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Self-serving bias interacts with attribution error in interesting ways that can be hard to untangle. People generally are less likely to commit the classic attribution mistake about themselves, because they notice and feel their own circumstances more keenly than those of others.109 If you are frightened by a dog, you are likely to emphasize how big and scary the dog was; an onlooker is likely to notice that, too, but is much more likely to also conclude that you are scared of dogs—to interpret the story in a “dispositional” rather than just a “situational” way.

Source: pp 242-243, The Legal Analyst, Ward Farnsworth

I'm vacillating between definitions 1, 2, and 4, and also am complicated by the quotes here. For example, if I use definition 4 (the power to deal with something as one pleases), then does the last clause mean that the onlooker interprets the story in whatever frame or way he pleases, because he has this power?

Yet if I use definition 4.1 (The determination of events by divine power.), then does the last clause mean that the onlooker interprets the story due to "nature's course", or the belief of godly determinism?

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Definition 1 is the best fit.

The author is discussing a person's feelings, qualities, thoughts, or temperament, which matches the first definition. There's discussion of neither ordering or arrangement (def. 2), nor the manner of determining or resolving events (def. 4). Indeed, someone who has "the power to deal with something as [they] please" (from def. 4) is unlikely to be afraid of the dog.

Conversely, we can see language's intent that does parallel that of definition 1. We can change this:

If you are frightened by a dog, you are likely to emphasize how big and scary the dog was

to this:

If you are frightened by a dog, you'll have a disposition to emphasize how big and scary the dog was

by using definition 1.1. We can also make the following substitution:

they notice and feel their own circumstances more keenly than those of others
they notice and feel their own inherent qualities of mind and character [from def. 1] more keenly than those of others

The other definitions of disposition don't offer any language synonymous with the passage's meaning.

Regarding the quotes, they are used to show that the author is using the terms in a nonstandard way and to ask the readers to permit some descriptive leeway with the language. We don't speak of dispositional interpretation, so it's a strange thing to say. Situational interpretation means an interpretation varying depending on the interpreter's circumstances, not an interpretation of an event strictly regarding only the physical circumstances. The quotes also emphasize the two words, telling us they are intended to be contrasted.

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If we see someone acting scared of a dog, and we are prone to self-serving attribution bias, then we might assume that the person is acting scared because they are inherently fearful. That is, fearfulness is part of their disposition, or in other words, part of their "inherent qualities of mind and character".

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