The Actor-Observer bias is best explained as a tendency to attribute other people’s behavior to internal causes while attributing our own actions to external causes.
It is one of the types of attributional bias, that affects our perception and interaction with other people.
We have an awesome article on Attribution Theory. Make sure you check it out.
The actor-observer bias is seen to be more prevalent when the outcomes are negative.
For instance, we are more likely to blame the situation or circumstances when we do something negative. On the other hand, if the same thing has been done by someone else, we tend to blame their personality, behavior, and personal choices.
Example of Actor-Observer Bias
Let’s say you have scheduled a meeting with a client. You reach well before the time, but your client is 30 minutes late. He is extremely sorry for being late, but you don’t really care what he has to say.
You have already attributed him being late as his personality trait, and you might think he has no regard for you or your time.
Now, let’s switch roles. Your client reaches the meeting point on time, but it’s you who is 30 minutes late. Here, you are not blaming yourself for being late, in fact, you have a genuine explanation for being late – whatever it may be.
This is a real-world example of actor-observer bias.
There have been a lot of research on the actor-observer bias. We will get to the causes and impacts of actor-observer bias shortly, but it’s also essential to find out how we tend to be biased.
Few studies have shown that we are less likely to succumb to actor-observer bias when the negative action has been done by people close to us, like friends, family members, or partners. The valid explanation for this behavior is that we don’t just have to rely on our assumptions about these people.
We already know quite a lot about them, including things like their needs, motivations, desires, and their personality. Due to this, we tend to give them the benefit of the doubt and we are more likely attribute their behavior to external causes.
Understanding the Actor-Observer Bias
There can be a number of different circumstantial causes to actor-observer bias. But the general reason remains almost consistent.
When we are the actors in a situation, we aren’t able to observe our actions. On the other hand, we clearly observe the behaviors of other people – other actors.
Due to this, we tend to attribute our behaviors to situational factors while attributing others’ behaviors to internal factors.
For Example: 
You trip and fall on the street. You immediately blame the uneven pavement or attribute to some other situational condition like ‘your shoelace was untied’.
However, if you see a random stranger fall on the street, you will just call him clumsy.
How is Actor-Observer Bias different from Fundamental Attribution Error?
While it seems quite similar, actor-observer bias and fundamental attribution error are two different things.
Both of them are types of attributional biases. Fundamental Attribution Error differs from Actor-Observer bias as it doesn’t take into account our behavior. Fundamental Attribution Error is often restricted to the attribution of people’s behavior to internal causes.
It doesn’t consider any external factors that might play a part.
Read more about Fundamental Attribution Error.
Referencing from the previous example. 
You will be quick to categorize the fallen stranger as clumsy, and that’s it. You won’t take into account any of the external factors that might come into play if it was you.
A word from Psychestudy
Actor-observer bias can be problematic as it can lead to misunderstandings and arguments. Think of it this way, two parties are having a discussion, where both parties see themselves to be right.
There cannot be a sensible reasoning when both parties attribute individual behaviors to external situations (External Attribution) and the other party’s situation to their traits (Internal Attribution.