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Series 2, Episode 8: Dunning-Kruger Effect



Welcome back to the bitesize behaviour podcast, and today we are discussing a really interesting behavioural bias, which is closely linked to what we discussed in Episode 5 when we looked at overconfidence.


Today we are looking at The Dunning-Kruger Effect. So let’s get straight into the details.


The Dunning-Kruger effect is a behavioural bias, and in essence shows that people will believe they are smarter and more able than they actually are. Essentially, people who have a low ability in something, or have no competence, do not possess the skills needed to a recognise their own incompetence.


And, this combination - a lack of self-awareness and the inability to recognise their incompetence, leads people to overestimate their abilities. It can be summed up in the well-known saying “a little information is a bad thing”. And we can illustrate this entire behaviour with one example, and the example we will use today, is investing money in the stock market..


INVESTING AND THE DUNNING-KRUGER EFFECT


Let’s say that you are new to investing and you decide that you want to invest in a stocks & shares based investment. You don’t know anything about it so you decide to do your research. You go online, read a few articles, watch a few youtube videos, maybe speak to a few friends, but all the time, you are slowly, slowly building up an embryonic knowledge base of investing in stocks & shares.


The problem comes when you have acquired a little bit of knowledge, because what happens is that we tend to over-inflate our ability when we apply that knowledge, and in doing so, reach the really quick conclusion that investing in stocks and shares is really easy.


In other words, our confidence in our skill, in our ability, in our knowledge on the subject has accelerated at a much quicker pace than our actual competence. In some cases, we may have a massively inflated view of how good we really are, but based on very little substance.


Now - here’s the kind of dangerous part. In some cases, people might just stop their education, their knowledge building right there. Yes, they may choose to top up their knowledge from time to time, but they will have a belief that they know the subject and have the skill needed to make good choices. However, if you continue to learn, accept that there is still a lot of knowledge to be acquired, then you go on a journey of self discovery, and the more you learn, the quicker you will recognise your own competence level - you will recognise that it’s not high - but also that there is more learning to be done, that you’ve only just scratched the surface in the subject of stock & shares investing.


But as you continue, as you continue to learn, your competence level will start to increase - and things will start to make more sense. You will start to be acutely aware of your knowledge gaps, until eventually you reach the point where you really do become an expert, where you know, potentially, all there is to know on the subject.


But more to the point, by reaching expert status you will now have the skill to easily recognise exactly what you do know and exactly what you don’t know. That is the Dunning-Kruger effect in action.


THE ROLE OF TECHNOLOGY


Now, it’s easy to understand when you listen to that example of Dunning-Kruger how overconfidence plays its part. But the Dunning-Kruger Effect also has an impact on how we process information, and can be one of the root causes of confirmation bias.


And of course, technology perpetuates this bias. More than ever before we are able to insulate ourselves by being the curators of our own research. This can mean that we seek out information that only serves to reinforce our knowledge and beliefs, AKA confirmation bias.


The thing is, when we limit the scope of information relating to relevant topics, such as investments, when we decide that the information we hold in our heads is sufficient, we risk missing crucial signals and end up making decisions based off a foundation of overconfidence.


AND SO...


There are a few things we can do to try and prevent the Dunning-Kruger Effect affecting our decisions.


First off, always be learning. Never assume that you know all there is to know about a subject. Experts will be the first to tell you that they are still learning, so keep on your quest for knowledge


Second, recognise the Dunning-Kruger effect happens at the beginning of a new thing… a new skill… or when you’ve learned a new topic.


Finally, and a tip from one of the bias founders, David Dunning himself, is to slow down. This behavioural bias typically pops up when we are making quick decisions and we haven’t slowed down to think about things in a clear way. So think about things for a bit longer than you perhaps would.


These tips don’t mean you will become immune from the Dunning-Kruger effect, but it does mean that you give yourself the best chance at arriving at the best decision for you.


That’s it for now. In the next episode of Bitesize Behaviours we’ll look at a behaviour that looks how we can over-value the things we own.


We’ll be looking at the Endowment Effect.


See you next time on bitesize behaviour.