What is a Self Serving Bias?
A self serving bias is a tendency in behavioral finance to attribute good outcomes to our skill and bad outcomes to sheer luck. Put another way, we chose how to attribute the cause of an outcome based on what is in our own best interest. Certainly, most of us can think of things that we’ve done recently and determined that when everything is going according to plan, it’s clearly due to skill. Then, when things don’t go according to plan, clearly I’ve just had bad luck.
You’ll recall, if you think back to one of the previous behavioral finance biases, that one of our buckets was self-deception. A self-deception bias. What we’re exploring now are some more of those self-deception biases. So one is, obviously, overconfidence. The key thing to remember is biases limit our learning or our ability to learn.
Learn more in CFI’s Behavioral Finance Course.
How to Limit Self Serving Bias
This is a dangerous limit to our learning because in practice it could. There could be a whole host of reasons why we’ve had an unexpected success or an unexpected failure. How do we actually try and mitigate this bias, this limit to our learning? One of the ways that you can do it is actually by recording and recognizing what actually happened in the past and documenting the reasoning behind your decisions and the outcomes that came as a result of that decisions.
So, think about keeping an investment log. List down every time you’ve actually, with your reasoning, delivered that good outcome but where you actually had the right reasoning but unfortunately a bad outcome resulted. In one instance, therefore, it was skill. In the other instance, although you had the right reasoning, it was just bad luck.
But likewise, when we have wrong reasoning, we might have a good outcome, but it’s important to acknowledge and label that as good luck. What’s also important to acknowledge is that when we have wrong reasoning and a bad outcome, we have clearly made a mistake and we can learn from those mistakes. We do need to map out the outcome of our decisions. In fact, billionaire investor George Soros has mentioned that he does this on several occasions as a way of mitigating this limit to learning. Read more about lessons from his $500 million mistake.
Thank you for reading CFI’s guide to understanding what a self serving bias is finance. To learn more, check out CFI’s Behavioral Finance Course.
Additional useful resources include: