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!
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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!
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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.
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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!
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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
THREAD: With #silversqueeze trending on Twitter, it appears that this week's market spectacle may well be in the silver market.
A perfect moment for a thread on the Hunt Brothers and their alleged attempt to corner the silver market...
1/ First, let's set the stage.
The Hunt Brothers - Nelson Bunker Hunt, William Herbert Hunt, and Lamar Hunt - were the sons of Texas tycoon H.L. Hunt.
H.L. Hunt had amassed a billion-dollar fortune in the oil industry.
He died in 1974 and left that fortune to his family.
2/ After H.L.'s passing, the Hunt Brothers had taken over the family holdings and successfully managed to expand the Hunt empire.
By the late 1970s, the family's fortune was estimated to be ~$5 billion.
In the financial world, the Hunt name was as good as gold (or silver!).
3/ But the 1970s were a turbulent time in America.
Following the oil crisis of the early 1970s, the U.S. had entered a period of stagflation - a dire macroeconomic condition characterized by high inflation, low growth, and high unemployment.
4/ The Hunt Brothers - particularly Nelson Bunker and William Herbert - believed that the inflationary environment would persist and destroy the value of their family's holdings.
To hedge this risk, they turned to silver.
They began buying the metal at ~$3 per ounce in 1973.
A perfect moment for a thread on the Hunt Brothers and their alleged attempt to corner the silver market...
1/ First, let's set the stage.
The Hunt Brothers - Nelson Bunker Hunt, William Herbert Hunt, and Lamar Hunt - were the sons of Texas tycoon H.L. Hunt.
H.L. Hunt had amassed a billion-dollar fortune in the oil industry.
He died in 1974 and left that fortune to his family.
2/ After H.L.'s passing, the Hunt Brothers had taken over the family holdings and successfully managed to expand the Hunt empire.
By the late 1970s, the family's fortune was estimated to be ~$5 billion.
In the financial world, the Hunt name was as good as gold (or silver!).
3/ But the 1970s were a turbulent time in America.
Following the oil crisis of the early 1970s, the U.S. had entered a period of stagflation - a dire macroeconomic condition characterized by high inflation, low growth, and high unemployment.
Stagflation 101
— Sahil Bloom (@SahilBloom) September 2, 2020
The term "stagflation" is used frequently in discussions of monetary policy and risks in the post-COVID world.
But what is stagflation and how does it work?
Here's Stagflation 101!
\U0001f447\U0001f447\U0001f447 pic.twitter.com/at4FmaCmkM
4/ The Hunt Brothers - particularly Nelson Bunker and William Herbert - believed that the inflationary environment would persist and destroy the value of their family's holdings.
To hedge this risk, they turned to silver.
They began buying the metal at ~$3 per ounce in 1973.
10 threads to accelerate your career:
How to Win (without talent or luck)
20+ principles compiled from the most impressive leaders and thinkers in the world.
20 Ways to Stand Out in a Hiring Process (that don’t involve your resume)
You can stand out without fancy degrees or credentials—learn how.
Common Interview Questions (& how to nail them)
Interviews suck—proper preparation makes them suck slightly less.
How to Write Cold Emails (or DMs)
Because one lucky break can make all the difference…
How to Win (without talent or luck)
20+ principles compiled from the most impressive leaders and thinkers in the world.
How to Win (without talent or luck):
— Sahil Bloom (@SahilBloom) October 16, 2021
20 Ways to Stand Out in a Hiring Process (that don’t involve your resume)
You can stand out without fancy degrees or credentials—learn how.
The hiring process is ultra-competitive.
— Sahil Bloom (@SahilBloom) May 31, 2021
But you\u2019ve incorrectly been told that the only way to stand out is by having fancy degrees and credentials.
THREAD: 20 ways to stand out in a hiring process (that don\u2019t involve your resume):
Common Interview Questions (& how to nail them)
Interviews suck—proper preparation makes them suck slightly less.
The interview process is ultra-competitive.
— Sahil Bloom (@SahilBloom) August 7, 2021
But with proper preparation, it is possible to stand out.
THREAD: 20 common interview questions, what they really mean, and how to nail them:
How to Write Cold Emails (or DMs)
Because one lucky break can make all the difference…
One cold email can change your life.
— Sahil Bloom (@SahilBloom) October 24, 2021
Here's how to write a great one:
Lifelong learning is a competitive advantage.
But contrary to what you’ve been told, lifelong learners are built, not born.
THREAD: 20 lifelong learning habits you can start developing today.
Stimulate Dynamically
The mind is a muscle - it needs to be stimulated dynamically to continue to grow.
Don’t rely on one “exercise” - develop a menu of options.
Write, read, listen, watch. Solve puzzles, play games. Enjoy it!
Stimulate dynamically, learn dynamically.
Build Learning Circles
The most powerful learning is communal, not individual.
Build learning circles with other intellectually curious minds.
Engage regularly with no set intention or goal.
Community is everything. Embrace it.
Keep Asking Why
“Why?” is the most useful tool in our learning toolkit.
But somewhere along the line, we are told to stop asking why and just accept “facts” as we are told them.
Reject the norm.
If you want to understand the world, take a cue from our kids - keep asking why!
Adopt a Process Orientation
Prioritize process.
Learn for the sake of learning, not always for a specific goal.
When you prioritize process, you become flexible in where you are headed.
Life is a winding, confusing journey - forward progress is all that matters.
But contrary to what you’ve been told, lifelong learners are built, not born.
THREAD: 20 lifelong learning habits you can start developing today.
Stimulate Dynamically
The mind is a muscle - it needs to be stimulated dynamically to continue to grow.
Don’t rely on one “exercise” - develop a menu of options.
Write, read, listen, watch. Solve puzzles, play games. Enjoy it!
Stimulate dynamically, learn dynamically.
Build Learning Circles
The most powerful learning is communal, not individual.
Build learning circles with other intellectually curious minds.
Engage regularly with no set intention or goal.
Community is everything. Embrace it.
Keep Asking Why
“Why?” is the most useful tool in our learning toolkit.
But somewhere along the line, we are told to stop asking why and just accept “facts” as we are told them.
Reject the norm.
If you want to understand the world, take a cue from our kids - keep asking why!
First principles thinking is a powerful mental model for driving non-linear outcomes. It also requires a willingness to ask difficult, uncomfortable questions.
— Sahil Bloom (@SahilBloom) March 14, 2021
Here are a few to help you get started: pic.twitter.com/KyuAr7IUf7
Adopt a Process Orientation
Prioritize process.
Learn for the sake of learning, not always for a specific goal.
When you prioritize process, you become flexible in where you are headed.
Life is a winding, confusing journey - forward progress is all that matters.
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The entire discussion around Facebook’s disclosures of what happened in 2016 is very frustrating. No exec stopped any investigations, but there were a lot of heated discussions about what to publish and when.
In the spring and summer of 2016, as reported by the Times, activity we traced to GRU was reported to the FBI. This was the standard model of interaction companies used for nation-state attacks against likely US targeted.
In the Spring of 2017, after a deep dive into the Fake News phenomena, the security team wanted to publish an update that covered what we had learned. At this point, we didn’t have any advertising content or the big IRA cluster, but we did know about the GRU model.
This report when through dozens of edits as different equities were represented. I did not have any meetings with Sheryl on the paper, but I can’t speak to whether she was in the loop with my higher-ups.
In the end, the difficult question of attribution was settled by us pointing to the DNI report instead of saying Russia or GRU directly. In my pre-briefs with members of Congress, I made it clear that we believed this action was GRU.
The story doesn\u2019t say you were told not to... it says you did so without approval and they tried to obfuscate what you found. Is that true?
— Sarah Frier (@sarahfrier) November 15, 2018
In the spring and summer of 2016, as reported by the Times, activity we traced to GRU was reported to the FBI. This was the standard model of interaction companies used for nation-state attacks against likely US targeted.
In the Spring of 2017, after a deep dive into the Fake News phenomena, the security team wanted to publish an update that covered what we had learned. At this point, we didn’t have any advertising content or the big IRA cluster, but we did know about the GRU model.
This report when through dozens of edits as different equities were represented. I did not have any meetings with Sheryl on the paper, but I can’t speak to whether she was in the loop with my higher-ups.
In the end, the difficult question of attribution was settled by us pointing to the DNI report instead of saying Russia or GRU directly. In my pre-briefs with members of Congress, I made it clear that we believed this action was GRU.
