The Fundamental Attribution Error: Why Your Brain Lies to You About Money

Have you ever met someone who seems to attribute all their success to their individual brilliance? A prominent US leader comes to my mind. This is actually a common mental fallacy that can get in the way of your financial success. Don’t be like that guy!

In honor of my master's thesis from the University of Chicago, I wanted to start this psychology of money series with a cognitive bias that shows up constantly in my work as a financial advisor: the Fundamental Attribution Error.

What is the fundamental attribution error?

With the fundamental attribution error, we attribute our successes to skill and our failures to forces outside of our control. When our investment portfolio grows, it's because we're smart, disciplined, good at spotting opportunities. When it shrinks, it's the market, the economy, the headlines, anything external. An example from everyday life:

• "I made it to work on time because I am responsible"

  
  

• "I'm late because traffic was terrible" 

This wouldn't matter much if it just lived in our heads. But it doesn't. It changes what we do.

In my line of work, people share stories about their financial wins. At a dinner party last year, a guest told me that he'd finally 'cracked the code' on investing. He'd moved a chunk of his 401(k) into a few AI stocks in early 2023 and watched it climb. 'I've been reading a lot,' he said. 'I think I just understand market cycles better now.' I nodded and changed the subject—you learn not to give unsolicited financial advice at social events. 

Fast forward to a few months ago and I ran into this friend again. He mentioned, much more quietly, that he'd moved everything to cash. 'The market's too unpredictable right now,' he said. 'Too much political risk.' He had missed out on recent market gains by trying to time the market. Same person, same brain, completely different explanation for why things happened. 

This friend isn’t wrong. He genuinely doesn't see the nuance in how he’s explained his investment choices. This is something we do routinely and it's an example of the fundamental attribution error in action.

How The Fundamental Attribution Costs You

The client who wants to chase the winning tech stock? That's FAE. He's mistaking a bull market for personal genius, and now he's ready to concentrate his risk based on that feeling.

The one who wants to bail out of bonds during a rough patch? Same thing. She's interpreting short-term results as evidence that the strategy is broken, when really it's just doing what bonds do in certain rate environments.

I see this play out in the following ways:

• People trade more after a good year, racking up costs and tax bills, convinced they've found their rhythm

• People abandon diversification because it "hasn't worked," not recognizing that diversification isn't supposed to win every year—it's a long-term strategy

• People panic during downturns, paralyzed by the feeling that they've failed, when what's really happening is just a normal market cycle

  
  

The fundamental attribution makes us overconfident in good times and overly harsh on ourselves in bad ones. Both responses lead to bad decisions.

How to minimize your bias and save money

The answer: you need objectivity and something outside your own head. A process. A person. A set of rules you've committed to in advance. Something that doesn't care how you feel right now.

When a client tells me they want to chase a hot stock, my job isn't to say "you're being irrational." It's to ask: "What's different now from when we built this plan? Has your timeline changed? Your goals? Your risk tolerance?" Usually the answer is no. What's changed is they feel smarter than they did six months ago.

When someone wants to panic-sell, I don't tell them the market will recover. I remind them that we built their portfolio assuming there would be years like this. We diversified because no one—including me—knows which asset class will win next year. The plan wasn't built on me being smart. It was built on both of us being humble.

The biggest value I provide isn't investment selection. It's being the person in the room who isn't subject to my clients' Fundamental Attribution Error. They get to feel brilliant or frustrated or scared. I get to stay boring and objective.

One Last Thing

In my research years ago, I learned that the Fundamental Attribution Error doesn't show up equally across cultures. It's much stronger in individualist societies like the U.S., where we're taught to see ourselves as the authors of our own success. In more collectivist cultures, people are more likely to attribute outcomes to circumstances, relationships, and context.

If you grew up outside the U.S. or in a collectivist community, you might already have a built-in advantage here. You might naturally see market results as less about you and more about forces beyond your control. 

Sonoma Mountain Financial LLC ("Sonoma") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Sonoma and its representatives are properly licensed or exempt from licensure.

Diversification does not ensure a profit or guarantee against loss. This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.