Investing & the Dunning-Kruger Effect

Everyone wants to be viewed as competent, skilled, or excellent at tasks we undertake. Social psychologists David Dunning and Justin Kruger observed the tendency of the unskilled to overestimate their own ability, without ever knowing that they lack skill. Their 1999 paper, “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments“¹ essentially demonstrates that we can all be blinded by ignorance.

An amusing example of the Dunning Kruger effect², can be seen in a clip from the movie The Princess Bride where Inigo Montoya challenges intellectual Vizzini, the pride-filled Sicilian. Of course, Vizzini uses the word “Inconceivable!” correctly, but Inigo assertively doesn’t agree. Click on the image below to watch the short clip.

Not only does the Dunning Kruger effect point out the blind-spot of ignorance; it also helps the wise realize that the more competency one acquires in a domain of knowledge, the more humble they become. The more you learn about a topic, the more you realize how much you don’t know.

We all love experts who demonstrate a self assured command of their domain of knowledge. The challenge to the experts can be an ignorance of knowledge. That is why experts especially need to demonstrate humility. The future is always uncertain and unknown. 

As your advisors, we realize that a byproduct of uncertainty is anxiety. As much as we all don’t want to hear it, uncertainty is part of investing. So how do we deal with uncertainty and the anxiety that investing can bring? 

Warren Buffett once said that, “Investing is 5% intellect and 95% temperament.” Investing can be a test of how well you can sit quietly when your inner emotions are yelling at you to do the wrong thing. Part of the temperament of successful long term investors is patient humility. This kind of humility keeps us from self-inflicted investing harm (doing the wrong thing at the wrong time) because we avoid having overconfidence in a particular market prediction.

Our aim is to carefully plan and monitor your investments across time to help create better long term outcomes. Our hope is that the methods (global diversification, low cost ETFs and mutual funds, best worst case time horizon portfolios, individual bonds), tools and diligence we offer will bolster your investing temperament with patience in poor market conditions, humility in good markets.

References

(1) https://doi.apa.org/doiLanding?doi=10.1037%2F0022-3514.77.6.1121

(2) https://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

(3) Reiner, Rob, director. The Princess Bride. YouTube, 1987, youtu.be/dTRKCXC0JFg. Accessed 9 July 2021..”