Dunning-Kruger effect
Behavioral New World
July 1, 2021
Know thyself—harder than you think
Here’s a fun phrase to toss around at a cocktail party, but be careful–it would be easy to insult someone if you directed it at them: the “Dunning-Kruger effect.”
This effect, which is well-known among the psychology community, refers to decisions for which we lack expertise, and that lack of expertise gets in the way of knowing that we lack sufficient expertise. Put differently, there are decisions about which we don’t know enough to know that we don’t know enough. Consequently, we overestimate our ability to make an informed and beneficial decision.
As a finance professor and Chartered Financial Analyst®, I am sometimes cornered at cocktail parties and asked for financial advice. Often they’re asking for hot stock tips! (They came to the wrong bloke: I’m an investor, not a trader.) Sometimes though people want to brag about their own investing success. One thing I’ve learned from these encounters is that many people buy and sell stock options and yet know almost nothing about what determines the value of options. That’s a rather important feature of options to know about before you jump in. In short, they don’t know enough to know that they don’t know enough, especially if they’ve had some accidental success. (Usually such types somehow never get around to mentioning to me any losses they might have incurred on this front.)
Awareness of two kinds is an important tactic for avoiding falling under the spell of the Dunning-Kruger effect: 1) awareness that this effect exists (having read this far, you know that now), and 2) awareness that we need pause and reflect, “How much do I really know about this topic?”
In turn, one’s ability to pause in such a manner arises from intellectual humility, the recognition and admission that perhaps you don’t know about much as you think you do, that other viewpoints might have some (or a lot) of validity, that there is even the possibility that you are completely wrong.
One way to cultivate intellectual humility is to adopt what is called a “growth mindset.” If you perceive yourself to be a lifelong learner, one who is open to new ideas and other viewpoints, you become more flexible and humble.[1] In contrast, if you have a “fixed” mindset, your ideas are, well, fixed: less open to change. (Self) knowledge of how you learn and how you think is called “metacognition,” another phrase to toss around after a martini or two.
However, intellectual humility is easier said than done, for two reasons. First, it is difficult to admit when you are wrong. Second, it requires reflection, contemplation, and thinking. And, as Henry Ford said, “Thinking is the hardest work there is, which is probably the reason why so few engage in it.”
Yet the Dunning-Kruger effect is not harmless. It can lead to overconfidence and the flawed decision making that accompanies overconfidence (the subject of my September 2020 newsletter). It can also lead to polarized views, none of which reflects the true state of knowledge (imperfect as that might be)—aren’t there at least two Covid-19 “experts” in your neighborhood with strongly contrasting views? And neither of them a scientist of any sort, I would suspect.
Thus, the rewards of working to counter the Dunning-Kruger effect can be substantial for both individuals and society. You’ve made progress just by reading this newsletter—you didn’t know that you didn’t know about the Dunning-Kruger effect before today; now you do.
[1] There is a physiological basis for a growth mindset—neuroplasticity, the ability of the brain to make new physical connections. We’re not stuck with the number of brain cells with which we were born! For more on the growth mindset and brain plasticity, see https://www.mindsetworks.com/science/