Decision Tips
Be aware of the self-serving bias.
The man who can smile when things go wrong has thought of someone he can blame it on.
—Anonymous
In May 1999, Maria Walker’s husband died of a brain tumor. He left her with a home that was paid for and about $350,000. Only 33 years old at the time, Maria knew she would need this money to sustain her lifestyle in the years to come. And uncertain how to invest, she turned the money over to Brion Randall, a long-time friend of her late husband who was a broker with Merrill Lynch.1 As a friend, Maria trusted Brion to invest her money well.
First, Brion invested Maria’s inheritance in blue chip stocks like Walmart and IBM. But as the price of high-tech stocks skyrocketed in late 1999, he advised Maria to dump the conservative stocks and become more aggressive. She gave him the go-ahead. By August 2000, Maria’s account was made up entirely of tech stocks. And the value of Maria’s portfolio grew. In less than a year, her initial $350,000 investment had grown to more than $500,000. Maria, meanwhile, was enjoying the benefits of her increased wealth. Her Visa bill alone was now averaging more than $4,000 a month. “You rock!” she repeatedly told Mr. Randall.
You can probably imagine where this story is going. The tech bubble collapsed in 2001. Meanwhile, Brion Randall continued to tout the profit potential in tech stocks, while the value of those stocks fell. By January 2002, the value of Maria’s portfolio had dropped to less than $76,000.
Maria was crushed. She had believed in Mr. Randall. Now she had to face the hard reality that much of her inheritance was gone. And while Maria applauded her smarts in deciding to turn her money over to Mr. Randall when her investments were increasing in value, now he was a persona non grata. She held him personally responsible for her losses. Mr. Randall, on the other hand, refused to accept blame for Maria’s shrunken portfolio. He blamed poor advice from Merrill Lynch analysts and Maria’s own greed.
Maria’s investment experience is not unique. During the high-tech stock market rally between 1996 and 2000, investors were quick to brag about their expertise and take credit for their investing smarts. But when the market imploded and eventually declined more than 75 percent, most of those same investors looked for someone to blame—their brokers, the investment analysts who kept hyping technology stocks, executives who “fudged” their company’s books, and even the Federal Reserve for not cutting interest rates fast enough.
We are quick to take credit for our successes and to blame failures on outside factors.
This stock market example illustrates a well-known human tendency. It’s called the self-serving bias.2 We are quick to take credit for our successes and to blame failures on outside factors.
An extensive amount of evidence supports that we attribute our successes to internal factors such as ability or effort, while putting the blame for our failures on external factors such as bad luck or chance. However, we’re not so kind when judging others. When looking at others’ decisions, we tend to underestimate the influence of external factors or outside causes and overestimate the influence of internal or personal factors. So when I lose money in the stock market, I’ve experienced bad luck or gotten bad advice. When you lose money in the market, I think you made some bad decisions!
Attributions can help us to better understand how we and others explain our decisions. They tell us we should be alert to our own tendency to hold others fully accountable for their shortcomings, while being far more tolerant of our own. For instance, millions of people suffer from alcohol dependency. When a group of alcoholics was asked to explain their own and others relapses, they came up with very different explanations.3 The relapses of others were attributed to internal causes—like lack of discipline or willpower. The alcoholics’ own relapses, however, were more likely to be blamed on outside forces such as peer pressure from alcohol-dependent friends.
We don’t assess the outcomes of our decisions objectively. Our willingness to accept responsibility for our decisions depends on whether the outcome was positive or negative and whether we’re judging ourselves or others. So be alert to the fact that when you screw up, you tend to want to place the blame elsewhere. When you succeed, you want to accept credit. Both of these responses can get you into trouble. No matter how skilled you are at decision making, no one bats a thousand. Factors outside our control can lead to unplanned negative outcomes. And we need to be careful in taking too much credit for our successes.
Moreover, because we’re not very good at assessing the cause of our decision outcomes, we often learn the wrong lessons from previous experiences. We become overly confident when we have a string of successes—thinking we have greater control over outcomes than we really do. We also may be unwilling to accept responsibility for decisions we made that didn’t turn out as planned.
How can we manage the self-serving bias? First, we need to be aware of this tendency. Be careful about being too confident in extrapolating from past successes to future successes or in placing blame for your setbacks. You’re probably not as smart or as unlucky as you think you are. Second, practice challenging your natural inclinations. For instance, when things go well, ask yourself this: What fortuitous factors might have helped this happen? And when things go bad, ask yourself: What did I do that may have precipitated this?
Challenge your natural inclinations to make incorrect attributions.