Step 1: Idea: spot the central phrase.
The central phrase is "believes he or she has the ability". So the answer must be a term about belief in one's own ability.
Step 2: Match the phrase to option (1).
Self-efficacy is defined as one's belief in being able to do what a situation needs. The phrase and the definition agree.
Step 3: Compare with option (2).
Self-esteem is a feeling of worth. It does not mention ability for a particular situation.
Step 4: Compare with option (3).
Self-regulation is about managing one's behaviour by one's own effort. It is a process, not a belief.
Step 5: Compare with option (4).
Self-observation is only watching our own actions. It has no link to confidence in ability.
Step 6: Use a short example.
A student who says, I know I can solve this kind of problem in the exam, shows high self-efficacy. The same student may still feel unworthy in general, which would be low self-esteem. So the two ideas are different and this question points to the ability belief.
Step 7: Conclusion.
Only self-efficacy fits the central phrase.
Final Answer:
The blank is filled with self-efficacy, option (1).
\[ \boxed{\text{Self-efficacy}} \]