Self Evaluation Bias

1. Hot Hand effect and
Self Evaluation Bias
PROFESSOR RAVI KIRAN

2. The ‘hot hand’ effect
• This effect derives its name from the mistaken belief among basketball players
and fans that a player’s chance of hitting a shot is greater following a hit than
following a miss on the previous shot (Gilovich, Vallone and Tversky, 1985).
• Although it appears that this ‘over-inference’ is the opposite of the gambler’s
fallacy, it is actually a complementary effect, again involving a misapplication of
the assumption of non-replacement.
• The "hot hand" is the notion where people believe that after a string of
successes, an individual or entity is more likely to have continued success.
Psychologists believe that the hot hand is a fallacy that stems from the
representative heuristic, as identified by behavioral economics.

3. If a player makes their first three shots in a basketball game, but their average success rate is 75%,
instead of realizing that the first three baskets were random successes, we are likely to think that player has
“hot-hands” and will continue to be successful in subsequent shots.

4. Hot-Hand Fallacy and Gamblers Fallacy
• The hot-hand fallacy occurs when gamblers think that a winning streak is more
likely to continue.
• The gambler's fallacy works in the opposite direction.
• This is the idea that during a losing streak, it is likely that a gambler's luck will
turn around and that they will start winning.
• Nearly every basketball player, coach or fan believes that some shooters have an
uncanny tendency to experience the hot hand—also referred to as being “on
fire,” “in the zone,” “in rhythm” or “unconscious.”

5. Synthesis
• It appears that the contradictory effects of the ‘gambler’s fallacy’ and the ‘hot hand’
are difficult to reconcile with each other.
• However, a study by Barberis, Shleifer and Vishny (1998) demonstrated that the
law of small numbers could lead to both effects, causing both underreaction and
overreaction to market signals.
• In the short term investors follow the ‘gambler’s fallacy’, believing that a series of
identical signals, like the stock price rising, will be followed by a fall (a ‘mean-
reverting’ regime).
• Thus they do not invest in the stock (underreact), causing it to be underpriced, and
returns will continue to be high over a short period of time, demonstrating
positive correlation or momentum.

6. Synthesis
• However, after a longer sequence, the investors overinfer, and expect a
‘trending’ regime, whereby the stock is now expected to continue to rise.
• This ‘hot hand’ effect causes overreaction, as investors now overinvest, making
the stock overpriced, and reducing returns, demonstrating negative correlation
of returns in the long term.

7. Self-evaluation bias
• Self-evaluation bias is described in terms of overconfidence, but we shall see that,
while overconfidence is an important aspect, there are other aspects, including its
opposite, under-confidence.
• In addition there is self-serving bias, which while it often involves overconfidence, can
relate to other aspects of belief.
• Self-evaluation bias includes all aspects of beliefs where some kind of evaluation of the
role of the self relative to a situation is involved.

8. Over-confidence
• It has been claimed that ‘No problem in judgment and decision-making is more
prevalent and more potentially catastrophic than overconfidence’ (Plous, 1993, p. 217).
Moore and Healy (2008) proposed three kinds of overconfidence:
1. overestimation,
i. over-placement; and
ii. over-precision.

9. Overestimation
• This relates to overestimation of one’s actual ability, performance, level of control or
chance of success.
• Empirical evidence suggests that this is a widespread phenomenon extending to many
situations.
• People overestimate their abilities to perform various tasks,
• overestimate how quickly they can finish a project (which seems to be happening with a
book!),
• overestimate their faculty for future self-control and
• overestimate their abilities to manage companies in the case of CEOs (Malmendier and
Tate, 2005; 2008).
• People can also be unrealistically optimistic about their future prospects (Buehler, Griffin
and Ross, 1994; MacDonald and Ross, 1999).
• However, in some cases people underestimate their abilities and are overly pessimistic.

10. Over-placement
• This aspect of overconfidence is sometimes referred to as the ‘better-than-average’
(BTA) effect:
• well over half of survey respondents typically rate themselves in the top 50% of
drivers (Svenson, 1981),
• ethics (Baumhart, 1968),
• managerial prowess (Larwood and Whittaker, 1977),
• productivity (Cross, 1997),
• health (Weinstein, 1980), and
• skill in solving puzzles (Camerer and Lovallo, 1999).

11. Over-precision
• This refers to excessive certainty regarding the accuracy of one’s beliefs.
• Studies frequently ask their participants questions with numerical answers (e.g.
‘How long is the Nile River?’) and then have participants estimate confidence
intervals for their answers).
• Results show that these confidence intervals are too narrow, suggesting that
people are too sure they know the correct answer.
• For example, Alpert and Raiffa (1982) found that a group of MBA students asked for
98% confidence intervals stated intervals that only contained the correct answer
57% of the time instead of the expected 98%.

12. Over-precision
• Similar results have been found in experimental studies by Klayman et al. (1999)
and Soll and Klayman (2004), and have been duplicated in the field in the case of
trading by individual investors (Odean, 1999; Barber and Odean, 2001).
• Investors overestimate the precision of their information about individual
companies, with the result that they traded too much.
• Barber and Odean further found that men were more overconfident in this
respect than women.

13. Self-serving bias
• A self-serving bias is the common habit of a person taking credit for positive
events or outcomes, but blaming outside factors for negative events.
• This can be affected by age, culture, clinical diagnosis, and more.
• The self-serving bias refers to the tendency to attribute internal, personal
factors to positive outcomes, but external, situational factors to negative
outcomes.
• Our minds are biased to act, judge, and see the world in such a way.

15. Self-serving bias
• Many individuals can remember their time during school, specifically
their different experiences and reactions when receiving a good grade
and a bad grade.
• As younger students, many people can remember attributing success to
their own skills when receiving a good grade on an assignment.
• In turn, when someone would receive a poor grade, they would
perhaps initially attribute the poor result due to external factors.

17. Self-serving bias
• Researchers have identified several different reasons for why the
self-serving bias occurs so frequently among individuals.
1. Self-Esteem. The self-serving bias is common in relation to our
need to either maintain or enhance our own self-esteem.
2. Self-Presentation.
3. Natural Optimism.
4. Age & Culture.

18. 1. Self-Esteem
• The self-serving bias is common in relation to our need to either
maintain or enhance our own self-esteem.
• By attributing our successes to our own characteristics, and our
failures to external circumstances, we spare ourselves of any real
opportunity for criticism.
• The self-serving bias skews our perception of ourselves and of our
reality, in order to improve and preserve our own self-esteem in the
process.

19. 2. Self-Presentation
• Self-presentation describes how an individual conveys information
about themselves to others.
• Self-presentation is either used to present information to match an
individual’s self-image to others or present information to match
audience expectations and preferences.
• Self-presentation aids individuals in maintaining their self-esteem, as
they are affected by other’s perceptions of themselves.
• To continue to enhance their self-esteem, an individual actively
portrays favorable impressions of themselves to others.

20. 3. Natural Optimism
• Another reason that this cognitive bias is particularly common, is due to the fact that
humans are inherently optimistic.
• Negative outcomes tend to surprise people, and thus we are more likely to attribute
negative results or outcomes to situational and external factors, rather than to
personal reasons.
• Along with our likelihood to be optimistic, humans consistently make what is
referred to by psychologists as a fundamental attribution error due to our self-
serving bias.
• A fundamental attribution error, also commonly referred to as correspondence bias or
the attribution effect, describes how when others around us make mistakes, we
blame the individual who makes the error, but when we make mistakes ourselves,
we blame circumstances for our failures.

21. Age & Culture
• Self-serving bias is a bias that many individuals will experience throughout
their lives.
• Self-serving bias does vary when looking at different age groups and cultures.
• Researchers have confirmed that self-serving bias is most prevalent among
young children and older adults.
• From a cultural perspective, there is no official consensus regarding self-
serving biases and cross-culture influences.
• However, researchers globally are now further investigating the cultural
implications of self-serving bias, specifically in regards to differences in self-
serving bias demonstrated in Western and non-Western cultures.

22. Self-serving bias
• Self-serving bias can quickly infect your workplace, leading to a
bevy of treacherous problems.
• If it gets especially bad, it can distort the perception of self, impair
one's ability to evaluate problems and generate hostility towards
others—leading to conflict and worse.

23. How to avoid the self serving bias?
• Give others credit during success. Every time you
succeed, try to find 5 people or reasons behind the
victory.
• Find an area for improvement for any bad outcome.
• Give yourself extra time to evaluate the outcome.

24. Self-serving bias in the workplace
• The workplace provides many examples of the self-serving bias at play.
Specifically, research in the subject of work-related self-serving bias identified
that self-serving bias was most present in relation to negative outcomes and
that the more distant the relationship between employees and their colleagues
were, the more coworkers actually blamed each other for failure in the
workplace.
• Self-serving bias is also commonly found in relation to explaining both
employment and termination of one’s job. People were found to typically
attribute their personal characteristics to the reasons that they were hired and
blamed external factors for their own termination from their job

25. Self-serving bias in sports
• Examples of self-serving bias are also particularly common in regards
to sports, such as when individuals address their own outcomes in
sporting events.
• Individual sports especially tend to showcase self-serving bias in
people, probably because one on one sports have clearly defined
winners, and results of a match can be more easily attributed to one’s
action than a team sport, with more ambiguous outcomes.

26. Self-serving bias in sports
• A study conducted on Division I collegiate wrestlers tested the self-
serving bias.
• The wrestlers were asked to self-report on their performance from
their preseason matches and the results of these matches.
• It was found that wrestlers who won were more likely to attribute
their success to internal and personal causes than those who lost.

27. Self-serving bias in sports
• Another study completed in 1987 looked to compare self-serving
biases between individual sport athletes and team sports athletes.
• The study gathered 549 statements from athletes who played
tennis, golf, baseball, football and basketball,
• The results suggested that individual sport athletes made more self-
serving attributions than sports team athletes.
• This research concludes that individual sport athletes and their
performance during sporting games had a more significant effect
on their self-esteem, thus using the self-serving bias to increase their
confidence