Understanding Self-Serving Bias in Finance: Definition & Impact

A self serving bias is a tendency in behavioral financeBehavioral FinanceBehavioral finance is the study of the influence of psychology on the behavior of investors or financial practitioners. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational to attribute good outcomes to our skill and bad outcomes to sheer luck.  Put another way, we choose how to attribute the cause of an outcome based on what makes us look best. Certainly, most of us can think of things that we’ve done and determined that when everything is going according to plan, it’s clearly due to our skill. Then, when things don’t go according to plan, clearly we’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 bias. The self serving bias, an error of overconfidence and misattribution of causes, is in that bucket. The key thing to remember is that biases limit our learning or our ability to learn.

Learn more in CFI’s Behavioral Finance Course.

How to Limit the Self Serving Bias

This is a dangerous limit to our learning because in practice it can lead to bad investment decisions and repeating such bad choices. There can be a whole host of reasons why we’ve had a particular success or failure in the financial markets. How can we avoid the self serving bias, this limit to our learning? One of the most effective ways is by actually recording and recognizing what actually happened, documenting the reasoning behind your decisions and the outcomes that followed.

Think about keeping an investment log/trading journal. Reviewing a well-kept trading journal can help you easily identify strengths and weaknesses in your trading. It can also help you identify – and thereby be able to correct – mistakes that you continually make. On the positive side, it can help you to identify when and why your analysis was correct. You also might pick up on some things that you might never otherwise have noticed. For example, some traders find that, for whatever reason, the majority of their profitable trades are initiated at a certain time of day or on a certain day of the week.

It’s important to acknowledge when we have followed faulty reasoning that led to a bad outcome. It is only through admitting and examining our mistakes that we can learn from those mistakes. And it’s only through recognizing when we’ve fallen victim to things such as the self serving bias that we can learn to avoid such thinking traps in the future.

Billionaire George Soros, along with many other famously successful investors, touts the value of recording, reviewing, and analyzing our investment decisions.

You can learn more by reading about lessons Soros learned from his $500 million mistake.

Additional Resources

Thank you for reading CFI’s guide to understanding what a self serving bias is in finance. To learn more, check out CFI’s Behavioral Finance Course.

Additional useful resources include:

• Behavioral Finance GlossaryBehavioral Finance GlossaryThis behavioral finance glossary includes Anchoring bias, Confirmation bias, Framing bias, Herding bias, Hindsight bias, Illusion of control
• Behavioral Interview QuestionsBehavioral Interview QuestionsBehavioral interview questions and answers. This list includes the most common interview questions and answers for finance jobs and behavioral soft skills. Behavioral interview questions are very common for finance jobs, and yet applicants are often under-prepared for them.
• Overconfidence BiasOverconfidence BiasOverconfidence bias is a false and misleading assessment of our skills, intellect, or talent. In short, it's an egotistical belief that we're better than we actually are. It can be a dangerous bias and is very prolific in behavioral finance and capital markets.
• Herd MentalityHerd MentalityIn finance, herd mentality bias refers to investors' tendency to follow and copy what other investors are doing. They are largely influenced by emotion and instinct, rather than by their own independent analysis. This guide provides examples of herd bias