How We Explain Behaviour — and Why We Get It Wrong
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When we observe someone else's behaviour, we tend to attribute it to their character, personality, or intentions. When we observe our own behaviour, we tend to attribute it to situational factors — the circumstances we found ourselves in. This asymmetry, known as the actor-observer asymmetry, is one of the most robust findings in social psychology, and it sits at the heart of a cluster of attribution errors with significant financial consequences.
The Fundamental Attribution Error
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The fundamental attribution error (FAE) — also called correspondence bias — was named and documented by social psychologist Lee Ross in a 1977 paper. It describes the tendency to overweight dispositional explanations for other people's behaviour (their character, motives, or traits) and underweight situational explanations (the context they were in).
In Ross's original experiments, participants watched people present arguments for positions they had been randomly assigned to argue. Even when told the presenters were assigned their position, observers still rated the presenter's actual beliefs as consistent with the argument. The situational constraint — being assigned a position — was discounted in favour of a character attribution.
In finance, the FAE shapes how we evaluate investment performance. When a fund manager delivers strong returns, observers attribute it to skill and insight. When a manager delivers poor returns, they attribute it to bad judgment or reckless strategy. The role of situational factors — market conditions, sector cycles, the luck of timing — is systematically underweighted.
Self-Serving Bias
While we attribute others' behaviour to character, we tend to explain our own behaviour in ways that protect and enhance our self-image. This is self-serving bias: the tendency to attribute successes to our own skill and effort (internal, controllable factors) and failures to external circumstances (bad luck, unfair markets, the behaviour of others).
Research by Dale Miller and Michael Ross in 1975 established the pattern: people take credit for good outcomes and assign blame for bad ones to external causes. In investing, this means successful trades are evidence of skill; unsuccessful ones are attributed to the market being irrational, the company releasing unexpected news, or timing being unlucky. The implication is that genuine learning from failure is obstructed — if failure is always someone else's fault, there is nothing to improve.
The False Consensus Effect
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A related pattern is the false consensus effect, documented by Lee Ross, David Greene, and Pamela House in 1977: people overestimate how widely their own views, values, and behaviours are shared by others. If you prefer index funds, you may assume most reasonable investors do too. If you avoided equities during the 2008 crisis, you may assume this was the sensible majority position.
The false consensus effect can lead investors to mistake their own preferences for universal wisdom — dismissing as irrational anyone who makes different choices. In practice, financial decisions involve genuine trade-offs where reasonable people differ; the false consensus effect obscures this.
Attribution Errors in Practice
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Together, attribution errors create a cognitive environment in which we overestimate the role of skill in performance, underestimate luck and circumstance, protect ourselves from learning through failure, and mistake our own preferences for objective rationality. The corrective is a systematic effort to consider situational factors — what role did circumstances play? — and to apply the same standards to our own performance as we apply to others'.