A Test of the Self-Serving Attribution Bias: Evidence from Mutual Funds

Abstract

This paper studies the dynamics of investor overconfidence. Using the sum of absolute deviations from one’s benchmark index (i.e., Active Share) as a proxy for confidence, we show that the average mutual fund manager tends to boost his confidence to a larger extent after receiving confirming public signals than to decrease it after disconfirming public signals. This bias is stronger among inexperienced managers and is largely absent among experienced ones. The bias also leads to poor future performance, the majority of which is driven by managers’ sub-optimal portfolio choices. In dissecting managers’ portfolio choices, we further document that the underperformance resulting from biased attribution is potentially due to managers’ increasingly active stock picks in industries that they are less familiar with.