May 252015
 

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.

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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.” 🙂

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Random Useless Fact:

15-05-smoke-detectors

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Two Degrees
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Two Degrees

I agree with the infographic 🙂

Kapitalust
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Kapitalust

What did you get on that quiz I posted on where you measure your confidence on each answer?

Amanda @ My Life, I Guess
Guest

Wait, are you saying I’m not an excellent driver…?

Investing Pursuits
Guest

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.

Tawcan
Guest

Interesting stuff, first time I heard of the Dunning-Kruger effect. Maybe I need to get out of my cave once in a while.

Financial Underdog
Guest

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 🙂

Debt Hater
Guest

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.

Phil
Guest

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.

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[…] may be suffering from the Dunning-Kruger effect, which can mislead you into believing you know more about finances than you actually […]

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[…] may suffer unknowingly from the Dunning-Kruger effect, which can falsely mislead you into believing you know more about finances than you actually […]

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[…] 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 […]