All of us have a strong tendency to evaluate our decisions in the way that is most favorable and least damaging to ourselves, based on the outcome.

My favorable outcome proves my wisdom and skill.
My unfavorable outcome is just bad luck.

However, when we evaluate other’s decisions and their results we say:

Their favorable outcome is just good luck
Their unfavorable outcome shows a lack of wisdom and skill.

This is called the self-bias error. Self-bias is a pernicious error. (pernicious = stealthy and harmful.) We don’t see the error coming. The impact is felt in later decisions, as we thought our initial success was due to skill when it was really just luck. Hence, we did not examine our decision and did not learn from it.

Nearly every decision has two elements: skill and luck. But luck implies something over which we have no control. Lack of control comes from a lack of knowledge of the environment or a lack of skill.

Studying our bad outcomes and our good outcomes can increase our knowledge and point out our skill shortfalls. Thus, our future decisions are improved with a reduced risk of a bad outcome.

Here is an example from the world of finance.

Many of those in the world of high finance, currency traders, option and futures players, etc. are called gun-slingers. They are riding high on fast decisions and quick, high-return outcomes. They make lots of money. They get promoted. They have a good outcome, and another, and another…until they don’t. Then they encounter a blow-up. They lose it all. Job, house, cars, wives, career. All gone because they over-valued their skill and undervalued the risks.

But there are some in the industry, very few, who understand the game. They are not well-known. They are not promoted. Their annual outcomes are usually modest. In fact, most years may even be slightly negative. But they have a strategy and stick to it. Then every few years they have a win…a really big win. These traders understand the concept of expected value and the effect of odds over time. And they stay. The others are fired at blow up.

How to Avoid Self-Bias Error

1. Recognize it. Recognizing Self-Bias Error is one of the most difficult things you can attempt. We all constantly justify our actions, even if it is only to ourselves. We make decisions based on emotion, then rationalize them. This tendency is so strong that we cannot overcome it ourselves.

2. Collaborate with one or more partners. Get help. Form a decision analysis group. The group should look for the truth. The group should have the freedom to constructively criticize.

3. Examine every decision, those with good outcomes as well as those with bad outcomes. Is the outcome due to skill or is it luck? Do not accept excuses, “Oh, that was just lucky.” or “Oh, that was just the luck of the draw.” If you accept that the outcome is excused by random chance, you won’t look for lessons. Learning is avoided.

Example: Over the past several evenings, my family has played the Squence® board game. In this game, each player has six cards. There two players on each team. The players place chips on a board, based on the cards in their hand, discarding the used card and drawing another. The object is to get two sequences of 5 chips in a row. Four of the jacks are wild cards, usable anywhere. The other four (yes, it uses two decks) allow you to remove a chip from the board. Obviously, drawing a jack is a great advantage. The team drawing the most jacks usually wins the game. Luck truly is a major factor in winning any given game.

However, strategy plays a part. Each player makes many decisions: Which card to lead? Should he extend a sequence or block an opponent? Should he use a jack early, or hold it for more impact? Should he waste a card that has a low value (due to the course of play) to improve the average value of cards in his hand?

In our particular case, we had one player who studied the actions closely, calculating the odds (ordinally, not cardinally). We had two players who did that to a lesser extent. The other player just played.

We played 11 games on each of three evenings, reshuffling the teams each. Examining each game, luck of the draw appeared to determine the winner. But the team who had more options on the board (e.g. 4 in a row, waiting to draw the fifth card or to be blocked) to actually use the wildcard, would win slightly more often.

The player who reviewed the play and calculated the odds was on the team that won the overall each evening. The player who just played, without reviewing the prior play, was on the losing team each evening. Using strategy made the difference in the long-run, despite the apparent dominance of luck in the short-run.

4. Examine Your Beliefs. Become information hungry and keep an open mind. You want your beliefs to be correct. You should want the truth.

5. Deconstruct decisions before the outcomes are known. Think about alternative outcomes. It’s difficult to evaluate decisions after the outcome is known. If you know the outcome, don’t tell your decision analysis group until after they give their analysis.

6. Not making a decision is a decision. Examine the status quo.

7. Use Ulysses Contracts with yourself. Determine your choices in advance, just as Ulysses tied himself to the mast to avoid the sirens.

There is much more to this concept. Very much more.

Read these to go deeper:

Thinking in Bets, by Annie Duke gives a great introduction.

Fooled by Randomness by Nassim Nicholas Taleb goes deeper.

The Black Swan by Nassim Nicholas Taleb goes deeper yet.