Got bias? No of course you don’t! Everyone else is biased, but definitely not you 😉
Have you heard of the Dunning-Kruger Effect? This effect is a cognitive bias in which people wrongly overestimate their knowledge or ability in a specific area.
I’d never heard of this until I was listening to a podcast one day (if I can remember which one, I’ll post a link to it) in which this Effect was discussed. The context in which it was mentioned was with students in college taking an exam. Students were interviewed before and after taking a test. Those with high confidence about their performance before and after the exam were then compared to those who had moderate to low confidence about their performance both before and after the exam. Their confidence levels were then analyzed with their exam results.
The result? Those with the highest confidence levels did not perform the best. But – if you asked them after the exam, they were certain they had done amazingly well. Know anyone like this? A national leader perhaps? 😂
All jokes aside, when I heard this, I immediately thought of a friend whom I love. He is THE single most confident person I have ever met. More confident than some of the most high-achieving people I know or have come across in various settings, people whom are industry leaders, self-made millionaires, MENSA members, you name it. But my friend? Confidence beyond all of them combined. And you know what? He’s super average. Not in a mean or shady way, I’m just saying it like it is. Literally, average or even below average in nearly every category…except for one…confidence. I can’t even type this without smiling and laughing, it’s just who he is and I love him.
So what makes someone to exemplify the Dunning-Kruger Effect? It comes from lack of self-awareness that prevents them from accurately assessing their skills.
In their 1999 study, “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments,” Dunning and Kruger assessed that some people are overly optimistic when evaluating their performance on social and intellectual tasks. Poor performers are subject to a double curse. First, they make mistakes and subsequently reach poor decisions. Then these knowledge gaps prevent them from catching their errors. To summarize, people lack the expertise to recognize how badly they’re doing.
You might be wondering – so what? Why does it matter that some people do this? Actually, we all do this. “We all have pockets of incompetence we don’t recognize” summarizes David Dunning in a great 5 minute Ted presentation. And it matters because this effect has been known to show up time and time again in rather critical arenas to include emotional intelligence, firearm safety and financial knowledge, to name a few.
So how often does this surface in personal finance? Every second of every day. If I had a penny for every time a prospective client told me what they believe about their finances, specific financial products and tools, their self-prescribed financial plan, or the stock market that wasn’t true, I would have retired at the age of 40. Financial entertainers, the media, financial columnists, financial advisors, financial salespeople and self-help do-it-yourself authors have created the perfect storm, dividing most people into two opposing personal finance camps. In one camp, you have those Dunning-Kruger Effect-afflicted millions who think that they know best about a subject that they haven’t trained in or spent a profession refining. The opposite camp? Those overwhelmed by so much information, misinformation, and biased narratives that they’re fearful and paralyzed with indecision.
Where do we go from here? “Ask for feedback from other people, and considerate it, even if it’s hard to hear. Second, and more important, keep learning. The more knowledgeable we become, the less likely we are to have invisible holes in our competence.” If you think you know everything there is to know about a subject, question it. Intentionally seek out those with different opinions and perspectives than your own; and yes, this applies to more than just personal finance.
Why? One, this is just great life advice – no one wants to be thought of as an example for a less-than-flattering psychological effect. And second, if you were making mistakes and bad decisions, wouldn’t you want to know sooner than later?