Equity Traders & Attribution Theory

Attribution theory, according to Wikipedia (which offers a very accurate definition) defines it as "The theory that is concerned with the ways in which people explain (or attribute) the behavior of others or themselves (self-attribution) with something else." Attribution theory was originally pioneered by Fritz Heider in his conjecture that humans operate in amateur scientist ways; mainly that we gather information and create internal/external causal inferences.  

Research in this area began to unravel the complex mechanisms in which we humans make these inferences.  Most important to us as investors are the mechanics that operate when we are 'depressed' or 'happy'.  Individuals use three grand schemeas to categorize attribunal inferences 1) Internal/External, 2)Stability, 3) Control.  Specifically for depressed  individuals, they attribute failures to: Internal, Stable, and Uncontrollable properties.  An example would be, "I can never pass this test, because I'm dumb and will always be dumb."  Very extreme but makes the point.  In the instance of a success: External, unstable,  and uncontrollable.  An example would be, "I got this A because the teacher likes me and I was lucky."  On the Flip side individuals who are happy respond in a polar way.  For failure attributions are: External, unstable, and uncontrollable.  For success attributions are: Internal, Stable, and controllable.  

It's a very big difference.  The most significant difference to note is that while depressive individuals blame themselves for failure, 'happy' individuals do not.  In the instance of success depressed individuals attribute it to something other than the self while 'happy' individuals take the credit.  On one hand it's very self defeating and on the other very self protective.

How does this relate to traders & How can it help us?  Very simply actually.  Using the Psycho Market Model we need to look for the ways traders attribute their failures & successes during a span of trading time (days, weeks, years, etc).  Are traders looking to blame the market, their system, themselves, or something else?  If we can get at the core of traders attribution styles we can use the plethora of information from entity & learning theory to 'reteach' traders how to make accurate attributions regarding their trading activity.  Accurate attributions will allow traders (if they so choose) to introspect and become meta analytic machines which can recognise their own weakness because they know where the fault lies.  Turning those weaknesses into large profits.

A very interesting variable that does not exist in life are stop loses.  How does this variable interact with attributions of success or failure in trading equities?  Research needs to be conducted in this area to enlighten market participants of their own possible short comings.  

In the coming months I will be developing a traders version of the Attribution Styles Questionnaire originally developed by: Peterson, C., Semmel, A., von Baeyer, C., Abramson, Metalsky G.I., & Seligman, M.E.P. in 1982.

Credit where credit is due:

Dan Ariely  had suggested that if I were to pursue a model that synthesized economics & psychology that I may begin by looking at how traders may vary from 'normal' people.  This is one instance, in which they may.  

References:

Hewitt, A., Foxcroft, D., & MacDonald, J. (2004, November). Multitrait-multimethod confirmatory factor analysis of the Attributional Style Questionnaire. Personality and Individual Differences, 37(7), 1483-1491.

Peterson, C., Semmel, A., von Baeyer, C., Abramson, L.T., Metalsky, G.I., and Seligman, M.E.P. (1982). The Attributional Style Questionnaire. Cognitive Therapy and Research, 6, 287-300.

Attribution theory. (2009, March 18). In Wikipedia, The Free Encyclopedia. Retrieved 22:54, March 18, 2009, from http://en.wikipedia.org/w/index.php?title=Attribution_theory&oldid=278139181

My notes from Dr. Johnson's social psychology class at Hofstra University