Many people are unaware that they are victims of the Dunning-Kruger effect, which is a cognitive bias wherein unskilled individuals suffer from illusory superiority, mistakenly assessing their ability to be much higher than is accurate. Conversely, highly skilled individuals tend to underestimate their relative competence, falsely assuming that tasks which are easy for them are also easy for others. 😉 A study by David Dunning and Justin Kruger of Cornell University concludes: “The miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others.”
Often when we’re bad at something we don’t even have the knowledge to know how bad we are. We witness this illusory superiority every day. 80% of men and women drivers surveyed in a study said they would rate themselves as above average drivers, lol. 😆 Boats become grounded when their captains overestimate their crew’s abilities. Confidence is good, but overconfidence can sink the ship.
Our financial situations can sink as well if we suffer from the Dunning-Kruger effect. Many of us lack the basic financial knowledge to even realize that we’re making mistakes. It’s this lack of understanding about things like the stock market, compound interest, and inflation that can lead us to erroneously believe we’re making the right decisions when in reality we’re only deluding ourselves and setting us up for potential failure.
Overconfidence is the most dangerous form of carelessness. And when it comes to our money we can’t afford to be careless. So learn something new everyday. An investment in knowledge pays the best interest, after all. Gain experience to combat ignorance. Become better at managing money. And in the meantime, heed the wise words of the ancient sage, Confucius: “Real knowledge is knowing the extent of what you don’t know.” 🙂
—————————————————————-
Random Useless Fact:
I agree with the infographic 🙂
I can cook enough to know that I can’t cook. XD 😛
What did you get on that quiz I posted on where you measure your confidence on each answer?
I’m not very good at trivia, lol. But it was a fun quiz.
Mean confidence: 60.60%
Actual percent correct: 64.00%
Mean confidence on correct answers: 62.81%
Mean confidence on incorrect answers: 56.67%
32 correct out of 50 questions answered (64.00%)
22 correct out of 37 questions answered with low (50 or 60%) confidence (59.46%)
5 correct out of 8 questions answered with medium (70% or 80%) confidence (62.50%)
5 correct out of 5 questions answered with high (90 or 100%) confidence (100.00%)
I’ve come to the same conclusion as you. Don’t risk it unless I’m at least 90% sure.
Wait, are you saying I’m not an excellent driver…?
There are many different aspects involved in driving. I’m not a particularly skilled driver per se, but I can drive a manual, which not everyone can. 😉
I never ever heard of this until this weekend past and now it is the 2nd time of heard of the Dunning-Kruger Effect. Here is a podcast from Sharpe Trade. The speaker is Dan , aka Aileron Trading, form YouTube, who is the public voice of Sharpe Trade.
Thanks for the podcast recommendation. It’s cool when terminologies and ideas sync up within our collective consciousness. 🙂 When I first learned what the word Irony meant I started to hear it everywhere in school and on the internet. Maybe the universe is giving us what we seek.
Interesting stuff, first time I heard of the Dunning-Kruger effect. Maybe I need to get out of my cave once in a while.
I like how discoveries and theories in the research community are named after the people who created them. Maybe I should do a study myself to discover how many people who read personal finance blogs are able to retire early and wealthy, and publish the results as the freedom 35 blog effect.
One smart man once said to me – the more you know, they more you don’t know. Meaning – as you expand your knowledge into more and more areas, you get to know how much knowledge there is out there and how little you actually know. And people who know everything …. well, they know everything simply because there isn’t much in front of them.
May be that’s why people get more and more humble as they age?
Good post 🙂
Socrates once said, “To know, is to know that you know nothing. That is the meaning of true knowledge.” I’m not sure if I agree with him completely but he does make a good point. I think people get more humble over time but maybe only up to a certain age.
Interesting, I had never heard of the Dunning-Kruger effect. I guess it’s the fact that once someone learns a little bit on a subject they suddenly think they are an expert on it? Most of the time we are not willing to admit that we can learn more about that particular subject. It’s important to realize you can always gain new knowledge.
I remember when everyone talked about the Mayweather vs Pacquiao fight. It seemed like over the course of a weekend everyone on the internet and their dogs had suddenly become an expert at boxing, lol. People who have never even watched a full boxing match before spoke as if they’ve been a life long fan of the sport. There were heated debates all over social media. Perhaps it’s human nature to want to fit in and talk about the hottest current events, and we pretend like we’re more knowledgeable than we actually are to satisfy our egos. But like you say, it’s really important to realize that we can always learn new things in this world. 🙂
I only know what I know… And I’ve learned I don’t know a lot of what you know… I also know if i want to know, I know how to find out… Science is full of wonders, but remember studies and statistics are only as good as the knowledge of their creators. That I know… because I know several in various fields of study that think they know, but really they don’t, they only know what they know which isn’t as much as I know… Now that Confucius guy, he always seems to know! – Cheers.
I like the Dr. Seuss style of writing, lol. I think there’s also a distinction between knowing something and knowing what to do with it. 🙂
…and that unfortunately is what most people lack.
[…] may be suffering from the Dunning-Kruger effect, which can mislead you into believing you know more about finances than you actually […]
[…] may suffer unknowingly from the Dunning-Kruger effect, which can falsely mislead you into believing you know more about finances than you actually […]
[…] sentiment towards management. 🙁 Furthermore, some people have a cognitive bias known as the Dunning-Kruger effect where they think they’re more competent than they really are, which could lead to […]