Self Serving Bias, Behavorial Finance, Smart Investor

What is Self Serving Bias? How can you Overcome this Bias?

Understanding Self-Serving Bias & Why You Need To Take Responsibility

How many times have you boosted your talent when things went right and luck when things did not go as planned? Most of us have done this multiple times and we are likely to do it few more times as well. And this behaviour in the field of behavioural finance is called as self-serving bias.

Simply put, self-serving bias is the tendency to credit good outcomes to our skills and talents and unfavourable outcomes to fate and luck. Overconfidence and misattribution of causes are the two parts of self-serving bias.

Examples of self-serving bias can be found in our day-to-day life….

– At Workplace, It can be hard to admit to a mistake, especially where your professional reputation (and salary) is on the line. But if you start to notice that you or one of your coworkers always seems to be taking credit, seeking praise and avoiding blame, then it’s likely that self-serving bias has reared its ugly head.

– A student gets a good grade on a test and tells herself that she studied hard or is good at the material. She gets a bad grade on another test and says the teacher doesn’t like her or the test was unfair.

– Athletes win a game and attribute their win to hard work and practice. When they lose the following week, they blame the loss on bad calls by the referees.

– A job applicant after being rejected can attribute it to the personal preference of the interviewer. Also, he may attribute his selection in the next interview to his qualifications and skills.

– In the investing world, we tend to attribute good performances of our investments / stock picks etc. to our investment skills and negative returns to the broader markets and factors outside our control. 

Investors with self-serving bias will only pay attention to information that supports their viewpoints. They are also less willing to accept the factual information. As a result, investors may take the wrong investment decisions.

They are also less likely to accept responsibilities for their wrong financial decisions. Hence, the probability of making the same mistakes goes up.

Self-serving bias might also affect your investment decisions. It limits your ability to act in a rational way and learn from our mistakes. Hence, this bias can adversely impact your investment portfolio.

Reasons behind Self-Serving Bias

Just like there is a reason for the way we behave, self-serving bias is caused by two main factors:self-enhancement and self-presentation.

Self-enhancement lets us maintain a positive self-image and gives us the feel of being worthy.If an individual uses the self-serving bias, attributing positive things to themselves and negative things to outside forces helps them maintain a positive self-image and self-worth.

To continue with the image, investors credit themselves for the positive outcomes and external reasons for unfavourable outcomes. After all, everyone wants to be seen as a person that makes all the right decisions.

Self-presentation is exactly what it sounds like — the self that one presents to other people. It’s the desire to appear a particular way to other people. In this way, the self-serving bias helps us maintain the image we present to others.

For example, if you want to appear as though you have good study habits, you might attribute a bad test score to poorly written questions rather than your inability to prepare correctly.

“I stayed up all night studying,” you might say, “but the questions weren’t based on the material we were given.” Note that self-presentation isn’t the same as lying. You may have indeed stayed up all night studying, but the thought that you could have studied inefficiently doesn’t come to mind.

Self-Presentation is appearing in a particular way in front of other people. It helps to maintain the image that we have presented earlier.

Ways to Overcome Self Serving Bias

The first step to changing your behavior in knowing how you’re behaving. Before you start accusing others, be contemplative and see if you’re guilty of self-serving bias.

If you are, then read up on it. There has been a great deal of research, articles and books on it. The more informed you are, the more you’ll be able to be aware when you’re acting in a self-serving bias way and develop tools and techniques to help you stop.

Accept That You’re Not Perfect

The first step to overcoming self-serving bias is acknowledging that the negative outcomes are not solely due to external factors. This will help you to understand the mistakes and learn from it as well.

Another thing to learn is that there is value in failure and being accountable for one’s actions. Failure is an inevitable part of life. It means you’re taking risks, stretching beyond your comfort zone and other clichés. But clichés are based on old truths and failure is a way to learn and grow. Being accountable for your actions is a sign of maturity and one that will earn a leader respect.

Also, find ways to give others credit; this will help you adjust your behavior. It allows other people to succeed and share the success. Helping others get recognition can be a boost to your self-esteem and make you feel better about yourself, too.

In decision making or in Investments, Tracking your investment and major decisions can help you to overcome the bias. Keeping a journal lets you find out your strengths and weakness. One can fix the weakness and keep their reasoning mistakes in check. You need to treat both their positive and negative outcomes objectively. Analysing and recording these events can help you figure out the reasons and go back to it later. It will also improvise your decision making skills and give you an edge as you scale up in life & Investments.

Conclusion:

Self-serving bias is the result of overconfidence and not taking responsibility for the negative outcomes, losses or wrong decisions. This bias helps you to protect and enhance your self-image in front of others. Rational thinking and analysing the outcomes, accepting responsibility for the wrong decisions and taking help of experienced professionals are some of the ways to overcome self-serving bias.

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