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<blockquote class="tr_bq">
"If you can meet with Triumph and Disaster, and treat those two strangers just the same" ... Rudyard Kipling
</blockquote>
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<a href="https://facultystaff.richmond.edu/~dforsyth/pubs/forsyth2008selfserving.pdf" target="_clear"> Donelson Forsyth</a> explains it:
<blockquote class="tr_bq">
“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.”
</blockquote>
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 <a href="http://heatherlench.com/wp-content/uploads/2008/07/svenson.pdf" target="_clear">Are We All Less Risky And More Skillful Than Our Fellow Drivers?</a> it appears to be a rare apocryphal "fact" which happens to be true:
<blockquote class="tr_bq">
“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. “
</blockquote>
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, <a href="http://papers.tinbergen.nl/99018.pdf" target="_clear">Hurting Hurts More Than Helping Helps</a>, suggests that people with a positive self-image will respond less favorably to someone being nice to them than you might expect:
<blockquote class="tr_bq">
“After all, someone as nice as yourself deserves to be treated well.”
</blockquote>
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 <a href="ftp://www.econ.bgu.ac.il/courses/Signaling_in_Financial_Markets/Readings/Articles/2009-01-21%20Investor%20Behavior/Investor%20Psychology%20and%20Security%20Market%20under-%20and%20Overreactions.pdf">Investor Psychology and Market Under- and Overreactions</a> the authors note:
<blockquote class="tr_bq">
“The <keyword id="41190" type="ENTERTAINMENT" weightage="60" keywordseo="confidence">confidence</keyword> 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 <keyword id="21796" type="UNKNOWN" weightage="60" keywordseo="success">success</keyword>, and blame external factors for failure”.
</blockquote>
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: <a href="http://www.psyfitec.com/2009/08/depressed-investors-dont-need-feedback.html" target="_clear">Depressed Investors Don't Need Feedback. Everyone Else Does</a>). 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 <a href="http://web.cenet.org.cn/upfile/79.pdf" target="_clear">Learning to be Overconfident</a>:
<blockquote class="tr_bq">
“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.”
</blockquote>
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 <a href="http://www.psyfitec.com/2012/09/investor-decisions-experience-is-still.html" target="_clear">Investor Decisions - Experience Is Still Not Enough (But It Helps A Bit)</a>.
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, <a href="https://europealumni.kellogg.northwestern.edu/accounting/papers/Li.pdf" target="_clear">Managers’ Self-Serving Attribution Bias and Corporate Financial Policies</a>, 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:
<blockquote class="tr_bq">
“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.”
</blockquote>
On a slightly more positive note Andy Kim in <a href="http://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2012-Barcelona/papers/EFMA2012_0072_fullpaper.pdf" target="_clear">Self-Serving Attribution Bias and CEO Turnover</a> 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 <a href="http://journal.sjdm.org/11/11816b/jdm11816b.html" target="_clear">bear the costs of mitigating climate change</a> – 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.
<div>
Self-serving bias, self-serving attribution bias added to <a href="http://www.psyfitec.com/p/list-of-behavioral-biases.html" target="_clear">The Big List of Behavioral Biases</a>.
</div>

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

<div class="image-container float_right" style="width:400px"><div class="image"></div><a href="http://statigr.am/viewer.php#/detail/326658172369261065_15495787">Instagram/koreenas</a></div>The world is full of schemes aiming to incentivize us; we’re spurred on to achieve new targets and scale new heights by the carrot of lucre-based incentivization schemes designed to appeal to our selfish natures. 
Which is not surprising because we live in a society characterised by a belief that we’re all out for what we can get, wheeling and dealing in our own self-interest, forever trying to get the maximum reward for the minimum effort.
Which is like determining that 5 is the square root of 17. Anyone who truly believes that <keyword id="6354840" type="PERSON" weightage="60" keywordseo="money">money</keyword> is the main motivation for most of our behavior is someone whose belief system needs to be carefully inspected with one of those devices used for stirring septic tanks. Worse still, financial incentive schemes may actually miss the point by undermining our most cherishable quality: curiosity makes the man, even if it flattens the feline.
Moral Prices
We’ve previously seen that financial <keyword id="29962" type="UNKNOWN" weightage="60" keywordseo="incentives">incentives</keyword> may have the curious effect of reducing a person’s natural inclination to engage in some behavior or other. So, for instance, in <a href="http://www.psyfitec.com/2010/01/money-cant-buy-happiness.html" target="_empty">Money Can't Buy You Happiness</a> Swiss people who were reluctantly willing to put up with a waste plant on their doorstep out of their simple good natures suddenly went cold on the idea when offered money to meet what they’d previously regarded as their civic duties.
Or consider the study <a href="http://www.npenn.org/cms/lib/PA09000087/Centricity/Domain/245/Daycare_fine_study.pdf" target="_empty">A Fine is a Price</a> by Uri Gneezy and Aldo Rustichini where fining people for turning up late to pick their kids up from kindergarten actually increased the number of late arrivals. The researchers suggest that introducing a financial penalty removed the moral obligation to arrive on time; a financial transaction is not the same as a moral one. 
This underlying natural inclination to behave morally is known in the jargon as intrinsic motivation (see <a href="http://www.psyfitec.com/2011/12/when-incentives-go-bad.html" target="_empty">When Incentives Go Bad</a>) and its disappearance under the influence of financial incentives is known variously as the undermining effect or the overjustification effect or even the mouth-numbingmotivation crowding out effect.
Duped by Dopamine 
Researchers have now found a neural mechanism to explain the effect, whatever the damn thing's called. Kou Murayamaa, Madoka Matsumoto, Keise Izuma, and Kenji Matsumoto in <a href="http://www.pnas.org/content/107/49/20911.full.pdf+html" target="_empty">Neural Basis of the Undermining Effect of Monetary Reward on Intrinsic Motivation</a> discovered that introducing performance based rewards on an interesting task actually reduced performance and, in particular, showed a decrease in activity in certain brain areas implicated in reward based processing – specifically one needed to prepare for mental processing and another implicated in the dopamine reward system: and we’ve met the dopamine reward system before, in <a href="http://www.psyfitec.com/2012/03/craving-high-trading-on-dopamine.html" target="_empty">Craving a High: Trading on Dopamine</a>. 
The idea that financial incentives can remove a person’s natural intrinsic motivation to engage in a high value task is a bit depressing if you’re particularly wedded to the idea that financial incentives are the solution to all ills. It’s probably closer to the truth to argue that they’re an easy answer to a difficult problem, and that most people are sufficiently self-interested not to argue with the prospect of extra money that they may get simply by getting lucky.
Curiosity Killed
However, perhaps the most depressing thing about this study is not that financial incentives don’t work but that they undermine peoples’ natural tendency to involve themselves in stuff that interests them. Because if there’s one quality that should define a human being above all others it’s curiosity – someone who is no longer interested in the world around them is someone who’s not really engaged with life and it’s a depressing thought that many of us end up trapped in circumstances that mean we carry on with the same old grind purely because of financial circumstances.
Of course a study showing that intrinsic motivation is reduced in the presence of financial rewards is not the same as one that says that it’s increased in the presence of simple curiosity. However, such a idea exists, something known as the information-gap theory, hypothesised by George Loewenstein in <a href="http://www.andrew.cmu.edu/user/gl20/GeorgeLoewenstein/Papers_files/pdf/PsychofCuriosity.pdf" target="_empty">The Psychology of Curiosity: A Review and Reinterpretation</a>:
“The proposed theory views curiosity as occurring when an individual’s informational reference point becomes elevated in a certain domain, drawing attention to an information gap. Curiosity is the feeling of deprivation that results from an awareness of that gap”.
Burning Bright
As Loewenstein points out, this may not explain all aspects of curiosity, but it’s an interesting approach and one that’s now been investigated using the same sort of neural analysis as in the previous study. In <a href="http://pss.sagepub.com/content/20/8/963.full.pdf+html" target="_empty">The Wick in the Candle of Learning</a> Loewenstein and colleagues have shown that:
"Subjects spend more scarce resources (either limited tokens, or waiting time) to find out answers when they are more curious. The fMRI also showed that curiosity increases activity in memory areas when subjects guess incorrectly, which suggests that curiosity may enhance memory for surprising new information. This prediction about memory enhancement is confirmed in a behavioral study— higher curiosity in the initial session is correlated with better recall of surprising answers 10 days later.”
And are you curious about which brain area is implicated in this information gap theory? Well, it’s that darned reward modulating dopamine system again. Indeed, enhanced curiosity about a particular subject was also correlated to the ability of experimental participants to recall answers to questions that interested them, suggesting that this mechanism is implicated in general learning.
Uncertainly Curious
As the study carefully points out this is almost certainly not the final word on curiosity – there are wide range of complicating effects which haven’t been teased out – but it’s certainly part of the answer. In a world saturated by information, much of which is irrelevant, it certainly raises issues about how we choose what to be curious about.
The theory, and the evidence, also argues that uncertainty is initially correlated with curiosity:
“The fact that curiosity increases with uncertainty (up to a point), suggests that a small amount of knowledge can pique curiosity and prime the hunger for knowledge, much as an olfactory or visual stimulus can prime a hunger for food, which might suggest ways for educators to ignite the wick in the candle of learning.”
Beyond a certain point, though, increasing uncertainty leads to declining curiosity. We know that peaks in uncertainty in financial markets are linked to a wide range of generally poor behavioral traits: perhaps beyond a given point it just gets too difficult to integrate new information with old, such that curiosity is overwhelmed by novelty. After all, how many of us had experienced the nightmare of irrational markets at their worst before 2008? 
Neuroeconomic Stimulation
Linking curiosity and financial incentives to intrinsic motivation and both to our dopamine modulating systems, while showing that different levels of curiosity are invoked by increasing uncertainty offers us a neat story but one that’s probably only a pastiche of the truth. Nonetheless, even glimpsing a path from brain structures to individual behavior to behavioral economics is a step forward, and a small triumph for neuroeconomics. 
<div>
But broadly speaking if you want to motivate them stimulate their interest. Only don’t overstimulate them, because they’ll probably start behaving less rationally than you’d want: truly this is incentives through the looking glass. Which is curious, is it not? The undermining effect, the overjustification effect and the motivation crowding out effect added to <a href="http://www.psyfitec.com/p/list-of-behavioral-biases.html" target="_clear">The Big List of Behavioral Biases</a>.
</div>

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