He contrasts self-observation with self-absorption. Self-absorption is is self-preoccupation.. You are concerned about yourself, worried about yourself. Self-observation means watching everything in you and around you as far as possible and watch it as if it were happening to someone else. You look at yourself and the situation as if you have no connection with them whatsoever. "Don't interfere, don't fix anything - watch and observe".
Great book that I will return to in the next two months. It is available on line on here: Awareness.