What is... | May 8, 2018

What is the Dunning-Kruger effect?

How do you rate your ability to predict successful investments compared to other people? Be careful – you could fall prey to the Dunning-Kruger effect.

The idea that we naturally tend to favour our own personal characteristics and abilities won’t be news to most people. It’s easy to feel more competent than others in some areas, usually without trying too hard. However, the feeling is often illusory.

And it gets worse: research has proven that people of lower ability are more likely to feel they’re highly competent at a task. The bias is called the Dunning-Kruger effect after the two psychologists who did the studies.

What do you know
It’s thought the Dunning-Kruger effect happens because without that higher level of knowledge or skill in a field, people cannot accurately assess their own ignorance level or lack of ability in that field.

The reverse can happen too when people actually are highly skilled or knowledgeable – they can easily underrate their own abilities relative to the average person when it comes to their area of expertise. As David Dunning himself wrote in a 2014 article for Pacific Standard magazine: “In many cases, incompetence does not leave people disoriented, perplexed, or cautious.

“Instead, the incompetent are often blessed with an inappropriate confidence, buoyed by something that feels to them like knowledge.”

Penny for the thought?
Dunning adds in the same article that more recent research not only confirms the existence of the Dunning-Kruger effect, but has gone on to show that many people might be overconfident, as a result, when it comes to their finances.

People of lower ability are more likely to feel they're highly competent at a task

The USA’s Financial Industry Regulatory Authority asked 25,000 people in 2012 to rate their own financial knowledge and then measured their actual level of financial literacy.

“Twenty-three percent of the recently bankrupted respondents gave themselves the highest possible self-rating; among the rest, only 13% did so,” Dunning writes.

Arguably, the 2008 financial meltdown was partly caused by the ignorance of consumers, Dunning says, and this ignorance is because we have lots of information in our heads which tempts us to think we know something – just not necessarily the right information. We’re typically misinformed, rather than uninformed, he says.

Ways to protect yourself
Interestingly, some studies suggest that culture can play a role. A University of British Columbia/Kyoto University paper in 2001 found that Japanese people may be less prone to the Dunning-Kruger effect than Americans – in the sense that Japanese people were more likely to underestimate their own abilities.

Instead, the Japanese sample tended to see failures as a chance to improve themselves and increase their social value. This suggests one method everyone might adopt to fight Dunning-Kruger: look for ways to improve your knowledge and abilities, even when you feel like you perform well.

The evidence suggests it can pay to take time to search out and listen to people with more experience in a field than yourself. This might improve the odds of success – or at least reduce the chance of loss.


eZonomics team
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