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Self serving bias

The self-serving bias is a common cognitive bias in behavioral finance where individuals attribute positive outcomes to their own abilities or efforts, while attributing negative outcomes to external factors beyond their control. This psychological phenomenon often stems from a fundamental human tendency to maintain a positive self-image and protect one's self-esteem.43

History and Origin

The concept of self-serving bias emerged from early social psychology research in the mid-20th century, particularly gaining prominence by the late 1960s.42 The theory was significantly developed through studies conducted in parallel with broader attribution theory, which examines how individuals explain the causes of events and behaviors.40, 41 Austrian psychologist Fritz Heider's work on attribution laid some groundwork, observing that people tend to make attributions based on their own needs, especially to maintain self-esteem in ambiguous situations.39

A seminal study in 1975 by psychologists Dale T. Miller and Michael Ross, titled "Self-Serving Biases in the Attribution of Causality: Fact or Fiction?", critically examined the evidence for this bias. While they argued that individuals often make self-enhancing attributions for success, they found less empirical support for self-protective attributions in the context of failure.37, 38 However, their work was pivotal in establishing the self-serving bias as a widely recognized phenomenon, even sparking further debate and research on its underlying cognitive and motivational mechanisms.34, 35, 36 The Federal Reserve Bank of San Francisco highlights that understanding such cognitive biases is crucial for comprehending financial decision making.33

Key Takeaways

  • Self-serving bias is a cognitive bias where individuals take credit for successes and deflect blame for failures.
  • It is a form of attribution theory that primarily serves to protect or enhance one's self-esteem.32
  • This bias can lead to overconfidence, inflated self-assessments, and suboptimal decision making in various contexts, including finance.31
  • Recognizing self-serving bias is the first step toward mitigating its potential negative effects on financial choices and personal growth.30

Interpreting the Self-Serving Bias

Interpreting the self-serving bias involves recognizing that an individual's assessment of their own performance may be skewed by a desire to maintain positive self-regard. For instance, an investor might attribute profitable trades to their unique market insights or skillful analysis, while dismissing losses as unpredictable market fluctuations or unforeseen external events.29 This bias can lead to an exaggerated sense of competence and control, making it difficult for individuals to objectively evaluate their strengths and weaknesses.28

In essence, the self-serving bias prevents individuals from learning effectively from their mistakes because they fail to acknowledge their own role in negative outcomes.26, 27 Conversely, by consistently taking credit for positive results, it can reinforce an overconfidence bias that might encourage excessive risk-taking or an unwillingness to seek external advice. Understanding this tendency is crucial for cultivating a more realistic view of one's capabilities and fostering continuous improvement in areas like investor behavior.

Hypothetical Example

Consider an investor, Alex, who actively manages a personal stock portfolio. In a bull market, Alex's portfolio experiences significant gains. Alex attributes these strong returns to their superior stock-picking skills, extensive research into company fundamentals, and excellent timing of market entries. Alex feels validated, believing their "brilliant" investment decisions are the primary driver of success.

Later, the market enters a downturn, and Alex's portfolio loses value. Instead of questioning their stock-picking strategy or timing, Alex attributes the losses entirely to broad economic factors, such as rising interest rates, global supply chain issues, or geopolitical events. Alex might say, "The market is irrational right now; there's nothing I could have done." This scenario illustrates self-serving bias because Alex takes full credit for positive outcomes (internal attribution) but blames external circumstances for negative ones (external attribution), thereby protecting their self-esteem regarding their investment prowess. This biased perspective hinders Alex's ability to objectively analyze their strategy and potentially adjust their financial planning approach.

Practical Applications

The self-serving bias has significant practical implications across various financial domains, particularly within behavioral economics. In investing, this bias can lead individuals to overestimate their abilities to select winning assets or time the market, fueling excessive trading and potentially suboptimal portfolio management strategies.25 For example, a successful trading streak might be attributed solely to skill, even if broader market trends or luck played a substantial role.23, 24

For financial advisors and wealth managers, recognizing self-serving bias in clients is vital. Clients may resist advice that implies their past "successful" strategies were flawed or that their "failures" stemmed from poor personal choices rather than external forces. This bias influences how individuals save, spend, and approach financial planning, and understanding it can lead to better client engagement and more realistic goal setting.22 Financial institutions are encouraged to provide training and awareness regarding the impact of self-serving bias on trading decisions.21 The CFA Institute highlights how behavioral finance offers insights into how emotional biases and cognitive errors influence individuals' perceptions and investment decisions.20

Limitations and Criticisms

While self-serving bias is a well-documented cognitive bias, it is not without limitations and criticisms. Some research suggests that the bias may not always manifest as strongly for failures as it does for successes, or that its presence can be influenced by factors such as cultural context or personality traits.18, 19 Critiques also highlight the interplay between self-serving bias and other biases, suggesting that what appears to be self-serving attribution might sometimes be better explained by processes related to information processing or even strategic self-presentation rather than purely ego protection.17

From a financial perspective, the pervasive nature of self-serving bias can lead investors to misjudge their true risk perception. This misjudgment can result in an inflated sense of one's ability to navigate market downturns or select high-performing assets, potentially encouraging an inappropriate level of risk-taking.16 For instance, the Financial Times has noted how investors are often overly confident in their abilities, a phenomenon linked to such biases.15 Furthermore, regulatory bodies like the U.S. Securities and Exchange Commission (SEC) acknowledge that investors are influenced by systematic biases that can impair their ability to maximize returns, raising questions about how best to regulate in light of such behavioral patterns.13, 14 Overcoming self-serving bias is crucial for developing into a rational investor and making more objective financial evaluations.12

Self-Serving Bias vs. Confirmation Bias

Self-serving bias and confirmation bias are distinct cognitive biases, although they can sometimes interact.

Self-Serving Bias is the tendency to attribute successes to internal qualities (e.g., skill, intelligence) and failures to external factors (e.g., bad luck, market conditions). Its primary aim is to protect or enhance one's self-esteem. For example, an investor might believe their clever market timing led to a gain, but a loss was due to unforeseen "Black Swan" events.10, 11

Confirmation Bias, on the other hand, is the tendency to seek out, interpret, and recall information in a way that confirms one's pre-existing beliefs or hypotheses, while downplaying or ignoring evidence that contradicts them.9 An investor exhibiting confirmation bias might only read news articles that support their bullish outlook on a stock, disregarding any negative reports.

While self-serving bias is about attributing outcomes to maintain self-image, confirmation bias is about selectively processing information to validate existing beliefs. However, self-serving bias can reinforce confirmation bias; if an investor believes they are skilled due to self-serving attribution, they may then seek out information that confirms their perceived skill, ignoring contradictory data.8

FAQs

How does self-serving bias affect investment decisions?

Self-serving bias can lead investors to overestimate their investment skills, causing them to take on too much risk or trade excessively.7 They may attribute good returns to their acumen and bad returns to external events or market volatility, hindering their ability to learn from mistakes and adjust strategies.

Is self-serving bias always negative?

Not necessarily. In small doses, self-serving bias can help maintain self-esteem and motivation, which can be beneficial in overcoming setbacks.5, 6 However, when it distorts reality significantly, especially in financial contexts, it can lead to poor decision making and a failure to adapt or improve.

Can self-serving bias be overcome?

Mitigating self-serving bias involves cultivating self-awareness and practicing objective analysis. Strategies include keeping detailed investment journals to track decisions and outcomes, seeking diverse perspectives, and actively considering alternative explanations for both successes and failures.4 Being aware of the tendency is the first step toward making more balanced evaluations.3

What is the difference between self-serving bias and emotional investing?

Self-serving bias is a cognitive distortion related to how individuals attribute causality for outcomes, specifically protecting their ego.2 Emotional investing, while also a behavioral finance concept, refers more broadly to investment decisions driven by feelings such as fear, greed, or excitement, rather than purely rational analysis. While self-serving bias can contribute to emotional responses (e.g., inflated confidence leading to impulsive trades), it is a specific type of attributional error rather than a general emotional state influencing decisions.

How does self-serving bias relate to hindsight bias?

Both are cognitive biases. Self-serving bias relates to attributing success internally and failure externally. Hindsight bias, often called the "I-knew-it-all-along" effect, is the tendency to perceive past events as more predictable than they actually were.1 An investor might combine these: "I knew that stock would go up because I'm a smart investor" (self-serving) and "It was obvious it was going to succeed" (hindsight).