What Is Self-Serving Bias?
Self-serving bias is a cognitive bias in behavioral economics whereby individuals attribute their successes and achievements solely to their own abilities and efforts while blaming others or external factors for their failures. In this way, it is a form of attribution bias. This psychological phenomenon is thought to stem from the human tendency to make sense of the world with the resulting by-products of a positive self-image and protection of one’s self-esteem.
By attributing positive developments and outcomes to one’s own personal attributes and negative outcomes to external circumstances, people come to create a self-enhancing pattern of thought that can, however, distort their perception of reality and their own abilities, leading to poor decision-making.
- Self-serving bias is a cognitive bias where individuals attribute successes to themselves but failures to external factors.
- In investing, self-serving bias can cause investors to overestimate their skills, leading to suboptimal investment decisions.
- At the same time, investment losses are chalked up to external factors or bad luck rather than to one’s own poor choices.
- Investors can avoid self-serving bias by implementing strategies that promote objective analysis and self-awareness.
- This bias can manifest in various other areas of life, including the workplace, the classroom, and interpersonal relationships.
Self-Serving Bias in Investing
Self-serving bias is a cognitive bias where people attribute successes to their own abilities and efforts while blaming external factors or others for failures—and discounting the role of luck. This tendency can have a significant negative impact on investors and their financial decisions.
Self-serving bias can lead investors to attribute the positive performance of their investments to their knowledge and skills while attributing negative returns to broader market forces and factors beyond their control. This biased perspective can lead to overconfidence and what behavioral finance calls the “superiority trap.”
For instance, investors may become overly confident in their ability to pick stocks or time the market, leading them to take on excessive risk. They might also hold onto underperforming investments for too long, hoping that they will eventually rebound, rather than accepting that their initial decision was incorrect.
Furthermore, self-serving bias can lead investors to ignore or dismiss valuable information and advice that contradicts their beliefs, because they come to believe that their own ideas are superior. This resistance to new information can result in a failure to adapt to changing market conditions or an inability to recognize mistakes and learn from them, a form of what is known as confirmation bias. Instead, when things don’t go according to plan, investors can explain away losses by blaming market conditions, government policies, or other factors rather than acknowledging the role of one’s own decision making.
Many investors have lost fortunes by being convinced that they were better and smarter than the rest. But this bias often only fuels losses. Moreover, these people can become easy prey for more skilled and sophisticated market participants who feed off of the mistakes of arrogant and stubborn investors.
How Investors Can Avoid Self-Serving Bias
Investors can take steps to avoid falling victim to self-serving bias and becoming overconfident in their trading ability. The first step is to recognize its existence and understand how it affects your decision-making process. Once you are aware, these steps can also help:
- Maintain a written record of investment decisions and the rationale behind them to facilitate objective analysis.
- Seek feedback from others, including peers, mentors, or professional advisors. Alternative viewpoints and expert opinions can help investors remain open to new information and counteract self-serving bias.
- Regularly review and evaluate investment performance and decisions objectively. Evaluating investment performance using objective metrics, such as benchmark comparisons or risk-adjusted returns, can help investors to assess their decisions more accurately and identify areas for improvement.
- Implement a disciplined investment process with well-defined rules and criteria. Set stop-losses and take-profit levels ahead of time, so that if you do turn out to be wrong, you will be stopped out. Periodically assess your investment decisions to identify patterns of success and failure.
- Practice humility and recognize the role of both good and bad luck in investment outcomes. Luck is often dismissed or misattributed for one’s own doing—respect the role of randomness in investment outcomes.
A recent study found that providing traders with feedback on their past performance and the accuracy of their price predictions was helpful in reducing investors’ self-serving bias. This was found to be more effective than presenting investors with contradictory information from others prior to their trading decisions.
Recent research also shows that the degree of self-serving bias differs among investors. The results show that both sociodemographic and investor sophistication significantly impact the self-serving bias of equity market investors. All else equal, men were found to be more sensitive to this bias than women, as well as those who traded more frequently.
Other Examples of Self-Serving Bias
Self-serving bias, or one’s tendency to take credit for successes while blaming others for failures, is ubiquitous and can manifest in many contexts beyond investing. Below, we list just some examples where self-serving bias can often present itself.
People are usually optimistic when predicting their outcomes and experiences. They expect to pass tests, get good jobs, and have long-lasting relationships rather than fail, get fired, or divorce.
In the Workplace
Employees might attribute their promotions or successful projects to their hard work and skills, while blaming unfavorable work conditions or difficult teammates for failed projects. Likewise, managers and executives may credit themselves for the positive performance of a company’s stock but blame things like the broader economy (e.g., rising interest rates or recessionary pressures) on a stock’s poor performance.
In the Classroom
Students may come to believe that they earned high grades due to their intelligence and effort, while attributing low grades to unfair exams, distractions from classmates, or poor instruction from teachers. Teachers may also attribute the success of their students to themselves but find excuses for their failures in things like insufficient school funding, inadequate classroom tools, or students’ parents who don’t prioritize their kids’ education.
Athletes may attribute their victories, personal records, or outstanding performances to their hard work, talent, dedication, or effective training regimens, but negative outcomes to factors such as unfavorable weather conditions, biased referees, or inadequate coaching. In team sports, those exhibiting this bias may take credit for a team’s victories, emphasizing their pivotal role as a star player in achieving positive outcomes, while attributing losses or poor team performance to the shortcomings of their teammates.
Factors That Affect Self-Serving Bias
Self-serving bias appears to be a psychological tendency that is deeply seated in many of us. It is a natural desire to present a positive self-image and avoid embarrassing mistakes. That said, self-serving bias seems to be more prevalent in individualistic cultures (such as the United States) than in collectivist cultures (such as China).
This means that there is likely an interplay between one’s individual cognitive dispositions and social and cultural forces that act on individuals in a certain society. Indeed, research suggests that self-serving bias is driven by both motivational and cognitive factors that work together to create a distorted perception of one’s own abilities and responsibility for outcomes.
It is worth noting that people seem to engage in self-serving bias as a sincere attempt to understand the reasons for events or outcomes in their lives, rather than as a deliberate attempt to artificially boost their self-esteem or manipulate the perceptions of others.
Impact of Self-Serving Bias
Self-serving bias can distort one’s perception of their actual knowledge and abilities, leading to overconfidence and potentially to poor decision making. By taking personal credit for successes and blaming others for failures, one’s ego can become inflated and morph into arrogance or hubris. This inflated sense of self-worth and expertise can impede personal growth, learning, and the ability to adapt to new situations.
Moreover, this bias can put strain on one’s interpersonal relationships and limit collaboration, as others may think of that individual as conceited and unwilling to accept responsibility. If left unchecked, self-serving bias could result in a stagnation of personal and professional development.
When self-serving bias becomes widespread within organizations or in society, it can contribute to a broader culture of self-interestedness and blame that hinders accountability and impedes productivity and progress. When self-serving bias permeates society at large, it can contribute to social fragmentation, increased polarization, and a weakening of social bonds and shared values.
What is the opposite of self-serving bias?
The opposite of self-serving bias is self-effacing or self-deprecating bias, where individuals attribute their successes to external factors and their failures to their own shortcomings. Someone with this mindset will tend to downplay their successes and internalize their failures. Those who are depressed or suffer from chronically low self-esteem tend to take the blame for their failures but deny responsibility for their successes.
What is the difference between self-serving bias and fundamental attribution error?
Both of these are classified as attribution biases in psychology, but the two differ somewhat.
Fundamental attribution error is the tendency to overemphasize internal factors, such as personality traits or abilities, when explaining others’ behaviors, while underestimating the influence of external factors, such as situational constraints or circumstances. This bias leads to an imbalance in the way people judge the actions of others compared to their own actions.
Self-serving bias, on the other hand, considers how one attributes their own successes and failures to either their own skills or external factors, respectively.
What is the difference between self-serving bias and confirmation bias?
Confirmation bias is the psychological tendency to seek out or prioritize information that conforms to one’s already-held beliefs while dismissing or discounting information that contradicts it.
Self-serving bias, on the other hand, is more about attributing successes to one’s own skills and failures to external factors. However, self-serving bias can create resistance against information that contradicts one’s beliefs, which can feed into confirmation bias.
The Bottom Line
Self-serving bias is a psychological tendency in which individuals attribute their achievements or successes to their own abilities or wherewithal, and at the same time blame others or external factors for their missteps or failures. This bias helps protect one’s self-esteem and maintain a positive self-image, but it can also lead to a distorted perception of the world and one’s actual abilities.
Self-serving bias can be a significant obstacle to making optimal financial decisions in the world of investing. By understanding how this cognitive bias affects our judgments and employing strategies to overcome it, investors can improve their decision-making processes and increase their chances of achieving financial success. Remember that no one is completely immune to self-serving bias, but with conscious effort and a willingness to learn from mistakes, it is possible to minimize its negative impact on your investment choices.