One Bias at a Time: When Attribute Bias Hits The Fan
Understanding biases can improve your investment returns. And if not that, you will at least become an even better human being.
A warm hello to all new readers! I’m glad you are on board.
New here? I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. I write an algorithm that does exactly that.
How it all started. The journey so far.
“Your assumptions are your windows on the world. Scrub them off every once in a while, or the light won't come in."
— Alan Alda
In one of my previous posts, I mentioned that I’ve created an overview of 50 biases and how they show up in our investment world.
This is the start of another series. Let’s get together one level deeper and eat some meat from the bone of wisdom. By the end of this series, we will be wiser than ever and one step closer to becoming the next big investor - the ones everyone is talking about. Let us be the fly on the wall and follow James through his life full of investment tripwires.
James Moneymaker is an investor and sitting in his sleek office sipping his Starbucks favorite. The floor-to-ceiling windows offer a great view of the city, but today James’s eyes are fixed on his screen. His latest interest is a tech startup called TheNextBigThing. They have fancy technology, but James is more interested in the CEO.
“Harvard graduate worked at Google, and a TED speaker,” he mutters while rolling through the CEO’s LinkedIn profile. “This guy is a winner!”
James makes a mental note “...allocate a big bunch of money into TheNextBigThing”. He is sure, that with a leader like that, the company is dressed for success.
James meets his friend and fellow investor, Lisa, for lunch at their favorite downtown bistro ThePlaceToBe. Lisa Luck is known for her careful research and often plays devil’s advocate to counter James’s impulsive findings.
“Hey, Lisa,” James greets her with a hug. As they sit down he fires with big eyes. “I’ve found a new gem!”
He leaned back in his chair with a knowing smile across his face. While raising both hands, curving a graceful arc he whispers “The – Next – Big - Thing.
The CEO is amazing: Harvard grad, ex-Google, and even a TED speaker.”
Lisa does what Lisa’s do, raising an eyebrow and being nice.
“Wow. Sounds - impressive. And?”
James the old pro quickly explains what TheNextBigThing is doing and finishes with. “Well, if the CEO is that of a caliber, the product is bound to be fantastic and successful, right?”
Lisa leans back. To gain some time and come up with a polite and respectful answer she’s taking a thoughtful sip of her iced tea. “You’re putting a lot of weight on the CEO’s background. That’s a classic example of attribute bias.”
James frowns. “Attribute what?!”
Lisa explains the details.
Back at his office, James finds himself still pondering Lisa’s words.
Attribute bias... hmmm.
He does a quick Google search to confirm Lisa is legit. He finds that: Attribute bias is the tendency to judge someone’s performance based on characteristics that are not directly related to their abilities or the task at hand.
It makes him think.
James thinks through some of his past investments. There were a few duds with convincing leaders and prestigious backgrounds. Did he already make this mistake without even realizing it? James is confused and hooked.
The next morning, James invites Lisa over to find out more.
“Okay, Lisa, I did some googling on that bias,” as she enters his office. “I think I understand it, but how can I avoid it?”
Lisa smiles. “It’s about seeing through the camouflage. Look beyond the surface. Would you buy the product, what about the team and its skills, market conditions, and the company’s financial health? Don’t let one impressive attribute dominate the big picture.”
James nodded. “So, what would you do with TheNextBigThing?”
Lisa pulls up a chair and leans over his desk. “Their product. Does it solve a real problem? Is it cheaply scalable? Next, let’s check their financials and see if you know something about their go-to-market strategy. And finally, one brilliant leader isn’t enough if the rest of the team can’t execute. Let’s check their background too.”
James feels a sense of clarity but can’t admit it.
Lisa grins again because she knows what is happening in James’ smart brain.
He realizes that by recognizing more facets of the company you automatically start addressing the attribute bias to form a more unbiased picture.
Lisa and James chatted for hours and he also understands that attribute bias hides in many forms and shapes. It isn’t just about being impressed by people’s CVs. It’s more nuanced.
For instance, he often judges other investors unforgivingly when they lose money, assuming they were incompetent or careless when they made their move. Yet, when he faces losses, he finds himself attributing them to factors like market volatility or unforeseen circumstances outside of his control.
This double standard is another embodiment of attribute bias, accentuating how easily one could be swayed by surface-level judgments instead of objective analysis.
He recalls an incident where a colleague lost a million on a failed investment. James had quickly written him off as a loser. But when James himself lost money in a comparable market situation, he justified it by blaming the tough market climate and its unpredictable conditions. Now - he knows better. Will he do better the next time?
One thing is sure.
Now that you know too, you can do better.
See you next time and good luck StockStar.
Behind the Scenes
The Progress
I’ve started to work on the day-to-day code and am updating and correcting the code where it is needed. It’s a tedious job since I’ve changed a lot, but who else should do it except me? So, just do it.
The Plan
My plan is to finish the code and my gut feeling says, that I will have to start the training again. Let’s wait and see :-)
What’s on my head
Nothing fancy this week.
Nuggets
Look beyond the headlines - especially when it comes to the climate.
Like this post if you have the attribution bias in check.
Michael
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I share my stock investment story without sugarcoating – you get the good, the bad, and those tricky ego trips. I'm developing a service with a mix of smart code and proven investment strategies, making stock analysis a thing of the past if you wish. Why? Because life offers so much more beyond the confines of stock analysis.
Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
What a great little story :-)