In 1999, David Dunning and Justin Kruger from the Department of Psychology at Cornell University published a paper in the Journal of Personality and Social Psychology titled “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.”
The study was inspired by McArthur Wheeler, a man who robbed two Pittsburgh banks in broad daylight. Video cameras caught Wheeler at both locations and he quickly became the topic of the 11 p.m. evening news. Those who recognized Wheeler from the video quickly called the police, and he was arrested within the hour.
Oddly, when Wheeler was shown the videotapes he was shocked that he was recognizable by the cameras. It seems that prior to Wheeler’s heists he had smeared his face with lemon juice with the belief that it would make him invisible to the cameras. Apparently, he had taken a “selfie” using a Polaroid camera to test this out his invisibility and when he was satisfied with the results, he decided to put his expert knowledge to good use.
Wheeler was one of those people who didn’t know what he didn’t know, which is now referred to in academic circles as the Dunning-Kruger effect.
The paper describes several studies performed on undergrads at Cornell University, with the general goal of each to measure how competent and incompetent people viewed their own abilities. Here are studies outlined in the article.
How well do you understand humor? Each subject was given a list of 30 jokes to rank by how funny they were. A panel of professional comedians were asked to rank the jokes as well. Dunning and Kruger explain that assessing humor accurately requires a degree of “subtle and tacit knowledge about other people’s tastes,” a skill that not everyone shares equally. The students whose rating of the jokes least matched the comedians were assigned to the “incompetent group.” Interestingly, the “incompetent” students ranked in the 12th percentile for accuracy, but self-scored in the 58th percentile.
How logical a thinker are you? Each subject took a quiz based on logic questions for the LSAT. They were then asked how they thought they scored on the test and relative to their peers. The subjects in the bottom three quartiles thought they were in the 50th to 70th quartiles, even though most were below that. The top performers thought they were slightly better than the pack, even though they were at the top of the range.
Do you know English grammar? This group was given 20 questions on basic grammar with similar self-scoring questions after they had completed the test. Not surprisingly, the same results appeared as with the logic questions. However, the top quartile didn’t self-score any better than the very worst students.
Four to six weeks after the original test were taken, the subjects returned and were given five of their peers’ tests. Once completed, they were given a chance to rerate themselves for accuracy and subjectively compared to other subjects.
For the top performers, seeing some other tests helped them to rerate their relative score more accurately, since they now knew they were among the best. On the other hand, for the least knowledgeable subjects, after looking at their peer groups’ responses they still thought they had done well.
Kruger and Dunning refer to their finding as the “dual burden” of the unskilled: “Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it.”
In a final study, the subjects were given training after having gone through another round of logical choices. As you would expect, this made the top performers feel more competent, but it had the opposite effect on the lowest quartile because they were finally learning what they didn’t know.
In 2003, David Dunning co-authored a paper with Joyce Ehrlinger on the effect of self-confidence in women’s academic self-perceptions. There studies showed that women and men scored the same on math and science tests, but men thought they’d done better and women underestimated their scores more persistently.
In 2004, a paper by David Ames and Lara Kammarth showed that the more narcissistic and self-absorbed a person is, the more likely he or she is to overestimate his or her own abilities. Further studies by Campbell, Goodie and Foster in 2004 indicate that narcissists not only think they are right but they are much more willing to bet on being right.
If you have gotten this far through the column, you might be thinking to yourself, “I’m sure glad I’m not one of those clueless narcissists.” But, here’s the problem with that statement: We all are.
When it comes to investing, there is just no way to absolutely know by how much Best Buy is going to beat its earnings, or when Federal Reserve Chairwoman Janet Yellen is going to start raising interest rates.
Since all these events are in the future, they are unknowable, but all is not lost.
The problem is not that we as humans are imperfect beings with flaws. The problem is that we think we are good at a lot of things even though we are not. The key is to approach decisions with more caution than your peers and spend just a little more time learning (even though you may think you’ve got it all figured out) and you’ll already be ahead of the pack.
For the coming week we have the following economic reports: Consumer Price Index and housing starts on Monday, FOMC minutes on Tuesday, and PMI Manufacturing Index Flash, Philadelphia Fed Survey, and existing home sales on Friday.
Laif Meidell, CMT, is the president of American Wealth Management, a Reno-based Registered Investment Advisor, and is a subadviser to the AdvisorShares Meidell Tactical Advantage ETF (ticker: MATH), an SEC-registered fund, and can be reached at 775-332-7000 or laif@financialhealth.com. Securities offered through Foothill Securities Inc., member FINRA/SIPC. American Wealth Management is a separate entity from Foothill Securities. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.