Behavior Finance 3 – Psychological Call Options, Self-Attribution Bias, Cognitive Dissonance and Hindsight Bias

Summaries

With financial advisors, investors usually feel better with their investment decisions. When they make good decisions, they attribute this to their own ability (Self-attribution bias) while blaming on their advisors on bad investments. This is just like buying a call option, which is termed as psychological call options by Shefrin.

Investors will also avoid cognitive dissonance, a disagreement between their actions and opinions. As a result, investors tend to be overconfident on their decision in order to justify the investment they have made. Naturally, they will also only remember the good decision they have made (hindsight bias).