The Dunning-Kruger Effect is a cognitive bias in which people with low ability at a given task are prone to overestimate their ability at that task.
Put simply, humans are notoriously incapable of objective evaluation of their competency levels.
Dunning-Kruger Effect 101
In a year when the markets have minted many new self-proclaimed geniuses, it is worth remembering the Dunning-Kruger Effect.
But what is the Dunning-Kruger Effect and how does it work?
Here's Dunning-Kruger Effect 101!
👇👇👇
The Dunning-Kruger Effect is a cognitive bias in which people with low ability at a given task are prone to overestimate their ability at that task.
Put simply, humans are notoriously incapable of objective evaluation of their competency levels.
Their paper, entitled Unskilled and Unaware of It, summarized, "People tend to hold overly favorable views of their abilities in many social and intellectual domains."
He hadn't worn a mask.
Instead, he had put lemon juice on his face, believing it would make him invisible to cameras.
Even after he was caught, he was legitimately incredulous that his plan with the lemon juice hadn't worked.
Their finding: the worst performers consistently overestimated their abilities relative to others.
Let's look at a few examples of this bias in action and how you can avoid its pitfalls.
As the saying goes, "everyone is a genius in a bull market."
When markets are ripping and your portfolio seems to grow by the day, many fall victim to the Dunning-Kruger Effect.
We may wrongly attribute this performance to our innate talent as investors.
With politics, intellectual humility is an aberration, not the norm.
Politicians espouse policy ideas with great confidence even if they have a weak handle of the details.
It's not shocking that we see Cobra Effects in the policy realm. https://t.co/gKuHcJTjW7
Cobra Effect 101
— Sahil Bloom (@SahilBloom) October 21, 2020
With the rise of government and central bank intervention in the economy and markets, the term "cobra effect" has experienced a revival.
But what is a "cobra effect" and how does it work?
Here's Cobra Effect 101!
\U0001f447\U0001f447\U0001f447 pic.twitter.com/Gs1199yes5
Everyone has had that one boss - the know-it-all who actually knows very little.
These bosses (who typically get stuck in middle management) hold back organizations from high performance.
They are easy to spot - we all know who they are.
Beware this boss!
So how do we avoid it?
Here are a few strategies.
👇👇👇
The Circle of Competence is the set of topic areas that align with a person's expertise.
Be ruthless in identifying and protecting the boundaries of your Circle of Competence.
Hint: it's usually smaller than you think.
Most people have an inherent discomfort with saying, "I don't know."
Change that. Embrace what you don't know.
The world would be a much better, more efficient place if we stripped out the fluff and cut to the "I don't know" chase.
Think you know something? Challenge yourself, your reasoning, and your assumptions as a matter of practice.
It's uncomfortable, but it is also essential to creating non-linear outcomes. https://t.co/31EZVZDLM1
First Principles 101
— Sahil Bloom (@SahilBloom) November 19, 2020
Many of the world's greatest thinkers and doers - from @naval and @elonmusk to @nntaleb and @chamath - tout the importance of first principles thinking.
But what is "first principles thinking" and how does it work?
Here's First Principles 101!
\U0001f447\U0001f447\U0001f447 pic.twitter.com/WCAQzSFyn4
Know your competencies, focus on them.
Know your incompetencies, avoid (or outsource) them.
So the next time you catch yourself marveling at your skill at a task, remember the Dunning-Kruger Effect and the strategies for avoiding it.
For more on this topic, check out the resources below:
https://t.co/5TpIxyWjCD
https://t.co/mYfcPw2rcH
https://t.co/9lmroooQHn
https://t.co/2rlAXpPGt6
https://t.co/sAqJLE1gJi
https://t.co/5vAlRTbi5u
For more educational threads on business, money, finance, and economics, follow me on Twitter and check out my meta-thread below. https://t.co/53UhhfzIcp
1/ An Allegory of Finance
— Sahil Bloom (@SahilBloom) July 18, 2020
I have been posting a lot of educational (and humorous!) threads on finance, money, and economics.
My mission is simple: to demystify these concepts and make them accessible to everyone.
All of the threads can be found below. Enjoy and please share!
More from Sahil Bloom
From a young age, we are taught to view the world as black and white.
But many of life’s most important truths appear contradictory on the surface.
THREAD: 15 powerful paradoxes (on growth, business, careers, and life):
Sprezzatura (“Studied Carelessness”)
You have to put in more effort to make something appear effortless.
Effortless, elegant performances are often the result of a large volume of effortful, gritty practice.
Simple is not simple.
Slow Down to Speed Up
Want to speed up? Try slowing down.
Slowing down gives you the time to be deliberate with your actions.
You can focus, gather energy, and deploy your resources more efficiently.
It allows you to focus on leverage and ROI.
Move slow to move fast.
Learn More to Know Less
The wisdom paradox - the more you learn, the more you are exposed to the immense unknown.
This should be empowering, not frightening.
“The more I learn, the more I realize how much I don't know.” - Albert Einstein
Embrace lifelong learning.
Shrink to Grow
Growth is never linear.
In order to grow, sometimes you need to shrink.
Shedding deadweight may feel like a step back, but it is a necessity for long-term growth.
This principle applies to your career, startup, or life.
One step back for two steps forward.
But many of life’s most important truths appear contradictory on the surface.
THREAD: 15 powerful paradoxes (on growth, business, careers, and life):
Sprezzatura (“Studied Carelessness”)
You have to put in more effort to make something appear effortless.
Effortless, elegant performances are often the result of a large volume of effortful, gritty practice.
Simple is not simple.
Slow Down to Speed Up
Want to speed up? Try slowing down.
Slowing down gives you the time to be deliberate with your actions.
You can focus, gather energy, and deploy your resources more efficiently.
It allows you to focus on leverage and ROI.
Move slow to move fast.
Learn More to Know Less
The wisdom paradox - the more you learn, the more you are exposed to the immense unknown.
This should be empowering, not frightening.
“The more I learn, the more I realize how much I don't know.” - Albert Einstein
Embrace lifelong learning.
Lifelong learning is a competitive advantage.
— Sahil Bloom (@SahilBloom) June 6, 2021
But contrary to what you\u2019ve been told, lifelong learners are built, not born.
THREAD: 20 lifelong learning habits you can start developing today.
Shrink to Grow
Growth is never linear.
In order to grow, sometimes you need to shrink.
Shedding deadweight may feel like a step back, but it is a necessity for long-term growth.
This principle applies to your career, startup, or life.
One step back for two steps forward.
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— Dr. Thomas Binder, MD (@Thomas_Binder) November 29, 2020
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Thread web\u2b06\ufe0f\u2b07\ufe0f
— Dr. Thomas Binder, MD (@Thomas_Binder) December 16, 2020
The fabrication of the "asymptomatic (super) spreader" is the coronation of the total nons(ci)ense in the belief system of #CoronasWitnesses.
Asymptomatic transmission 0.7%; 95% CI 0%-4.9% - could well be 0%!https://t.co/VeZTzxXfvT
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Krugman is, of course, right about this. BUT, note that universities can do a lot to revitalize declining and rural regions.
See this thing that @lymanstoneky wrote:
And see this thing that I wrote:
And see this book that @JamesFallows wrote:
And see this other thing that I wrote:
One thing I've been noticing about responses to today's column is that many people still don't get how strong the forces behind regional divergence are, and how hard to reverse 1/ https://t.co/Ft2aH1NcQt
— Paul Krugman (@paulkrugman) November 20, 2018
See this thing that @lymanstoneky wrote:
And see this thing that I wrote:
And see this book that @JamesFallows wrote:
And see this other thing that I wrote:
