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

This paper studies the dynamics of investor overconfidence. Using the deviation from his benchmark index 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, most of which is driven by managers’ sub-optimal portfolio choices rather than excessive trading. In dissecting managers’ portfolio choices, we further document that underperformance resulting from the bias is mainly due to managers’ increasingly active stock picks within industries they are less familiar with (i.e., those industries that they underweight relative to their benchmark indices).