bias to the positive gets taken to the extreme in some people and people with a bad case of self-serving bias are quite dangerous to be around. One piece of research, by Theo Offerman, Hurting Hurts More Than Helping Helps, suggests that people with a positive self-image will respond less favorably to someone being nice to them than you might expect:

“After all, someone as nice as yourself deserves to be treated well.”

But, of course, this effect is reversed if someone is nasty to you. In fact subjects are much more likely to reciprocate an intentionally hurtful action than an intentionally helpful one. And the key is intentionality – people with a strong positive self-image really, really don’t like being mistreated.

Believing in Yourself

Of course, if most people are afflicted by self-serving bias then most investors will also be, and the tendency to attribute our investing successes to skill and our failures to the incompetence of management or some other ethereal force has long been attested to. For instance, in Investor Psychology and Market Under- and Overreactions the authors note:

“The confidence of the investor in our model grows when public information is in agreement with his information, but it does not fall commensurately when public information contradicts his private information. The psychological evidence indicates that people tend to credit themselves for past success, and blame external factors for failure”.

Applied to stock market trading this has several disconcerting implications, because if we believe our triumphs are the outcome of our own efforts and our failures the result of unavoidable external interventions we’re never going to learn – we’re blocking our own feedback paths, and feedback is critical to improving investment performance (see: Depressed Investors Don't Need Feedback. Everyone Else Does). We would expect such beliefs to tend to lead to over trading and as we’ve seen overtrading leads to underperformance. However, the implications go beyond this, as Simon Gervais and Terrance Odean point out in Learning to be Overconfident:

“In times when aggregate success is greater than usual, overconfidence will be higher … In many markets returns will be a trader’s metric of success. Traders who attribute returns from general market increases to their own acumen will become overconfident and therefore trade more actively. Therefore we would predict that periods of market increases will tend to be followed by periods of increased aggregate trading.”

Shocking, ain't it?

CEO SAB
Of course, this result is intuitively obvious. Fortunately, given that human intuition is about as reliable a guide as a compass in a cyclotron, there’s some empirical evidence to support the idea. Most interestingly the model goes on to suggest that we’re more overconfident early in our investing lifetimes – experience does reduce this effect, as we saw confirmed in Investor Decisions - Experience Is Still Not Enough (But It Helps A Bit).

However, behavioral biases don’t stop at one level, they afflict us all, no matter what position we hold. Just as self-serving bias impacts us in ordinary life and as investors it will also afflict us at work. And when your job happens to be as a chief executive of a major corporation this can have consequences for more than you and your immediate family.

In a neat study, Managers’ Self-Serving Attribution Bias and Corporate Financial Policies, Feng Li looks at how and when CEO’s use the personal pronoun “I” in 10-K filings. The finding is unsurprising at one level – when times are good executives are quick to promote themselves, and when times are not so good they’re rather more likely to retreat to use of the third-person. Heads I win, tales they lose. However, the implications are rather graver than the sloping of well padded corporate shoulders. Let me quote at length:

“Consistent with this argument, managers with more SAB [self-serving bias] are more likely to issue forward-looking statements and make earnings forecasts, the tone (e.g., positive versus negative) of their forward-looking discussions has smaller variation, and their earnings forecasts tend to be overly optimistic. Firms whose managers have more SAB have higher investment-cash flow sensitivity and experience more negative market reactions around acquisition announcements. These firms also tend to have higher leverage, rely more on long-term debt financing, are more likely to repurchase stocks, and are less likely to issue dividends.”

On a slightly more positive note Andy Kim in Self-Serving Attribution Bias and CEO Turnover suggests that CEO’s with bad cases of self-serving attribution bias are more likely to get fired. Even the market response to these executives appearing on CNBC is generally negative, so not all media exposure is bad.

Climatic Penury

From all of which we can roughly conclude that people who aren’t very good at accepting the blame are not good for us personally or as investors. However, because this is an all-encompassing bias it can appear in all sorts of places: we even find this in national attitudes to who should bear the costs of mitigating climate change – a difference that appears to mirror the current impasse in negotiations, and probably reflects the impact of self-serving bias on the negotiators.

Of course, we can’t attribute all of the woes of the world to self-serving bias, but the idea that what’s good for us is fair, that our successes are always the result of our innate skill and that our failures are inevitably caused by evil outside intervention is a dangerous one for investors. For us the proper state is to be egoless; willing to recognize that triumph and disaster are strangers we should treat just the same.

In investing, as in life, dogmatic persistence with a particular approach is a good thing right up until it isn’t. Very many very rich people have got that way by believing in themselves and ignoring feedback – but unfortunately these are just the ultimate result of survival bias. If everyone gambles constantly someone will fluke a fortune. Following these “successes” is a one-way ticket to penury. Better take the long reflexive way home. You may not end up filthy rich, but at least you won’t end your days chasing hubcaps for a crust.