Self-Serving, Spending and Savings

Published On: June 23, 2020

Written by: Ben Atwater and Matt Malick

Self‐attribution bias or self‐serving attribution bias is our tendency as individuals to assign our successes to our natural gifts, such as talent and foresight.  At the same time, we tend to blame our failures on outside influences, such as bad luck and bad timing. 

Self-serving attribution falls under the category of self-deception in the world of behavioral finance, which is the crossroads of psychology and economics.  Behavioral finance recognizes that investors are not always rational, have limits to their self-control and have biases that influence their decision-making. 

In our retirement planning work, one of the most important factors to understand is the level of spending required to support your standard of living.  When we dig into spending with clients, we have observed a human tendency to significantly underestimate household spending. 

Underestimating spending may be an example of self-serving attribution bias.  People tend to think of their day-to-day spending as being responsible, well under their control and often credit their innate frugality.  At the same time, they will see large expenditures as “one-time,” necessary because of situational factors and often out of their control. 

In other words, people can believe they are quite frugal, while at the same time spending meaningful sums.  Take our current predicament of social distancing as an example.  Because of our new reality, recreational vehicle manufacturers are reporting a spike in sales as consumers see RVs as necessary to adapt to the new normal.  We are seeing a similar surge in demand for swimming pools, bicycles, home renovations and outdoor furniture.

Just as we may underestimate our spending, we might overestimate our savings.  If we think we are thrifty, it would be only natural to assume we are also great savers. 

There is a legitimate argument that we do not save enough because of structural factors.  For a significant percentage of the population their wages simply do not allow them to save, even for an emergency.  In 2017, a Federal Reserve report said 41% of American households cannot cover a $400 emergency expense.

For the mass affluent, a structural problem with saving is the lack of a widespread definition of what successful saving even is.  For most of us, saving is an artificial construct.  For example, someone might save 3% of their wages into a 401(k) because their company matches the 3%.  In doing so, they are saving 6% of their wages.  Does this make you a prodigious saver? 

So much time is spent in articles, television segments, podcasts, etc. on investment speculation, but so little time is spent on savings.  You will see segments about this stock and that stock, Federal Reserve policy, trade wars, political tensions, but you will see very little on basic personal finance, like savings.  Imagine if the financial news network CNBC spent a full day broadcasting the merits of saving 10% of your pay.  Nobody would watch. 

Another savings phenomenon we see around self-attribution bias is a tendency to underestimate what the market has done for us.  If you save $1,000 a month in a brokerage account for 25 years and your average annual return is 7%, then your balance will be $810,071.  When looking at that balance, you say to yourself, “I have done a great job saving this money,” not really considering how much the market helped. 

However, if you’ve accumulated $810,071 and suffer a normal market-based loss of 15%, you tend to think, the market lost me $120,000! 

The self-attribution bias is that you saved the money, but the market lost the money.  The truth though is you saved the money and the market still made you a lot of money.  You put $300,000 aside and even with the large loss you still have $688,561.  And, if history is any indication, staying properly invested will make the losses temporary anyway and your account will likely be heading to $1,000,000 or more, given time and patience. 

Remember, not all behavioral finance decision-making biases are necessarily bad or wrong.  There is nothing wrong with treating yourself and spending money on occasion.  Remember too there is often overlap in decision-making biases.  Last week we wrote you about overconfidence, and being confident can be a great advantage, rather than a disadvantage.  But both overconfidence and self-attribution bias are forms of self-deception.  These are not traits we should seek to eliminate, but we should be aware of them.