Too Stupid to Realise How Stupid You Are

Most people believe their driving skills are better than average. I did a dipstick with a few friends, and it appears that all of them are above average drivers. To tell you the truth, I think I am way above average, too 😂

As you can see, this is mathematically impossible since most of us cannot be above average by definition. It brings home the point that most of us are brimming with delusions about our driving capabilities. What’s astonishing is that this belief in our superior abilities is not just limited to driving but percolates into many different walks of life where we see this overconfidence at full display. Don’t you know someone who thinks they are far more intelligent or more competent than they are? I’m sure a few names and faces pop right up as you answer this question. Don’t you have a friend or a few of them who know it all the better than the batsman and how he should have played that particular ball in a game of cricket? I’m sure you have had this experience many times over. We all have. During the lockdown last year, I watched this reality show contestant making a total fool of herself live on television. To my dismay, and of most viewers, I believe, she went ahead with her performance in full gusto. That got me thinking: maybe she doesn’t even realise how bad she is at singing. She appeared to be very high in her confidence and very low on talent, as was pointed out by the show judges too. 

My investing world has always had a lot of such folks: very high in confidence and extremely low on talent and skills. But the numbers have shot up dramatically post-pandemic as a swathe of new investors joined the markets. I also see similar behaviour in crypto markets, which has seen participation from more than 100 million Indians who are crypto owners. Studies suggest that overconfident and ill-equipped financiers and consumers who were not as financially literate as they thought they were, caused the 2008 global financial crisis. But wait a minute. Before judging them, let’s check if you are free from the same bias. 

Answer these two questions for yourself: 

1. What is it that you do for a living? 

2. Do you think you are average, below, or above average in your profession? 

Please don’t be shocked when I tell you that most people think they are above average. A majority of those who are actually below average consider themselves way above average. Food for thought, right?

This phenomenon is so prevalent that David Dunning and Justin Kruger, two psychologists, published the relationship between confidence and competence. It is now consequently referred to as the Dunning-Kruger (DK) effect. It seems that when you lack competence, you’re most likely to be brimming with confidence. Essentially, it is a double whammy. If you intrinsically have low capability, you find it challenging to recognise how low your capability is. No wonder you go about thinking you are pretty good with your competence and knowledge. Simply speaking, this happens when people are too stupid to realise how stupid they really are. If you can’t, you don’t even realise that you can’t. As Dunning said, “The first rule of the Dunning-Kruger club is you don’t know you’re a member of the Dunning-Kruger club.” 

As can be seen, beginners don’t fall prey to the DK effect. As you start knowing a little bit about any subject, you may think you know it all. As you genuinely begin putting in the effort and understanding the subject, you realise the vastness of it all and how what you know is just a trifle bit. This is one reason why PhD students and PhD degree holders learn they don’t know their subjects too well and are far from being masters in their area. Intelligent people know how small they are and how little they know. We now know that the more you know, the more you know you don’t know. 

Why does this happen?

When you first gain a little knowledge about any area that you were previously unaware of, you feel as though you’ve suddenly become an expert in that area. I love teaching and experienced this first-hand when students in my class would get exposed to and understand portfolio theory for the first time. It is incredible to realise how risk and return are two sides of the same coin for the first time. With the addition of every incremental stock to a portfolio, the overall risk-return profile of the portfolio alters. It was a total ‘aha’ moment for them, and they would go about thinking they know all about portfolio management. When you delve deeper into the subject and explore the various facets and complications, you realise how deep the subject goes and that you have only understood the proverbial tip of the iceberg.

A little knowledge is a dangerous thing.

Alexander Pope

You use Google to find out about various things, I’m sure. Did you know that googling far too often makes you prone to mistaking the Internet’s knowledge as your own? This leads to you becoming a victim of the DK effect. So, how does one prevent from becoming a DK victim? 

How do you avoid falling prey to this bias?

Awareness of your actual level is an excellent first step not to think too much of your abilities and knowledge. Easier said than done, though. To be aware of where you are, you need to play the devil’s advocate to yourself. Challenge your knowledge to realise how much you know. Pay close attention to people who don’t share your viewpoints. 

If this doesn’t work, seek out people in your area of work that have been there, done that, and will essentially know more than you in that particular field. Actively seek feedback from other people in your area. These people can act as an excellent sounding board and give you a fair idea of your actual level. When they provide you with feedback, you don’t have to be defensive about your stance but take it as constructive criticism. 

Another way of finding out your level is to keep on learning more about your line of work. The more you know, the more you will become comfortable with your level of knowledge and understand how competent you are. 

As an organisation, Equanimity has created a culture where failure is not considered taboo. When a colleague doesn’t know a sector or business deeply, we encourage them and help them to delve deeper and learn more about it. When there is no shame attached to not knowing it all, the need to fake it goes away or at least diminishes. The instinctive reaction to google the required information and believe that you now know the answers goes away as you truly understand the business. The larger picture is more critical than the immediate need to show that you know everything. 

This seems to be a simple problem to avoid and ensure you are not a DK victim, but in reality, you will be amazed to see who many folks around you are indeed DK’ed. So, put your thinking hat on and go looking for them. Also, it might be a good idea to self-reflect and ensure you are not a DK victim when you do put your thinking hat on.